global macro research top mind europe a t a crossroads
TRANSCRIPT
EUROPE AT A CROSSROADS
ISSUE 102| October 18, 2021| 5:15 PM EDT—’’’’’S’’’’’
’’’’ ’ ’ ’ ’
Global Macro Research
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
The Euro area's unprecedented program of fiscal risk sharing in response to the pandemic, and a new, likely less fiscally conservative ruling coalition in Germany, looks set to put the region on a path towards increased integration, higher growth, and better investor returns. But whether the current moment will go down as a seized—or (another) missed—opportunity for Euro area integration and growth is Top of Mind. We speak with our own Jari Stehn, who is optimistic that the fiscal shifts will move the region in the right direction over the medium term and remains constructive on the economic outlook despite China and energy risks, and former ECB Chief Economist Otmar Issing, who is more worried about the fiscal shifts and
longer-term growth. We then ask former PM of Italy and President of the EC Romano Prodi and Oxford’s Timothy Garton Ash whether these shifts will ultimately lead to a stronger EU. Prodi thinks the EU is past the point of existential danger, although integration from here will be slow. But Garton Ash warns that peak populism may not be behind us.
While I do think some progress [on integration] is possible…further progress in the most sensitive areas such as fiscal union will likely be very slow.
- Romano Prodi
“[Euro area] growth beyond 2022 will depend quite significantly on fiscal policies, and I’m afraid some countries may waste the opportunity to pursue productive investments.
- Otmar Issing
“
INTERVIEWS WITH:
Otmar Issing, Former Chief Economist of the European Central Bank
Romano Prodi, Former Prime Minister of Italy and President of the European Commission
Timothy Garton Ash, Professor, University of Oxford
Jari Stehn, Chief European Economist, Goldman Sachs
DON’T LET A GOOD CRISIS GO TO WASTE Filippo Taddei, GS Europe Economics Research
EUROPEAN EQUITIES: A STRONGER CASE Sharon Bell, GS European Equity Strategy Research
THE COSTS OF DECARBONIZATION Jeff Currie, GS Commodities Research
SAFE ASSET SUPPLY IN THE POST-MERKEL ERA George Cole, GS Markets Research
A NEW POST-MERKEL GERMAN FISCAL NORMAL Sören Radde, GS Europe Economics Research
WHAT’S INSIDE
of
Allison Nathan | [email protected] ...AND MORE
Europe has seldom missed an opportunity to miss an opportunity over the last decade.
- Timothy Garton Ash
TOP MIND
Jenny Grimberg | [email protected] Gabriel Lipton Galbraith | [email protected]
Note: The following is a redacted version of the original report published October 18, 2021 [31 pgs].
-90-75-60-45-30-15
0153045607590
105120
Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22
New CarsUsed CarsRental CarsVideo/Audio/Photo & Info. Equip.Sports & Recreational VehiclesSporting EquipmentFurnitureHousing Appliances
GS Forecast
0 1 2 3 4 5 6 7 8 9 10 11 12
US
India
Europe
Japan
Indonesia
Philippines
Australia
New Zealand
Korea
Thailand
Singapore
Malaysia
Taiwan
Hong Kong
Consumption
Investment
Percent of GDP
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
Q4 Q1 Q2 Q3 Q4
2021 2022
Germany France Italy Spain UK
Scenario 1 Scenario 2 Scenario 3
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Direct effects
Indirect effects
Financial conditions tightening
New starts: -15%Completion: +10%Sales volume: -5%ASP: -5%Land sales: -15%FCI: +35bp
New starts: -22.5%Completion: 0%Sales volume: -7.5%ASP: -7.5%Land sales: -22.5%FCI: +70bp
New starts: -30%Completion: -10%Sales volume: -10%ASP: -10%Land sales: -30%FCI: +140bp
Base case
The Euro area has more room for catch-up growth Vaccination rates are high in Euro area economies
Recovery funds will provide a small boost in the north… …and a substantial one in the south
Euro area inflation should moderate throughout 2022 We expect a temporary bridge from the PEPP to APP
-10
-8
-6
-4
-2
0
2
4
6
8
10
Spain UK Italy Germany France Japan US Russia China
Above pre-pandemic level
Below pre-pandemic level
UK
Spain
Italy
Germany
France
JapanUS
Russia
China
30
40
50
60
70
80
90
-10 -5 0 5 10
High vaccination rates
More catch-upgrowth
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2019 2020 2021 2022
National
EU Recovery Fund
Total
GS forecast
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2019 2020 2021 2022
National
EU Recovery Fund
Total
GS forecast
0
1
2
3
2017 2018 2019 2020 2021 2022 2023 2024
GS forecast
0
20
40
60
80
100
120
140
160
180
Jan-20 Sep-20 May-21 Jan-22 Sep-22 May-23 Jan-24
APP PEPP
GS forecast
What is it? How are funds disbursed to member countries?
Funding mix How will this be paid for?
Southern European countries at the forefront 19 countries have been authorized to receive funds so far*
€338bn of grants
€385.8bn of loans
RRF total:€723.8bn
Loans are disbursed with light
conditionality at very low
rates. Countries
can request a loan worth up
to 6.8% of 2019 GNI as
part of submission
of NRRPs or until August
2023 if NRRPs have already been
submitted
Grantallocation takes into account
population, the inverse of GDP per
capita, and average
unemployment rate (for 70% of grant), and observed loss in real GDP instead of
unemployment for remaining
30%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
20
40
60
80
100
120
140
160
180
200
Austr
ia
Belg
ium
Cro
atia
Cypru
s
Czechia
De
nm
ark
Fra
nce
Germ
any
Gre
ece
Irela
nd
Ita
ly
La
tvia
Lithu
ania
Lu
xe
mbo
urg
Ma
lta
Port
ug
al
Slo
vakia
Slo
ven
ia
Spain
Grants (lhs)
Loans (lhs)
% of GDP (2019) (rhs)
0
3
6
9
12
15
18
21
24
27
Austr
ia
Belg
ium
De
nm
ark
Fra
nce
Germ
any
Gre
ece
Ita
ly
La
tvia
Lu
xe
mbo
urg
Port
ug
al
Slo
vakia
Spain
Cro
atia
Cypru
s
Lithu
ania
Slo
ven
ia
Czechia
Third batch (9/8)
First batch (7/13/21)
Second batch
(7/28/21)
The Recovery and Resilience Facility (RRF) is the
centerpiece of the Next Generation EU (NGEU) fund, a
€807bn (in current prices) temporary recovery instrument
aimed to help repair the economic and social damage to the
EU from the COVID-19 pandemic. Beyond repairing the
immediate damage from the pandemic, the RRF is
designed to make EU economies more sustainable,
resilient, and better prepared for the green and digital
transitions underway around the world. As a part of this,
each country that is approved to receive funds from the
RRF must commit to spending a minimum of 37% of
expenditures on climate investments and reforms, and a
minimum of 20% to support their digital transitions.
To finance NGEU, and the RRF by extension, the European
Commission, on behalf of the EU, borrows money on the capital
markets at more favorable rates than individual member states.
Net borrowing operations are scheduled to end by 2026, and
repayment to start in 2028 and continue until 2058. The loans will
be repaid, through the Commission, by the borrowing member
states, and the grants by the EU budget (any grants requested
over the maximum amount allowed per country will be financed
by that country). To do so, the Own Resources Decision (ORD),
which establishes how the EU budget is financed and was
ratified on May 31, 2021 by all member states, raised the
maximum level of resources that can be called for from member
states from 1.2% to 1.4% of EU GNI. It also provides for a
temporary increase in the ORD ceiling by an additional 0.6%, to
be used exclusively for servicing the RRF debt. Additional
sources of revenue are expected to be linked to a carbon border
adjustment mechanism, a digital tax, and the EU Emission
Trading System, although these have not yet been approved.
Only a small amount of grants to be disbursed this year Recovery Plan grants, €bn (lhs), % of GDP (rhs)
Southern Europe at the forefront Loans and grants from the Recovery Plan by region, €bn
42.7
338.2
0.3
2.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0
50
100
150
200
250
300
350
400
2021 Disbursement Capacity 2021 Disbursement Capacity
82.6
44.5
308.1
61.1
0
50
100
150
200
250
300
350
So
uth
ern
Eu
rop
e
Co
re a
nd
Se
mi-
Co
re
Easte
rnE
uro
pe
Re
st
Loans
Grants
A global asset in the making Funds currently committed under the Recovery Plan by region, €bn
Room to grow within the program Recovery Plan loans, €bn (lhs), % of GDP (rhs)
NGEU funding, €bn (lhs), % of GDP (rhs)
0
40
80
120
160
200
So
uth
ern
Eu
rope
Ea
ste
rn E
uro
pe
Co
re a
nd
Se
mi-C
ore
Re
st
So
uth
ern
Eu
rope
Ea
ste
rn E
uro
pe
Co
re a
nd
Se
mi-C
ore
Re
st
So
uth
ern
Eu
rope
Ea
ste
rn E
uro
pe
Co
re a
nd
Se
mi-C
ore
Re
st
2021 2022 2023
62.3
185.4
132.6
20.0
153.8
0.2
1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0
20
40
60
80
100
120
140
160
180
2021 Disbursement Capacity 2021 Disbursement Capacity
338
385.8
83.1
2.5
2.9
0.6
0
1
2
3
4
5
6
7
0
100
200
300
400
500
600
700
800
900
Grants Loans Other Grants Loans Other
Trust in the EU has risen during the pandemic But stark divides remain in terms of the economic outlook
Top domestic priorities differ between north and south And citizens remain divided on the key issues for the EU
Euroskepticism has retreated in recent years EU citizens are aligned around a common foreign policy
10
20
30
40
50
60
70
2007 2009 2011 2013 2015 2017 2019 2021
Germany France Italy Spain
0
10
20
30
40
50
60
70
80
90
100
2007 2009 2011 2013 2015 2017 2019 2021
Germany France Italy Spain
0
5
10
15
20
25
30
35
40
45
50
Crime Climate& Energy
EconomicSituation
GovernmentDebt
Health& SocialSecurity
RisingCost
of Living
Germany France Italy Spain
0
5
10
15
20
25
30
35
40
45
Climatechange
/environment
Economicsituation
EU'sinfluence
in the world
Immigration Risingprices
Memberstates'public
finances
Germany France Italy Spain
40
45
50
55
60
65
70
75
80
85
90
2000 2005 2010 2015 2020
Germany France Italy Spain
50
55
60
65
70
75
80
85
90
2000 2005 2010 2015 2020
Germany France Italy Spain
European equity has kept pace with the US Total return, local currency
Inflows to Europe have improved over the past year Cumulative flows into equity by region since 2016, USD bn
European companies are increasingly globally exposed Geographic revenue exposure of STOXX Europe 600, % of total
Europe has a high beta to World growth Beta of earnings to nominal GDP growth, qoq changes since 1993
95
100
105
110
115
120
125
130
Jan-21 Mar-21 May-21 Jul-21 Sep-21
CAC 40S&P 500Euro STOXX 50MSCI WorldFTSE 100DAX
MSCI EM
-200
-150
-100
-50
0
50
100
150
200
250
300
350
400
450
500
16 17 18 19 20 21
Europe
US
EM
Asia
5
7
9
11
13
15
17
19
21
40
45
50
55
60
65
04 06 08 10 12 14 16 18 20
Europe(LHS)
Asia Pacific(RHS)
43%
19%
7.4
6.35.7
5.3
4.1
0
1
2
3
4
5
6
7
8
Japan UK Europe Asia ex-Japan US
Even accounting for sector differences, European valuations
remain well below those of the US 24m fwd P/E with global equity weights, MSCI indices
6x
8x
10x
12x
14x
16x
18x
20x
01 03 05 07 09 11 13 15 17 19 21
US
Europe
Europe faces a surge in energy driven inflation Contributions to Euro area headline inflation, pp
-1.5
-1
-0.5
0
0.5
1
1.5
2
2019 2020 2021 2022
Petrol Electricity
Gas Liquid Fuels
Solid Fuels Heat
Total
The German bond market was shrinking into 2020 Nominal bond market size, indexed to 2010=100
A looser fiscal stance will act as a tailwind to higher yields 10-year yield, %
50
75
100
125
150
175
200
225
250
2009 2011 2013 2015 2017 2019 2021
Germany France
Italy UK
US Spain
-1
0
1
2
3
4
5
2009 2011 2013 2015 2017 2019 2021
Germany 10y
UK 10y
US 10y
Left
Can
did
ate
s:
An
nale
na
Baerb
ock
Wo
n 1
5%
of
vo
tes a
nd
118
of
735 s
eats
in
th
e
Bu
nd
esta
g
•R
oots
in the 1
970s;
his
torically
focused o
n
pacifis
m a
nd e
nvironm
enta
l
activis
m
•S
upport
sconstitu
tional
change t
o d
ebt
bra
ke t
o
allo
w f
or
public
investm
ent
with a
specifie
d lim
it
•In
favor
of
rais
ing h
ighest
incom
e t
ax r
ate
s;
support
s
wealth t
ax,
25%
corp
ora
te
tax,
dig
ital corp
ora
te t
ax
•S
upport
s E
UR
50bn o
f
annual additio
nal public
investm
ent
until 2030
•A
ims to r
educe c
arb
on
em
issio
ns b
y 70%
by
2030;
aim
s f
or
carb
on n
eutr
alit
y
well
befo
re m
id-c
entu
ry
•S
upport
s incre
asin
g
unem
plo
yment
benefits
LIN
KE
Fre
e D
em
oc
rati
c
Pa
rty
(FD
P)
“Y
EL
LO
W”
GR
EE
NS
So
cia
l D
em
oc
rats
(SP
D)
“R
ED
”
Ch
ris
tia
n
De
mo
cra
tic
Un
ion
of
Ge
rma
ny/C
hri
sti
an
So
cia
l U
nio
n o
f
Ba
va
ria
(CD
U/C
SU
)
“B
LA
CK
”
PO
TE
NT
IAL
CO
AL
ITIO
NS
Cen
ter-
rig
ht
Can
did
ate
: A
rmin
Lasch
et
Wo
n 2
4%
of
vo
tes a
nd
196
of
735 s
eats
in
th
e
Bu
nd
esta
g
•C
DU
has r
oots
in the
Cath
olic
Cente
r P
art
y th
at
was f
ounded in 1
870
•C
SU
is the B
avarian s
iste
r
part
y of
the C
DU
•C
om
mitte
dto
debt
bra
ke;
wants
a s
wift
retu
rn t
o
bala
nced b
udgets
and t
he
60%
debt
ratio
•A
gain
st
rais
ing t
axes,
as
well
as w
ealth o
r
inherita
nce t
ax
•In
favor
of
main
tain
ing a
n
ele
vate
d level of
infr
astr
uctu
re i
nvestm
ent
•A
ims to r
educe c
arb
on
em
issio
ns b
y 65%
by
2030;
aim
s f
or
carb
on n
eutr
alit
y
by
2045
•C
om
mitte
d t
o p
ensio
n a
ge
of
67 b
y 2030
Cen
ter-
left
Can
did
ate
: O
laf
Sch
olz
Wo
n 2
6%
of
vo
tes a
nd
206
ou
t o
f 735 s
eats
in
th
e
Bu
nd
esta
g
•F
ounded in 1
875;
traditio
nally
repre
sents
the
inte
rests
of
the w
ork
ing
cla
ss
•R
eje
cts
auste
rity
;seeks to
levera
ge t
he f
iscal ro
om
allo
wed c
onstitu
tionally
•S
upport
s w
ealth t
ax,
financia
l tr
ansaction t
ax,
dig
ital ta
x,
and inte
rnational
min
imum
corp
ora
te t
ax
•In
favor
of
susta
inin
g E
UR
50bn o
f centr
al govern
ment
investm
ent
annually
•A
ims to r
educe c
arb
on
em
issio
ns b
y 65%
by
2030
and 8
8%
by
2040;
aim
s f
or
carb
on n
eutr
alit
y by
2045;
wants
to e
nhance g
reen
transport
ation
•A
ims to incre
ase m
inim
um
wage
to E
UR
12/h
our
Far-
left
Can
did
ate
s:
Jan
ine
Wis
sle
r an
d D
ietm
ar
Bart
sch
Wo
n <
5%
of
vo
tes a
nd
39
ou
t o
f735 s
eats
in
th
e
Bu
nd
esta
g
•F
ounded in 2
007 a
s a
merg
er
of
the P
art
y of
Dem
ocra
tic S
ocia
lism
(PD
S)
(successor
to t
he
Com
munis
t P
art
y th
at
rule
d
East
Germ
any)
and t
he
Ele
cto
ral A
ltern
ative f
or
Labor
and S
ocia
l Justice
(WA
SG
), c
om
prised o
f
trade u
nio
nis
ts a
nd
dis
gru
ntled f
orm
er
mem
bers
of
the
SP
D
•In
favor
of
a p
rogre
ssiv
e
wealth t
ax
•A
ims to r
educe p
ensio
n
age t
o 6
5
•A
ims to r
educe c
arb
on
em
issio
ns b
y 70%
by
2030;
aim
s f
or
carb
on n
eutr
alit
y
by
2035
Lib
era
l
Can
did
ate
:C
hri
sti
an
Lin
dn
er
Wo
n 1
2%
of
vo
tes a
nd
92
ou
t o
f 735 s
eats
in
th
e
Bu
nd
esta
g
•F
ounded in 1
948;
traditio
nally
pro
-
busin
ess/s
mall
govern
ment
•C
om
mitte
dto
debt
bra
ke
and w
ants
sw
ift
retu
rn t
o
60%
debt
ratio
•In
favor
of
rais
ing t
he
corp
ora
te t
ax r
ate
to a
t
most
25%
•A
ims for
gro
ss investm
ent
at
25%
of
GD
P
•A
ims for
carb
on n
eutr
alit
y
by
2050,
main
ly a
chie
ved
thro
ugh c
arb
on p
ricin
g
•In
favor
of
more
fle
xib
ility
in
the w
ork
ing w
eek,
more
support
for
fam
ilies,
and
more
adult r
eskill
ing
PA
RT
IES
Alt
ern
ati
ve
fo
r
Ge
rma
ny (
AfD
)
Far-
rig
ht
Can
did
ate
s:
Alice W
eid
el
an
d T
ino
Ch
rup
alla
Wo
n 1
0%
of
vo
tes a
nd
83
ou
t o
f 735 s
eats
in
th
e
Bu
nd
esta
g
•F
igure
heads a
re m
ostly
form
er
mem
bers
of
the
CD
U;part
y w
as f
orm
ed t
o
oppose p
olic
ies o
f th
e
Euro
zone
•A
nti-E
uro
and a
nti-
mig
ration,
far-
right
nationalis
t
•F
irst
gain
ed s
eats
in t
he
2017 e
lection
Jam
aic
a
(CD
U/C
SU
+ G
RE
EN
S+
FD
P)
We b
elieve a
Jam
aic
a c
oaliti
on
lo
oks i
ncre
asin
gly
un
likely
Late
st
develo
pm
en
ts:
Fo
rmal
co
aliti
on
talk
s b
etw
een
mem
bers
of
the
Tra
ffic
Lig
ht
co
aliti
on
are
set
to b
eg
in.
Po
ten
tial
po
licy i
mp
licati
on
s:
We l
oo
k f
or
a m
ore
exp
an
sio
nary
fis
cal
sta
nce c
om
pare
d t
o c
urr
en
t p
olicie
s,
alt
ho
ug
h a
Jam
aic
a c
oaliti
on
wo
uld
feel
mo
st
co
mm
itte
d t
o f
iscal
rule
s.
Sim
ilarl
y t
o t
he T
raff
ic L
igh
t co
aliti
on
,
we e
xp
ect
the d
igit
al
an
d g
reen
tra
nsit
ion
s t
o b
e a
t th
e c
ore
of
the a
gen
da.
Po
ten
tial
mark
et
resp
on
se:
Sim
ilar
to t
he T
raff
ic L
igh
t co
aliti
on
, w
e e
xp
ect
that
a l
oo
ser
fiscal
po
licy s
tan
ce w
ill
pro
vid
e a
tailw
ind
fo
r E
uro
pean
yie
lds
an
d t
he E
uro
over
co
min
g q
uart
ers
.
Tra
ffic
Lig
ht
(GR
EE
NS
+ F
DP
+ S
PD
)
We b
elieve a
Tra
ffic
Lig
ht
co
aliti
on
is t
he m
ost
likely
ou
tco
me
Late
st
develo
pm
en
ts:
Th
e S
PD
, G
reen
s,
an
d F
DP
all v
ote
d t
o e
nte
r in
to f
orm
al
co
aliti
on
talk
s.
Po
ten
tial
po
licy i
mp
licati
on
s:
We l
oo
k f
or
a m
ore
exp
an
sio
nary
fis
cal
sta
nce
co
mp
are
d t
o c
urr
en
t p
olicie
s,
an
d t
he d
igit
al
an
d g
reen
tra
nsit
ion
s t
o b
e a
t th
e
co
re o
f th
e g
overn
men
t’s a
gen
da.
Po
ten
tial
mark
et
resp
on
se:
Th
e m
ark
et
reacti
on
to
th
e e
lecti
on
its
elf
was
rela
tively
lim
ited
, an
d t
he e
ven
tual
form
ati
on
of
a c
oaliti
on
may n
ot
trig
ger
a
su
bsta
nti
al
reacti
on
, b
ut
we e
xp
ect
that
a lo
oser
fiscal
po
licy s
tan
ce w
ill
pro
vid
e a
tailw
ind
fo
r E
uro
pean
yie
lds a
nd
th
e E
uro
over
co
min
g q
uart
ers
.
CIT
IZE
NS
ST
AT
E G
OV
ER
NM
EN
TF
ED
ER
AL
GO
VE
RN
ME
NT
LE
GIS
LA
TU
RE
EX
EC
UT
IVE
JU
DIC
IAL
P U B L I C
BU
ND
ES
TA
G
(FE
DE
RA
LD
IET
)
•P
rim
ary
legis
lative b
ody
of
Parlia
ment
•A
t le
ast
598 d
eputies d
irectly
ele
cte
d b
y th
e p
ublic
every
four
years
(half e
lecte
d p
ers
onally
; half
via
vote
s f
or
their p
art
y)
•E
lects
the C
hancello
r; c
an b
e
dis
so
lved b
y th
e F
edera
l P
resid
ent
if t
here
is a
vote
of
no c
onfidence
•M
ost
legis
lation is in
itia
ted in
the
Executive b
ranch,
but
the
Bundesta
g a
ssesses a
nd a
mends
the le
gis
lation a
nd its
support
is
required f
or
the p
assage o
f all
law
s
•M
ost
of
the f
orm
al le
gis
lative w
ork
takes p
lace in
com
mitte
es t
hat
follo
w t
he d
ivis
ion o
f fe
dera
l
min
istr
ies (
i.e.
defe
nse,
labor,
etc
.)
•S
cru
tiniz
es
the a
ctions o
f th
e
Executive b
ranch
BU
ND
ES
RA
T
(FE
DE
RA
L C
OU
NC
IL)
•Legis
lative b
ody
that
repre
sents
the s
ixte
en f
edera
l sta
tes o
f
Germ
any
at
the n
ational le
vel
•T
he 6
9 m
em
bers
are
dele
gate
d b
y
their r
espective s
tate
govern
ments
•T
he p
resid
ency
of
the B
undesra
t
rota
tes a
nnually
am
ong t
he
Min
iste
r P
resid
ents
of
the s
tate
s
•T
he n
um
ber
of
vote
s p
er
sta
te is
based o
n p
opula
tio
n;
each s
tate
is
allo
cate
d a
min
imum
of
thre
e v
ote
s
and a
maxim
um
of
six
; th
e s
tate
must
cast
its v
ote
in
a s
ingle
blo
c
•T
he f
edera
l gov’t is r
equired t
o
subm
it a
ll le
gis
lation t
o t
he
Bundesra
t befo
re t
he B
undesta
g
and B
undesra
t appro
val is
required
when t
he s
tate
has c
oncurr
ent
pow
ers
or
when it
must
adm
inis
ter
federa
l re
gula
tio
ns
•H
as s
om
e v
eto
pow
er
whic
h c
an
be p
ow
erf
ul
if t
he o
ppositio
n
contr
ols
the B
undesra
t
•U
nlik
e the B
undesta
g,
the
Bundesra
t cannot
be d
issolv
ed
CH
AN
CE
LL
OR
•T
he H
ead
of
Govern
ment
and t
he
effective le
ader
of
Germ
any
•S
ele
cts
the F
edera
l C
abin
et
•R
esponsib
le f
or
all
gov’t p
olic
ies;
the C
abin
et
carr
ies o
ut
the
Ch
ancello
r’s v
isio
n
•E
lecte
d b
y th
e m
ajo
rity
in
the
Bundesta
g;
•U
su
ally
als
o t
he c
hair p
ers
on o
f
his
/her
part
y, d
irecting p
art
y
str
ate
gy
•H
as s
ubsta
ntial auth
ority
as h
ead
of
the E
xecutive a
nd le
ader
of
the
part
y th
at
has a
majo
rity
in
the
Bundesta
g;
i.e.
contr
ols
both
the
executive a
nd le
gis
lative b
ranches
CA
BIN
ET
•C
om
prise
d o
f M
inis
ters
that
head
depart
ments
org
aniz
ed b
y key
are
as (
defe
nse,
labor,
etc
.)
•C
hancello
rdete
rmin
es t
he n
um
ber
and id
entity
of
Min
iste
rs
•F
orm
ally
subord
inate
to t
he
Ch
ancello
r in
polic
ymakin
g;
expecte
d t
o c
arr
y out
the v
isio
n o
f
the C
hancello
r
•S
uperv
ise
their d
epart
ment’s p
olic
y
pla
nnin
g,
legis
lative in
itia
tives,
and
adm
inis
tration o
f fe
dera
l la
ws,
in
accord
ance w
ith t
he C
hancello
r’s
polit
ical directives
FE
DE
RA
L P
RE
SID
EN
T
(FR
AN
K-W
AL
TE
R
ST
EIN
ME
IER
)
•A
larg
ely
cere
monia
l post;
gre
ets
vis
itin
gheads o
f sta
te,
attends
offic
ial govt
functions,
etc
.
•F
orm
ally
in
volv
ed in
the p
olit
ical
pro
cess b
y sig
nin
g la
ws a
nd
appoin
tin
g c
abin
et
min
iste
rs b
ased
on C
hancello
r’s r
ecom
mendations.
•S
ele
cte
d e
very
fiv
e y
ears
by
a
Federa
l C
onvention c
om
posed o
f
the B
undesta
g a
nd a
n e
qual
num
ber
of
reps f
rom
the s
tate
s
ST
AT
EG
OV
ER
NM
EN
TS
•S
ixte
en f
edera
l sta
tes o
f G
erm
any
•P
arlia
menta
ry s
yste
m m
odele
d
after
the n
ational govt; s
tate
s h
ave
a u
nic
am
era
l le
gis
latu
re t
hat
is
directly
ele
cte
d b
y popula
r vote
•T
he p
art
y or
coalit
ion t
hat
contr
ols
the le
gis
latu
re s
ele
cts
a M
inis
ter
Pre
sid
ent
to h
ead t
he s
tate
gov’t
•T
he M
inis
ter
Pre
sid
ent
wie
lds
consid
era
ble
in
flu
ence a
t th
e s
tate
and n
ational le
vel and o
ften g
oes
on t
o s
ecure
national positio
ns
•T
he M
inis
ter
Pre
sid
ent
appoin
ts a
cabin
et
to a
dm
inis
ter
sta
te
agencie
s a
nd r
un t
he s
tate
govt
•S
epara
tion o
f pow
ers
assig
ns
gre
ate
r le
gis
lative r
esponsib
ility
at
the f
edera
l le
vel and g
reate
r
adm
inis
trative r
esponsib
ility
at
the
sta
te le
vel, b
ut
there
are
severa
l
are
as w
here
sta
tes h
ave
concurr
ent
pow
er
(i.e
. public
health
and r
efu
gee m
atters
) or
prim
ary
pow
er
(education,
law
enfo
rcem
ent, e
tc.)
CO
NS
TIT
UT
ION
AL
CO
UR
T
•D
ivid
ed into
tw
osenate
s;
each h
as
its o
wn p
anel of
eig
ht
judges,
its
ow
n a
dm
inis
trative s
taff a
nd its
ow
n C
hie
f Justice.
The first
senate
is c
urr
ently
pre
sid
ed o
ver
by
the
Pre
sid
ent
of
the C
ourt
, th
e s
econd
by
the V
ice
Pre
sid
ent
•T
he f
irst
senate
prim
arily
deals
with
fundam
enta
l rig
hts
, w
hile
the
second s
enate
is p
rim
arily
a c
ourt
for
sta
te m
atters
•M
em
bers
sele
cte
d in
equal
num
bers
by
the B
undesta
g a
nd t
he
Bundesra
t
•Justices c
an b
e r
em
oved f
rom
offic
e o
nly
for
abuse o
f th
eir
positio
n
Ele
cts
Appoin
ts
Germany has become significantly wealthier under Merkel GDP per capita, 2005=100
Germany relies heavily on external demand for growth Sources of volatility of German GDP growth, %
Germany has underinvested notably in public infrastructure Public net fixed capital investment, % of GDP
The green transformation requires a surge in investment Avg. annual investment needs under climate neutrality scenario, % of
2021 GDP
85
90
95
100
105
110
115
120
125
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
GermanyUKUSEA18 average
Merkel takes office
0
10
20
30
40
50
60
70
80
90
100
Full Sample(1991-2019)
Pre-Merkel(1991-2004)
Merkel(2005-2019)
Foreign
Domestic
-1
-0.5
0
0.5
1
1.5
2
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
GermanyFranceItalyUKUS
Merkel takes office
0.2
0.6
0.5
0.7
2.1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Industry Energy Transport Construction Total
Range of studies
Demographic headwinds loom large Old-age dependency ratio
Towards more expansionary fiscal policy General government balance, % of GDP
Fiscal growth impulse, pp
0
10
20
30
40
50
60
70
Japan Italy Germany France UK Canada US
2005
2020
2035
-6
-5
-4
-3
-2
-1
0
1
2
2008 2010 2012 2014 2016 2018 2020 2022 2024
ActualBaselineJamaicaTraffic Light
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026
ActualBaselineJamaicaTraffic Light
GS
GIR
: M
acro
at
a g
lan
ce
Watc
hin
g
•Glo
ba
lly,
we e
xpect
full-
year
gro
wth
of
6%
in
2021 a
nd s
ee a
som
ew
hat
less favora
ble
mix
of
slo
wer
gro
wth
and h
igher
infla
tio
n a
head o
n le
ss v
irus-s
ensitiv
e c
onsum
er
spendin
g a
nd a
slo
wer
resolu
tio
n
of
supply
bott
lenecks.
We e
xpect
gro
wth
will
slo
w f
urt
her
next
year
as the f
iscal polic
y im
puls
e turn
s n
egative,
moneta
ry p
olicy
sta
rts to n
orm
aliz
e, and f
urt
her
reopenin
g g
ain
s r
equire m
ore
sig
nific
ant
medic
al im
pro
vem
ents
as w
ell
as b
ehavio
ral adapta
tio
n,
although t
hese s
hifts
should
als
o s
ee in
fla
tio
n m
odera
te.
•In
th
e U
S,
we e
xpect
full-
year
gro
wth
of
5.6
% in
2021,
and t
hin
k s
low
er
recoverie
s in
consum
er
spendin
g a
nd s
em
iconducto
r supply
suggest
a l
ess fro
nt-
loaded r
ecovery
. W
e e
xpect
the u
nem
plo
ym
ent
rate
to f
all
to 4
.2%
by y
ear-
end,
and w
e b
elie
ve t
hat
core
PC
E w
ill lik
ely
peak t
his
quart
er
and e
nd t
he y
ear
at
4.2
5%
, befo
re f
alli
ng b
ack t
o 2
% b
y y
ear-
end 2
022.
•Th
e F
ed
has p
rovid
ed a
dvance n
otice t
hat
taperin
g is c
om
ing, cle
arin
g t
he w
ay f
or
a f
orm
al announcem
ent
of
the s
tart
of
QE
taperin
g o
f $15/b
n p
er
month
at
its N
ovem
ber
meetin
g. W
e d
on't e
xpect
lifto
ff u
ntil Q
3 2
023 g
iven o
ur
gro
wth
and in
fla
tio
n f
ore
casts
. O
n t
he f
iscal polic
y f
ront,
we e
xpect
the p
assage o
f additio
nal spendin
g f
ocused o
n in
frastr
uctu
re, socia
l benefits
, and lo
ng
-term
in
vestm
ent
tota
ling a
round $
2.8
tn a
nd t
ax h
ikes o
f aro
und $
1.5
tn o
ver
10 y
ears
.
•In
th
e E
uro
are
a,
we e
xpect
full-
year
gro
wth
of
4.9
% in
2021,
and s
ee t
he n
ear-
term
s r
isks a
s tw
o-s
ided g
iven g
enero
us g
overn
ment
support
and t
he p
rospect
of
a la
rger
hit to g
row
th f
rom
ris
ing e
nerg
y
prices. B
ut w
e r
em
ain
constr
uctive o
n t
he E
uro
are
a o
utlo
ok in
to n
ext
year
giv
en C
OV
ID-s
ensitiv
e s
erv
ices s
ecto
rs s
till
have s
ignific
ant catc
h-u
p r
oom
, supply
issues s
hould
ease a
s d
em
and m
odera
tes
and f
iscal polic
y w
ill s
tay e
xpansio
nary
. W
e e
xpect
core
in
fla
tio
n t
o p
eak a
t 2.3
% y
oy in
Novem
ber,
befo
re f
alli
ng s
harp
ly in
January
2022 a
s b
ase e
ffects
wash o
ut.
•Th
e E
CB
recently s
trength
ened t
heir f
orw
ard
guid
ance o
n in
tere
st ra
tes t
o a
lign w
ith t
heir n
ew
str
ate
gy,
whic
h w
e v
iew
as c
onsis
tent
with t
he f
irst ra
te h
ike in
2025.
We e
xpect
the P
EP
P p
ace w
ill f
all
this
quart
er
and a
nticip
ate
a t
em
pora
ry P
EP
P “
bridge”
consis
ting o
f tw
o f
urt
her
reductions in t
he p
urc
hase p
ace in 1
H22 b
efo
re t
he
pro
gra
m is e
xhauste
d.
We e
xpect
the G
overn
ing C
ouncil
to u
se t
he A
PP
to
rein
forc
e its
rate
forw
ard
guid
ance,
but
sto
p s
hort
of
a la
rge,
open
-ended i
ncre
ase in
AP
P.
•In
Ch
ina
, w
e e
xpect
belo
w-c
onsensus 2
021 r
eal G
DP
gro
wth
of
7.8
%, re
fle
ctin
g g
row
ing h
eadw
inds f
rom
in
cre
ased r
egula
tory
pre
ssure
on m
any p
rovin
ces t
o m
eet energ
y c
onsum
ptio
n a
nd in
tensity
targ
ets
, a s
malle
r fiscal deficit a
nd a
slo
wdow
n in
the p
ropert
y s
ecto
r. W
e s
ee c
onsid
era
ble
uncert
ain
ty a
round t
he p
ace o
f g
row
th h
eadin
g in
to y
ear-
end,
with u
psid
e a
nd d
ow
nsid
e r
isks b
oth
possib
le
based o
n t
he g
overn
ment's a
ppro
ach t
o m
anagin
g E
verg
rande,
the s
tric
tness o
f environm
enta
l ta
rget
enfo
rcem
ent and t
he d
egre
e o
f polic
y e
asin
g.
•WA
TC
H C
OR
ON
AV
IRU
S.
Th
e r
ecent
Delta w
ave h
as c
ontin
ued t
o r
etr
eat
aro
und t
he w
orld
. O
ur
base c
ase a
ssum
es that
hig
h a
nd r
isin
g e
ffective p
rote
cti
on
rate
s a
gain
st
hospitaliz
atio
n o
win
g t
o a
com
bin
atio
n o
f prio
r in
fectio
n,
vaccin
atio
n,
and b
ooste
r shots
will
drive a
contin
ued r
ecovery
in
glo
bal econom
ic a
ctivity. W
e fin
d t
hat
eff
ective p
rote
ctio
n r
ate
s a
gain
st
hospitaliz
atio
n h
ave r
isen to a
round
75%
in
the U
S a
nd U
K, 70%
in
the E
U, 65%
in
India
, 60%
in
Chin
a a
nd J
apan,
and 7
0%
on a
glo
bal-
GD
P w
eig
hte
d b
asis
.
Gold
man S
achs G
IR.
Gro
wth
So
urc
e: H
ave
r A
na
lytics a
nd
Go
ldm
an
Sa
ch
s G
lob
al In
ve
stm
en
t R
ese
arc
h.
Note
: G
S C
AI
is a
me
asu
re o
f cu
rre
nt g
row
th. W
e h
ave
re
ce
ntly r
evis
ed
ou
r m
eth
od
olo
gy f
or
ca
lcula
tin
g t
his
me
asu
re.
Fo
r m
ore
info
rma
tio
n o
n t
he
me
tho
do
log
y o
f th
e C
AI
ple
ase
se
e “
Le
sso
ns L
ea
rne
d: R
e-e
ng
ine
erin
g O
ur
CA
Is in
Lig
ht
of
the
Pa
nd
em
ic
Rece
ssio
n,”
Glo
ba
l E
co
no
mic
s A
na
lyst, S
ep
. 2
9,
20
20
.
Fo
rec
as
ts
So
urc
e: B
loo
mb
erg
, G
old
ma
n S
ach
s G
lob
al In
ve
stm
en
t R
ese
arc
h.
Fo
r im
po
rta
nt
dis
clo
su
res,
se
e t
he
Dis
clo
su
re A
pp
en
dix
or
go
to
ww
w.g
s.c
om
/re
se
arc
h/h
ed
ge
.htm
l.M
ark
et
pri
cin
g a
s o
f O
cto
be
r 1
5,
20
21
.
Disclosure Appendix
