Confidence among businesses in Germany, the Eurozone's biggest economy, firmed slightly in June. The IFO Institute's Business Climate Index climbed to 85.6, landing exactly where the market had expected. That is up from 85.0 in May, a figure that was itself revised higher from an earlier reading of 84.9.
The headline number is built from two parts, and in June each told a slightly different story.
Current Conditions Beat Expectations
The Current Assessment Index, which captures how firms view their situation right now, came in at 87. That topped the 86.4 forecast and improved on the previous reading of 86.0. In short, German companies feel better about the state of their business today than they did a month ago.
Outlook Improves but Misses the Mark
The Expectations Index, which reflects how businesses see the months ahead, also rose, reaching 84.1. That is up from 83.9 in May, a number revised higher from 83.8. Even so, it fell a touch short of the 85.0 that had been forecast.
Why Germany Matters for the Euro
Because Germany is the largest economy in the Eurozone, its health feeds directly into the Euro. The country's GDP, employment and inflation figures carry heavy weight in shaping confidence and stability in the single currency. When the German economy strengthens, it tends to support the Euro's value, and when it weakens, the opposite holds. Taken together, Germany plays a central role in how strong the Euro looks and how it is perceived in global markets.
Germany is also an influential player across the region. During the Eurozone sovereign debt crisis of 2009 to 2012, it was pivotal in setting up various stability funds to bail out indebted countries. It took the lead in rolling out the 'Fiscal Compact' after the crisis, a tighter set of rules to manage member states' finances and discipline 'debt sinners'. Germany championed a culture of 'Financial Stability', and its economic model has been widely treated as a template for growth by other Eurozone members.
Bunds and How Their Yields Work
Bunds are bonds issued by the German government. Like all bonds, they pay holders a regular interest payment, or coupon, and then return the full value of the loan, or principal, at maturity. Because Germany has the Eurozone's largest economy, Bunds serve as the benchmark for other European government bonds. Long-term Bunds are seen as a solid, risk-free investment, backed by the full faith and credit of the German nation. For that reason investors treat them as a safe haven, with their value rising in times of crisis and falling during periods of prosperity.
Bund Yields measure the annual return an investor can expect from holding these government bonds. The coupon is fixed, but the yield shifts as the bond's price changes, which makes it a more accurate gauge of return. When a Bund's price falls, the coupon becomes a larger percentage of the loan, pushing the yield up, and a rise in price does the reverse. That is why Bund Yields move inversely to prices.
The Role of the Bundesbank
The Bundesbank is Germany's central bank. It plays a key part in carrying out monetary policy within Germany and, more broadly, among central banks in the region. Its core aim is price stability, keeping inflation low and predictable. It is responsible for the smooth running of payment systems in Germany and takes part in overseeing financial institutions. The Bundesbank has a reputation for being conservative, putting the fight against inflation ahead of economic growth, and it has been influential in shaping both the setup and the policy of the European Central Bank (ECB).
