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ECONOMY

‘Wise man’ warns bank levy could spark crisis

One of Germany’s “wise men” of economics has cast doubt on the government’s plan to charge banks a levy that would be used to bail out troubled financial institutions, warning on Tuesday it could spark a credit crisis.

'Wise man' warns bank levy could spark crisis
Photo: DPA

Peter Bofinger, one of the five top economists on the German Council of Economic Experts, told daily Passauer Neue Presse that too heavy an imposition on banks at this delicate point in the recovery could hamper their ability to provide credit.

“There exists the danger that with a bank levy, a credit crunch could result,” he said.

The government announced at the weekend it wanted to use the levy to build up a “crisis fund” that would be used to save troubled banks in future, saving taxpayers the expense.

Bofinger did not oppose wholesale the idea of a levy but rather stressed that the charge should not be too burdensome.

“Therefore it depends essentially on the amount of the levy: I regard more than 0.1 percent of total assets as counterproductive.”

The influential German Council of Economic Experts – often known as the ‘five wise men’ of economics – directly advises the government on the economy.

The government was forced to dip into its own coffers in recent years to rescue failing banks such as Hypo Real Estate.

Under the current plan, which is similar to a scheme being considered by the United States, bigger banks and those with riskier business would be charged a higher levy.

Estimates vary on the total amount of money pouring into the fund from €1.2 billion a year to nearly €10 billion. It would be expected to continue for some years until the fund was big enough to comfortably bail out major banks in a crisis.

The centre-right coalition government has stressed it wanted to avoid overburdening banks in order to prevent the credit crunch Bofinger spoke of.

Right now the “most important thing” was that “credit institutions build up more of their own capital,” Bofinger said. Banks needed capital reserves to buffer themselves against future turbulence.

As an alternative, he suggested that the government safeguard against the “domino effect” whereby a single bank failure rippled through the system. This could be done by banning banks from lending more than 10 percent of their capital to other banks.

“A crash of the borrower would indeed mean losses but it would not spark a domino effect for the creditor bank and other institutions,” he said.

The state was only vulnerable as long as the crash of one bank resulted in the crash other banks, he said.

“You have to drastically reduce inter-bank borrowing,” he said.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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