Public debt: Return to go (after a run of luck)

The spread of the delta variant will divert tourist flows in the 2021 summer season when individual holiday countries – such as Portugal recently – are classified as areas of variants of concern. However, delta is also likely to become dominant in Germany and other European countries in the near future. The question therefore arises as to how long the classification of countries with a high share of delta as areas of variants of concern can be justified. Ultimately, the classification into risk area and high incidence area might again be more reasonable. If a protection concept is lacking at schools after the summer vacations and delta leads to disruptions in school operations, this could influence the voting decisions of many people. [more]

The recovery was quick and resounding. The banking sector in Europe has shaken off the impact of the pandemic and in many ways it looks like nothing happened in the past two years at all. In Q1 2021, profitability, costs, efficiency levels, several capital and liquidity indicators were all similar to Q1 2019. Nevertheless, the crisis has left its imprint: balance sheets are far larger, revenues and loan loss provisions are substantially higher, as is the CET1 ratio. Hence, there is still room for further normalisation. [more]

The Federal Constitutional Court's "climate change order" has the potential to trigger considerable political and social disruption. The greenhouse gas emission reduction targets set by policymakers will have implications for our everyday lives. Political and social resistance appears inevitable. We need better climate technologies. Better technology is key if we want to keep climate-related restrictions to individual freedom as well as political and social tensions as low as possible, both now and in the future. Perhaps we should regard the Court order as a call for much higher investments in research and development. [more]

We compare the current debate with the discussion about the introduction of the computer in the 1980s. Then as now, positive and negative effects on a macroeconomic level could almost cancel each other out at first. Accordingly, we anticipate that the question of productivity is only likely to be answered in some years’ time. [more]

After Berlin's rent cap was declared unconstitutional by the Federal Constitutional Court, Germany is discussing the consequences. Will there be a nationwide rent cap after the federal election in September? This is one of the most frequent and potentially most important questions for many landlords and tenants. [more]

Single-family homes have recently been drawn into the discussion about suitable climate-policy measures in Germany. However, arguing about whether and to what extent single-family homes contribute to climate change or consume more resources than multi-family homes simply draws away the attention from the real energy and climate-policy challenges in the building sector. Moreover, the discussion underlines once again that calls for certain climate-policy measures often clash with how millions of people live or would prefer to live. [more]

2020 was an extraordinary year for banks, as for most other industries. In Europe, banks barely made money, as revenues fell substantially and loan loss provisions doubled. Expense cuts cushioned the blow only partly. Capital and liquidity ratios reached record highs though, thanks to disciplined risk management and funding support from central banks. Once again, European banks underperformed their US peers. But how do their results compare in the longer term, ten years after the end of the financial crisis, and also vis-à-vis smaller competitors? [more]

2020 ended on a conciliatory note for European banks. Following a heavy hit in H1, H2 saw a dynamic recovery in the economy and financial markets, which helped slow down the rise in loan loss provisions and buoyed trading income. Corporate loan growth stabilised but remained elevated and retail lending shrug off the crisis, while banks’ liquidity reserves at the ECB surged to unprecedented and unsustainable levels. Government bond holdings initially rose strongly before calming down a bit. Capital and liquidity ratios weathered the crisis well, without even needing support from supervisors which relaxed a number of rules, at the risk of undermining confidence and transparency though. The outlook for 2021 is more benign with bank profitability set to rebound significantly thanks to much lower loss provisions. [more]

If green hydrogen is to make a significant contribution to climate-friendly energy supply in the future, it will need to be produced (1) in large quantities, (2) cost-efficiently and (3) using low-carbon methods. Any solutions to these problems have remained in the realm of theory so far. Additional challenges arise in connection with the transport and storage of hydrogen. Initially, green hydrogen will be used to satisfy large-scale demand at specific locations, for example in energy-intensive industries. Like many other climate-friendly technologies, hydrogen will need government subsidies in the beginning. In the longer run, hydrogen might be used in the transport sector as well, for example as aircraft or ship fuel. In theory, hydrogen is highly versatile. However, it is quite expensive, too. That is one reason why hydrogen will probably make only a small contribution to the national and global energy transition in the next one or two decades. [more]

The quick development of highly effective vaccines and, of course, expectations of huge fiscal stimulus in the US had made investors optimistic about global growth. However, their hopes were recently dampened as vaccination campaigns were slow to start and, in Europe, experienced supply problems. Furthermore, concerns about more infectious COVID mutations have led to prolonged and more restrictive lockdowns which have weighed on business and consumer sentiment. That has stopped the equity market uptrend for now. [more]

The European Green Deal labels the goal of climate neutrality by 2050 as a growth strategy where no one is left behind. This is akin to squaring the circle. In the next few years, we will see whether we, as a society, are ready for an honest democratic discussion about climate neutrality. We will have to deal with inconvenient questions and inconvenient truths. But if this discussion does not take place, climate neutrality will remain a just topic for fine speeches and promises – and nothing will be said, much less done, that could hurt anybody. [more]

After the summer break new cases have picked up strongly in most of Germany’s neighboring countries. In many cases (France, Spain, UK, Netherlands, Poland, Czech Republic), numbers are (by far) exceeding the peaks reported in spring or are back at these levels (Belgium, Austria). Various governments have introduced new measures, such as Paris shutting down parts of the hospitality and leisure sector, and Spain ordering a partial lockdown in Madrid, albeit not as encompassing as in April. In other countries, social distancing and mask-wearing rules have been tightened or are being discussed. [more]