FEPS Fresh Thinking

At the Brussels forum of the German Marshall Fund I chaired a debate on the role of Germany in Europe.

10 years ago the Schröder government undertook painful reforms in Germany – called Agenda 2010. The overall aim of the reform was to make the labour market more flexible or “fitter” for the globalisation. The purpose was to assist people to get quicker reinsert in the labour market but also to give the business sector the possibility to act more flexible. “Fördern und Fordern – assist and challenge” was the mantra of the Chancellor Schroder at that time.

The key elements have been more flexible rules on the labour market with an emphasis for small businesses, as well as more flexible rules for low paid and part time jobs and temporary work. But the essential was to merge the federal assistance for long term unemployed with the municipal system of support for poor people into a guarantee for a minimum and basic living standard – called Hartz IV.

A part from that, the reform introduced rigid rules for jobless people who are seeking jobs to accept work. The maximum benefit time was limited to 12 months, respectively 18 months for the elderly.

Most of the German new position in Europe is due to this reform. It stimulated investment and research in particular for the SMEs and created in consequence jobs and growth. Germany opened more and more to the new markets in Asia and South America. As a consequence Germany was less vulnerable in 2008 when the crisis begun.

Today, Germany has the lowest unemployment rate amongst the big Europeans economies, the German budget is more or less in equilibrium and growth perspectives for the next years are positive – also seen in the spring “hausse” of the DAX stock market index which is at its highest peak since 2008. The index is currently above the before crisis level!

This is the one side of the story. But there are two other important elements for the German performance at the moment. Much of this success is due to the relatively moderate increases of wages in Germany in the last decade, which created deep imbalances in Europe and helped Germany at lot to strengthen its market position. Second, not all countries can be export-oriented economies – exports of one country are imports in another.

Therefore the feeling amongst the European partners is that much of the success is part of the German economic model as a strong export oriented economy with a clear strategy to build further on that business model.

The feeling in the south of Europe is that the government of Germany is imposing its policies and the European austerity policy helps to maintain the strong German position in Europe.

In this perspective we have to question if German interests are really European. The answer lies in the perspective to maintain German national interests as the strongest and most competitive economy in Europe. The horror scenario of dissolution of the Euro would be a total disaster for the German industry. Still more than 2/3 of German exports are going to the Euro-zone. A return to a strong Deutsch Mark would involve more or less automatically a high risk for the German export position.

But Europe is more than the Euro, the market position and the performance figures. Europe is an overall fascinating “experiment of the future of the globalised world” – as Timothy Gorton Ash pointed this out at the Brussels forum. Europe is a common responsibility for jobs, competitiveness and growth.

Therefore the only chance for Germany and also Europe to remain strong in our globalised world is to go further, to share more sovereignty and to assume better together the challenges.

Stronger sovereignty should be accompanied by coordination of national and European fiscal policies and by a substantial federal European budget. The European federal budget can then be used as a stabilization mechanism and to achieve fiscal transfers.

There is a clear tendency to see things in black and white. The debt crisis cannot be solved with the tough austerity policy imposed since 2010 for the Southern European countries. Deficits cannot be eliminated overnight, that worsen the already existing downward spiral.

Eu-Council President Herman Van Rompuy stipulates that each individual country has to make its own and difficult choices. This is definitely the wrong approach. Not an individual country solution but a sound European solution is needed. Tax evasion for example is a global and an European problem. Growth and industrial policy are European issues.

Europe can only remain strong with a common action and as Germany is part of the European project this has to be undertaken on a mutual beneficial basis. To bind the member states stronger to each other in a cooperative and realistic manner needs to be done. In times of crisis solidarity to one another through stronger cooperation and effective integration is the answer- it is not imposing just rules and concepts.

And it is not about being proud and arrogant to be a super-champion. The future is a European Europe and not a “German-Merkel” Europe!

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  1. Actually President Van Rompuy is more nuanced. As he said to the EP today:

    “Some people say ‘Just go easy on fiscal consolidation and growth will flourish!’

    If there really was a simple, binary choice between “austerity” and “growth”, then of course, no leader would hesitate for a second in choosing growth!

    But growth is not something governments can simply buy or summon by an easy flick of a switch…. .And the choices are not black or white. It’s important to bring in some nuance in the debate, especially as regards fiscal consolidation, sometimes oversimplified as ‘austerity’.

    On the one hand, those countries with a debt crisis won’t solve it with more debt. …. At the same time, deficits cannot be eliminated overnight – that would risk triggering a downward spiral – so it has to happen gradually. Our fiscal rules provide for enough flexibility to take into account unexpected economic downturns. This is the real issue: how to reduce public and structural imbalances in a gradual, growth-friendly and differentiated way, depending on the specific situation in each country.

    Countries that need to bring deficits down must persevere, but making their own choices:
    • on the balance between raising taxes and cutting expenditure
    • if raising taxes, which ones, and not just tax rates but being ruthless on tax evasion and fraud
    • if cutting expenditure, what to safeguard, and not just short-term cuts but also long-term reforms, NOT stifling vital areas like innovation or education.

    and in any case, pursuing well-designed structural reforms: shifting taxation away from labour and launching fast-acting and targeted measures to boost growth and employment, in particular for youth.”

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