AMERICAN FUTURE

It’s human nature, stupid — especially in democracies. Think of it as cognitive inertia.

Raghuram Rajan expands on this conclusion:

On a recent visit to Europe, I found economists, journalists, and business people thoroughly frustrated with their politicians. Why, they ask, can’t politicians see the abyss that yawns before them, and come together to resolve the euro crisis once and for all?

Even if there is no consensus on what a solution might be, can’t they meet and thrash out a plan that goes beyond their repeated half-measures? It is only because of the European Central Bank’s bold decision to lend long term to banks that we have seen some respite recently, or so their argument goes. Politicians, in contrast, are failing Europe by being forever behind the curve. Why do they find it so hard to lead?

One answer that can be easily dismissed is that politicians simply don’t understand the gravity of the situation. Political leaders need not be economic geniuses to understand the advice that they hear, and many are both intelligent and well-read.

A second answer – that politicians have short time horizons, owing to electoral cycles – may contain a kernel of truth, but it is inadequate, because the adverse consequences of timid action often become apparent well before they are up for re-election.

The best answer that I have heard comes from Axel Weber, the former president of Germany’s Bundesbank and an astute political observer. In Weber’s view, policymakers simply do not have the public mandate to get ahead of problems, especially novel ones that seem small initially, but, if unresolved, imply potentially large costs.

If the problem has not been experienced before, the public is not convinced of the potential costs of inaction. And, if action prevents the problem, the public never experiences the averted calamity, and voters therefore penalize political leaders for the immediate costs that the action entails. Even if politicians have perfect foresight of the disaster that awaits if nothing is done, they may have little ability to persuade voters, or less insightful party members, that the short-term costs must be paid.

Talk is cheap, and, in the absence of evidence to the contrary, the status quo usually appears comfortable enough. So leaders’ ability to take corrective action increases only with time, as some of the costs of inaction are experienced.

Calamity can still be averted if the costs of inaction escalate steadily. The worst problems, however, are those with “inaction costs” that remain invisible for a long time, but increase suddenly and explosively. By the time the leader has the mandate to act, it may be too late.

[This is the example that always comes to my mind, too]

A classic example was Winston Churchill’s warnings against Adolf Hitler’s ambitions. Hitler’s plans were outlined in Mein Kampf for all to read – and he did not disguise them in his speeches. Yet few in Britain wanted to give them credence, and many thought that communism was the greater threat, especially in the bleak years of the Great Depression. The Nazis’ dismembering of Czechoslovakia in 1938 made the sincerity of Hitler’s ambitions all too clear. But it was only after the invasion of Poland the following year that Churchill was appointed First Lord of the Admiralty, and he became Prime Minister only after the invasion of France in 1940, when Britain stood alone. Britain might well have been better off had Churchill held power earlier, but that would have meant costly rearmament, which was unacceptable so long as there was a chance that Hitler proved to be a paper tiger. And, of course, it would also have meant entrusting Britain’s fate to a politician who, though now regarded as an indomitable leader, was widely distrusted at the time.

Non-linear costs of inaction are most obvious in the financial sector. At the same time, financial-sector problems may be particularly difficult to address: if politicians emphasize the need for action too strongly in order to get a mandate, they might precipitate the very turmoil that they seek to contain.

Between the Bear Stearns crisis and the failure of Lehman Brothers, the United States government could do little to get ahead of the growing problem (though, of course, the government-backed mortgage underwriters Fannie Mae and Freddie Mac were placed under conservatorship in the interim). It took the post-Lehman panic for Congress to authorize the Troubled Asset Relief Program, which threw a financial lifeline to banks and the auto industry, among others. And only frenetic action by the Federal Reserve and Treasury (with authorities around the world joining) prevented a systemic meltdown. A subprime-mortgage problem that was initially estimated to imply losses of a few hundred billion dollars imposed far higher costs on the entire world.

Similarly, eurozone politicians have obtained a mandate to take bolder action only as the markets have made the costs of inaction more salient. Even setting aside Germany’s understandable attempt to limit how much it would have to pay, it is difficult to see how politicians could have gotten ahead of the problem.

While the ECB has bought the eurozone some time, the calming effect on markets may be a mixed blessing. Have Europeans seen enough of the abyss to tolerate stronger action by their leaders? If not, markets might have to deteriorate further to make possible a comprehensive resolution to the eurozone crisis.

Similarly, with government bond yields as low as they are in the US, the public has little sense of urgency about its fiscal problems, though some doomsayers, like Peter Peterson of the Blackstone Group, have been trying their best to awaken it. One hopes that the coming US presidential election will lead to a more enlightened public debate about tax and entitlement reform. Otherwise, a rapid escalation of yields in the bond market might be necessary for the public to accept that there is a problem, and for politicians to have the room to resolve it.

Don’t blame the leaders for appearing short-sighted and indecisive; the fault may lie with us, the public, for not listening to the worrywarts.

Raghuram Rajan is Professor of Finance at the Booth School of Business, University of Chicago, and the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

In today’s FT, Gillian Tett contrasts how well American banks prepared for the possibility of a U.S. default last summer and how European banks are now preparing — or not preparing — for a break-up of the eurozone. The comparison isn’t reassuring.

Here’s what she says about the banks on this side of the pond:

Last summer, some of America’s largest banks secretly stocked their cash machines with the maximum possible supply of notes. The reason? In July 2011, the bankers feared that the US might be about to suffer a technical default, because Congress could not agree on measures to raise the debt ceiling.

So, they decided – after collective discussions – to keep those ATMs stuffed with greenbacks to ensure that consumers would never panic about running out of cash if that “worst-case” default scenario transpired.

In the first half of 2011, large banks such as JPMorgan and Bank of New York Mellon are thought to have each spent about $50m ensuring that their contracts were legally watertight in the event of a US default, and that repo deals and financial markets were continuing to function (along with those ATMs.)

At this week’s meeting of the World Economic Forum, eurozone leaders have stressed their commitment to keeping the single currency intact. And the consensus among senior bankers is that the most likely scenario for the eurozone for the foreseeable future is continued muddling through. Hardly anyone, however, expects a truly positive “solution” soon, and most think that a break-up or exit scenario remains entirely possible. Accordingly, most large banks are now secretly preparing contingency plans – just in case.

This time, says Tett, some large banks may be spending far more than $50 million, since the task is dramatically more complex: they have to review the fine print of all legal contracts for any euro exit, and to ensure that financial market transactions are watertight, or at least hedged. Many large banks are also trying to make sure that their liabilities in peripheral countries are matched with assets inside the same country – rather than across the eurozone as a whole.

Here’s the crux of the matter:

In Europe today, however, it appears that there is little – or no – similarly collaborative move. Or if there is, it is so utterly secret that not even senior bankers know about it yet. On an individual level, most large banks insist they are well prepared (though many express concern that the exchanges or settlement systems seem less organised). But nobody appears to have spoken extensively to anyone else, far less to any central government group.

Why? One problem is that the banking landscape in Europe is far more fragmented than in America. Another is weak European banks are now too distracted, or cash-poor, to prepare for a vague risk. There is also a deep reluctance among some eurozone bankers to admit they are preparing for a worst case, which would risk undercutting their own politicians. And some bankers argue that if a truly serious crisis materialised (such as the exit of Italy, say) it would be so devastating and complex that planning would be pointless.

As indicated by the fact that I haven’t added to this series of posts since the start of the year, the recent decoupling of the US equity market from events in Europe has made me complacent. I figure that the best way to prevent myself from paying (figuratively and literally) the consequences of overconfidence is to make sure that I once again pay very close attention to the goings-on “over-there.”

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The FT’s Wolfgang Münchau is upset with the IMF for earmarking 91% of its definitive commitments to programs in Europe. He says “no” to these two questions:

• Would an increase in IMF funds to bail out the eurozone be justified?
• Should non-eurozone countries participate in raising new capital?

Here’s his case:

It is not necessary because the eurozone has the financial capacity to help itself . . . Considering that the eurozone is economically unconstrained, and among the richest regions in the world, the request to involve the IMF in hypothetical future rescue operations is morally reprehensible. What is happening here is that eurozone member states find it hard to commit additional funds to the rescue operations, and find it politically more expedient to channel resources through the IMF as a way to bypass national parliaments.

But there is an even more important argument in my view. The way the eurozone member states have been dealing with the crisis has increased the chances of a catastrophic outcome. An extension of the IMF’s commitments is very likely to support current policies.

[...] The eurozone’s cumulative policy errors are turning a liquidity squeeze into a solvency crisis. And herein lies an acute risk for the IMF. If Italy were to become trapped in a long recession, the probability would increase significantly that it would not be able to repay its debt, currently at 120 per cent of GDP. News reports from Italy suggest that the IMF is about to forecast a two-year recession for the country, which could well lead to an increase in the debt-to-GDP ratio at the end of that period. Italy’s future solvency is entirely dependent on market interest rates and the prospect of a return to strong and sustainable economic growth. I struggle to think how this can be accomplished without a fiscal union and much greater burden-sharing.

There are additional technical arguments that would favour more cautious IMF involvement. Mario Blejer, the former governor of the central bank of Argentina, argued recently that the IMF’s preferred creditor status could become a problem, as an IMF loan would automatically subordinate every other bondholder. The probability of a default on those defaultable bonds is thus significantly higher. Furthermore, the situation could become so acute that the IMF’s seniority might fail, which in turn would endanger its capacity to lend at low interest rates.

There are several proposals on the table for how to involve the IMF in a clever way. But they all are subject to the same problem. Any outside liquidity assistance would encourage the eurozone to proceed with policies that are aggravating the crisis.

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Evidently, Münchau was responding to IMF chief Lagarde, who today said that the Fund was ready to help the eurozone and was seeking to increase its lending resources by up to $500 billion. She went on to say that the IMF estimates that in coming years, additional global financing of potentially $1 trillion could be needed.

She then said that there are three imperatives are needed to fully restore confidence: stronger growth, larger firewalls, and deeper integration. Regarding the second of the imperatives, Lagarde called on European policymakers to create a larger firewall. Without it, she stated, countries like Italy and Spain, that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal funding costs―a development she warned would have disastrous consequences for systemic stability.

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The FT reports that, soon after Lagarde’s address, Germany appeared to soften its longstanding resistance to increasing the eurozone’s rescue funds (to €750 billion) in exchange for strict budget rules in a new fiscal compact.

According to German and eurozone officials, Angela Merkel is prepared to let the existing European Financial Stability Facility, which has about €250bn in unused funds, run in parallel with its successor, the €500bn European Stability Mechanism, the launch of which has been brought forward to July.

In return the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments.

The most recent version of the fiscal compact would allow governments to breach deficit limits in “periods of economic downturn” – a phrase criticised by the ECB as an “escape clause” that could lead to “easy circumvention” of what are meant to be cast-iron rules.

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On a positive note, US money market funds have begun moving back into European bank paper, a sign that central bank efforts to backstop key institutions are improving risk appetite.

This past week, the funds were buyers in increased issuance of French and Spanish banks’ commercial paper, according to bankers. Notes issued by US banks with foreign parents rose $6bn to $152bn and foreign domiciled bank notes outstanding rose nearly $3bn to $133bn, according to figures from the Federal Reserve.

Last year, money market funds were sellers of many European banks’ short-term commercial paper as worries grew about the repercussions of a possible European sovereign default. That was a critical factor in market anxiety, as the highly rated funds’ $2.7tn in liquid assets are a key source of dollar funding.

Money market funds bought French bank paper with maturities as long as one month, as well as small amounts of Spanish bank paper, according to bankers. The funds also bought longer-dated UK, Dutch and Scandinavian bank paper, up to six-month maturities.

The move comes despite France losing its triple A-rating but after a series of strong auctions for Spanish and French sovereign debts and hopes that Greece will reach agreements with creditors to avoid a default in the spring.

The author is the chairman of Goldman Sachs Asset Management.

The key quote from the following document:

. . . some might describe the fiscal compact as more like “compost” as, without some offsetting measures elsewhere, all indebted countries tightening fiscal policy further simply to satisfy some new numerical target doesn’t seem like sensible economics, especially for those with large youth unemployment and members of a union that, never massively popular, is increasingly regarded as a problem.

To complicate matters, some Euro Area policymakers realize the potential insanity of the above and have inserted an“escape clause” into the fiscal compact discussions that allows countries to avoid tightening further “in periods of severe economic downturn”. This strikes me as sensible in principle, but whether Berlin and Frankfurt will agree remains to be seen. The early signs from ECB members is that they worry it will be an excuse for countries to avoid structural challenges.

From a big picture perspective, there is a lot of evidence that major fiscal tightening, especially if it includes reductions in government spending, is rather key to raising countries economic growth potential. If you throw in supply side reforms, and – what might normally be the case – easier monetary conditions such as a decline in the exchange rate and lower interest rates, this is the classic recipe for a nice long-term outcome. However, given the constraints of a monetary union, and one seemingly dominated by Germanic caution, it is not so obvious that we can get there. [My emphasis]

If you’ve wondered why I haven’t proffered a “solution” to the eurozone crisis, this post should suffice. Here we have experts far more knowledgeable than I who reach diametrically opposed conclusions regarding the fate of the eurozone and, by implication, the futures of economies and financial markets. The optimistic argument is that the euro will be saved because everyone realizes that the consequences of it not being saved are so dire. The pessimistic argument is that, while the euro’s collapse would have serious negative consequences, these consequences are preferrable to the political and financial costs of preventing the collapse.

The optimistic argument smacks of idealism (a.k.a.wishful thinking); the pessimistic of realism (a.k.a., defeatism). At the bottom of it all lies this question, which always arises at times of crisis: are there forces at work that are beyond the keen of even the most well-intentionned, hard-working, knowledgeable people?

The Peterson Institute’s Bergsten and Kirkegaard:

The economic and financial problems in the euro area are clearly serious and plentiful. An increasing number of commentators and economists have begun to question whether the euro can survive. There are only two alternatives. Europe can jettison the monetary union or it can adopt a complementary economic union. Every policymaker in Europe knows that the collapse of the euro would be a political and economic disaster for all and thus totally unacceptable. Europe’s overriding political imperative to preserve the integration project will surely drive its leaders to ultimately secure the euro and restore the economic health of the continent.

The key is to observe what Europe does rather than what it says. At each critical stage of the crisis, both Germany and the European Central Bank have demonstrated they will pay whatever is necessary to preserve the euro area and avoid defaults (except possibly Greece). But neither can say they will provide unlimited bailouts because this would alleviate the pressure on the debtor countries to reform and weaken the bargaining position of each creditor group (northern European governments, ECB, private lenders, IMF) vis-à-vis the others as they allocate the costs of the bailouts. Europe’s key political actors in Berlin, Frankfurt, Paris, Rome, Athens, and elsewhere will thus quite rationally exhaust all alternative options in searching for the best possible deal before at the last minute coming to an agreement. For all this turmoil, however, Europe is well on its way to completing a true economic and monetary union, and will emerge from the crisis much stronger as a result.

The Financial Times’ Münchau:

The eurozone has fallen into a spiral of downgrades, falling economic output, rising debt and further downgrades. A recession has just started. Greece is now likely to default on most of its debts and may even have to leave the eurozone. When that happens, the spotlight will fall immediately on Portugal, and the next contagious round of downgrades will begin.

Europe’s insufficient rescue fund, the European Financial Stability Facility, now also faces a downgrade because it had borrowed its ratings from its members. The way the EFSF is constructed means that its effective lending capacity will thus be reduced . . .

By downgrading France and Austria but not Germany and the Netherlands, Standard & Poor’s also managed to shape expectations of the economic geography of an eventual break-up. A downgrading of all triple A rated members would have been much easier to deal with politically. Germany is now the only large country left with a triple A rating. The decision will make it harder for Germany to accept eurozone bonds. The ratings wedge between France and Germany will make the relationship even more unbalanced.

[...] The conclusion of the fiscal treaty, which is the top priority of EU politics right now, is at best an irrelevant distraction. Most likely, it will enhance the trend towards pro-cyclical austerity of the kind we have seen in Greece . . .

[...] With each turn of the spiral, the financial and political costs of an effective resolution increase. We have moved past the point where electorates and their representatives are willing to pay the ever-rising costs of repairing the system. Last week a couple of senior parliamentarians from the ruling CDU party, whom I had previously considered voices of moderation, argued that a Greek exit from the eurozone would not be such a big deal. Expectations are changing quickly, and so is the acceptance of a violent ending.

And no, the European Central Bank’s huge liquidity boost is not going to fix the problem either. I do not want to underestimate the importance of that decision. The ECB prevented a credit crunch and deserves credit for that. The return of unlimited long-term money might even have a marginal impact on banks’ willingness to take part in government debt auctions. If we are lucky it might get us through the intense debt rollover period this spring. But a liquidity shower cannot address the underlying problem of a lack of macroeconomic adjustment.

Even economic reforms, necessary as they may be for other reasons, cannot solve this problem. This is another European illusion. We are now at a point where effective crisis resolution would require a strong central fiscal authority, with the power to tax and allocate resources across the eurozone. Of course, it will not happen.

This is the ultimate implication of last week’s ratings downgrades. We have moved beyond the point where a technical fix would work. The toolkit is exhausted.

“Its neighbors may be suffering, but the euro crisis has created conditions that actually benefit the German economy. Not only is the government enjoying the windfall of negative interest rates on bonds, but unemployment is down and exports are booming.”

– Spiegel Online, January 10, 2012

This may be Germany’s 1999. If you’re too young to remember (I don’t know the demographics of my readership, such as it is), that was when the U.S. economy and stock market were booming and (nearly) everyone thought the good times would last forever. Rampant hubris was the order of the day. The Economic Report of the President, issued in February 2000, began this way:

Today, the American economy is stronger than ever. We are on the brink of marking the longest economic expansion in our Nation’s history. More than 20 million new jobs have been created since Vice President Gore and I took office in January 1993. We now have the lowest unemployment rate in 30 years—even as core inflation has reached its lowest level since 1965.

This expansion has been both deep and broad, reaching Americans of all races, ethnicities, and income levels. African American unemployment and poverty are at their lowest levels on record. Hispanic unemployment is likewise the lowest on record, and poverty among Hispanics is at its lowest level since 1979. A long-running trend of rising income inequality has been halted in the last 7 years. From 1993 to 1998, families at the bottom of the income distribution have enjoyed the same strong income growth as workers at the top.

In 1999 we had the largest dollar surplus in the Federal budget on record and the largest in proportion to our economy since 1951. We are on course to achieve more budget surpluses for many years to come. We have used this unique opportunity to make the right choices for the future: over the past 2 years, America has paid down $140 billion in debt held by the public. With my plan to continue to pay down the debt, we are now on track to eliminate the Nation’s publicly held debt by 2013. Our fiscal discipline has paid off in lower interest rates, higher private investment, and stronger productivity growth.

These economic successes have not been achieved by accident. They rest on the three pillars of the economic strategy that the Vice President and I laid out when we took office: fiscal discipline to help reduce interest rates and spur business investment; investing in education, health care, and science and technology to meet the challenges of the 21st century; and opening foreign markets so that American workers have a fair chance to compete abroad. As a result, the American economy is not only strong today; it is well positioned to continue to expand and to widen the circle of opportunity for more Americans.

These words were written only 12 years ago. One month after they were penned, the stock market peaked and soon thereafter the economy entered a recession. A very different future — one that was in most every respect the exact opposite — eventuated.

Now, it’s Germany’s — or, at least, Der Spiegel’s — turn. In “Europe’s Crisis Is Germany’s Blessing,” the most important German news magazine says this:

It’s every debtor’s dream. When asked for a loan, the bank not only agrees, but actually pays the borrower for their patronage. It sounds like a fairy tale, as though the laws of the market economy had been suspended. But on Monday it really happened.

The debtor in this case was the German government, which borrowed €3.9 billion ($5 billion) for the next six months at the unbelievable interest rate of -0.01 percent. Even the German Finance Agency was stunned. “This has never happened before,” a spokesperson said. The Finance Ministry should be pleased. In the last four years, they’ve had to shell out around 1.8 percent in interest for such bonds. But recently even interest rates on German bonds with longer maturities have decreased significantly. The federal government is saving a bundle.

The reason for the windfall? Amid the ongoing euro crisis, Germany is one of the few borrowers that are still regarded as a safe haven. Many investors would rather lend the government money at bargain-basement rates than risk losses.

Half of Europe Suffers While Germany Profits

Other countries can only fantasize about such a bonanza. Italy is currently being forced to pay record interest rates of some 7 percent on 10-year government bonds because investors lack confidence in the government in Rome. Questions remain over whether Prime Minister Mario Monti will succeed in reducing the government’s €1.9 trillion mountain of debt without stifling the economy. Meanwhile bond yields in crisis-stricken countries like Spain and Ireland have also risen sharply.

It has become a rule of the euro crisis: While a number of euro-zone countries suffer, Germany profits. The crisis may slow economic growth in Germany, but there are also a raft of crisis-related mechanisms that help the country profit at the expense of other nations. As long as a big euro-zone crash doesn’t materialize, this cushions the effects of the downturn for Germany.

A recent projection by the Munich-based Ifo Institute for Economic Research found that the economies of France, Spain, Italy, Belgium, Greece, Portugal and Cyprus would likely shrink in 2012. The German economy, on the other hand, is still expected to grow by 0.4 percent this year.

The imbalance between Germany and many other euro-zone countries is most apparent on the job market, though. Euro-zone unemployment now averages 10.3 percent, but in Germany the figure sank to 7.1 percent for 2011. Last year, just under 3 million unemployed people were registered out of 82 million residents in Germany. By contrast, the number of unemployed in Spain recently reached 4.42 million out of just 45 million residents.

German Firms Profit from Weak Euro

As mass protests form in Spain due to high unemployment among young people, Germany is benefiting from an influx of new skilled professionals. An increasing number of southern Europeans looking for work are heading north to prosperous Germany. The number of Greek immigrants rose by 84 percent in the first half of 2011 to reach some 4,100 people, according to the Federal Statistical Office. The total number of immigrants rose by 19 percent year-on-year for that time period, reaching 435,000.

But that’s not all. Indirectly, Germany also profits from a simple symptom of the crisis — the weak euro, which has fallen to about $1.27, its lowest value since Sept. 2010. For German companies, the sinking euro acts as a kind of crisis buffer. While it reduces demand for German products within the euro zone, these make up only around 40 percent of the country’s exports. But for the rest of the world, a weak euro means cheaper German products, which means they’re more competitive.

Indeed, German exports grew by 2.5 percent month-on-month in November, reaching €94.9 billion. Compared to a year earlier, exports were up by an impressive 8.3 percent. The crisis notwithstanding, exports for 2011 as a whole surpassed the historic trillion-euro level, a benchmark not even reached during the boom year of 2008.

If it were not a real possibility, the following paragraphs from the prospectus for the UniCredit (Italy’s biggest bank) stock offering to existing shareholders (a “rights” offering) wouldn’t be necessary:

Furthermore, concerns that the Eurozone sovereign debt crisis could worsen may lead to the reintroduction of national currencies in one or more Eurozone countries or, in particularly dire circumstances, the abandonment of the Euro.The departure or risk of departure from the Euro by one or more Eurozone countries and/or the abandonment of the Euro as a currency could have major negative effects on both existing contractual relations and the fulfilment of obligations by the UniCredit Group and/or customers of the UniCredit Group, which would have a significant negative impact on the activity, operating results and capital and financial position of the Group.

Any deterioration of the political and socioeconomic situation in Greece, as well as a decision by the Group to participate in restructuring plans for Greek debt (including the extension of maturities or the reduction of bonds’ redemption value to their par value) could result in even bigger losses for the Group than those recorded on 30 September 2011.

Furthermore, any decision by the ECB to suspend or revise the terms that apply to buying back the sovereign debt of certain European countries, as well as the failure of the initiatives implemented by supranational institutions to resolve the debt crisis, could have a negative impact on the value of sovereign debt securities, resulting in major negative effects on the operating results and capital and financial position of the UniCredit Group.

This excerpt is from page 66 of the 463 page prospectus. The highlighting is mine.

Those with the gold make the rules. Within the eurozone, Germany has the gold. Why change the rules when the status quo is just fine?

If you’re trying to understand why Germany is dead-set against eurobonds and other porposed solutions to the eurozone crisis, look no further than this:

The starkly contrasting economic trajectories of countries inside the eurozone were highlighted on Tuesday as Germany reported unemployment at 20-year lows while Spanish jobless figures rose for the fifth consecutive month.

The number of Spanish jobseekers rose to 4.42m, while Germany’s jobless count fell to 2.976m. Another measure, based on household surveys, puts Spanish seasonally adjusted unemployment at 5.4m, nearly 23 per cent of the workforce. The comparable German figure decreased to 6.8 per cent in December from 6.9 per cent the prior month.
And this:

The German car makers’ association said on Tuesday that 3.2m new cars had been registered in Germany in 2011, 9 per cent more than the year before, with domestic brands beating foreign rivals.

In greater detail, here’s the German employment situation:

German unemployment dropped markedly in December, bringing the number of out-of-work in the eurozone’s largest economy to a 20-year low . . . Unemployment fell by 22,000 in an unusually warm month, rendering an adjusted jobless rate of 6.8 per cent, down from 6.9 per cent in November.

German companies are profiting from solid order books, with demand for their goods increasingly coming from domestic consumers and companies as well as foreign ones.

Economists said the positive labour-market trend could continue over the next few months as companies were still willing to take on more staff – carmaker Audi said it would hire about 1,200 extra workers in Germany this year.

Other manufacturing companies were said to have shortened their traditional Christmas production break to work off their order backlog, and numerous sectors have been reporting many open positions in the past months.

But in Spain it’s austerity, not employment, that’s growing:

The . . . government has already announced €15bn of emergency public spending cuts and tax rises after announcing that the 2011 budget deficit could exceed 8 per cent of gross domestic product – two percentage points higher than the 6 per cent target agreed by the previous Socialist government with the EU.

The employment ministry statistics show that the jobless total has more than doubled since mid-2007 . . .

Evidently, the Germans have convinced themselves that their economy isn’t dependent on the economic health of the other members of the eurozone. If and when the Germans begin to listen to the advice of others, it will be a signal that the Merkel government has started to anticipate an economic slowdown.