On May, 12th, the Argentinian newspaper Tiempo Argentino has published an interview with me on the impact of the sovereign debt crisis on the forthcoming German federal election. Miguel Queirolo conducted this interview for the newspaper and translated it into Spanish. An online version is available here.
The interview was originally conducted in English. Here is the unshortened version of the interview.
Tiempo Argentino: Please, explain to us the idea, or even the reality, of Germany as a big Exporter of the E.U. and the effects of that in the rest of the European countries. In 29 april – Der Spiegel, EU Social Affairs Commissioner László Andor, sayed that Germany must increase its wages.
For Germany, the establishment of the European Union and the euro area reduced barriers to trade and fostered growth and prosperity. The single currency, the euro, also effectively slowed down the tendency of appreciation of the currency that was characteristic before for the German currency, the Deutschmark. In the last decade, exports were promoted by low increases in wages and unit labour costs. As a consequence, current account imbalances in the euro area have aggravated. Some countries imported more than they exported, and they have accumulated debt in order to pay their imports. Germany and a group of other countries showed continuous export surpluses leading to an increase in assets and to lending to other countries. For Germany, this export-led growth model did not fully pay off. Private consumption and GDP growth in Germany have been below euro area average for a long time. Furthermore, the German wage restraint had a negative impact on other member states of the euro area. It contributed to a widening of differentials in inflation rates and to a loss in price competitiveness of several countries of the euro area.
Tiempo Argentino: A new political party has suddenly appeared in the politics of Germany, your country. They support the idea of the south-european countries going back to their former moneys (Lira, Escudo, Peseta,Dracma) but mantaining a currency with the Euro in order to devalue. What is your opinion about it? Talks about a resurging of economic heterodox point of view?
The so called ‘Alternative for Germany’ is the outcome of an ultraliberal-conservative movement that would like to return to the Deutschmark or at least dismiss the so called soft-currency countries. I cannot see that this party will have a significant impact on the forthcoming elections. The liberals and the conservatives will lose some votes, that will be it. Economically, I would say that a split of the euro area could lead to a disaster, especially for Germany. The consequence would be a drastic appreciation and a fall in exports. Moreover, the remaining euro area would be under constant surveillance: which country is next to leave the euro area? In the long run there will also be a significant increase in transaction costs, which a large currency area is able to prevent. From my point of view, a solution has to include a reform of European institutions, meaning a common fiscal policy, reduction of veto positions and side-payments in the political decision process, and a transfer of responsibilities from the national parliaments and governments to the European parliament. Moreover, the European Central Bank could use a further instrument, asset-based reserve requirements. This instrument allows to address excessive inflation in a specific country. This does not hold for the interest rate, which is a tool that affects the whole euro area and cannot be used to reduce inflation in a single country or a subset of the euro area. I have to clarify, however, that at the moment inflation is not a topic in Europe, not even for those countries, like Germany, which perform comparatively well. But such a tool could be very helpful to avoid further financial market crises.
Tiempo Argentino: The september elections in your coutry could change the situation of the EU? Who is in a better position to win? If the socialdemocracy returns to the power, will it changes the position of German and its supporting of the budget cuts and fiscal austerity? In a few words, German socialdemocracy will put Merkel´s policies aside definitely?
The social democratic party would like to form a coalition with the Greens but they are too weak to reach majority. On the other hand, Merkel´s coalition partner, the liberals, might lose too many votes to be part of the next parliament; there is a five per cent threshold for parties in Germany. Thus, the most likely outcome is a great coalition of Merkel’s conservatives and the social democrats. This would shift the German policy towards a more pro-European policy. But I don’t expect drastic changes in fiscal policies or a cancellation of the austerity approach. Firstly, the social democrats will only be the junior partner in the coalition; secondly, they have agreed to far reaching labour market deregulations and a debt brake for the public budget, enshrined in the constitution in the past.
Tiempo Argentino: What about the idea that “Cyprus model” could become a new approach to bank crisis instead the former one (saving the bank with public money and no burden to private sector)? Is that idea just a debate or maybe it can become a reality?
The Cypress model is based on the idea that the public should no longer bail out banks and investors and assume the debt burden. And who would not agree that the transformation of private failures and private debt into public responsibility and public debt is annoying, to say the least. The problem is, however, that the negative effects of insolvency and losses and potential spill-overs to other countries can be contained in a small country like Cypress. It might be different, however, for larger countries and is a threat to the stability of the euro area.
It is due to German influence that the European Stability Mechanism already includes the option of private sector involvement. So in principle involving the private sector is nothing new. What caused the public uproar in the case of Cypress was the later corrected proposal to levy a substantial charge also from deposit holders who, as small savers, are normally shielded against losses due to guarantees of the state and the banking system.
Tiempo Argentino: The Merkel´s goverment support the idea of “Cyprus model”? And the rest of the goverments of E.U.?
From the German government´s point of view, Germany has already paid enough to counter the crisis and to support its neighbours. It was very difficult for Merkel to organise approval for to the several aid programmes and credit obligations in the past. The Cypress model offers the possibility to shift responsibility to the indebted countries and to limit further monetary obligations for Germany and other members of the euro area that follow the German export-oriented model of growth, accompanied by current account surpluses but also weak domestic demand and only moderate growth rates.
Tiempo Argentino: Ist growth rather than austerity the way out of the E. U. crisis? And if it really is, what should do Germany in order to help that growth? Meaning with its position as big exporter.
Indeed, the current austerity policy leads only to a prolonged crisis. A country cannot repay its debt if unemployment is rising, tax revenues are decreasing and GDP is stagnating or even shrinking. Growth is essential to overcome the crisis. This clearly includes institutional reforms, e.g. to strengthen the tax base and to reduce tax avoidance. However, we have to consider further policies. Currently, the options of monetary policy are limited. The European Central Bank can increase the money supply but if no one uses this money to invest because of weak domestic demand and a negative outlook, fiscal policy has to step in. Investment programmes in the countries in dire straits have to stabilise income and increase productivity. Germany can and has to contribute to a recovery, too. The euro area is an important market for German exports and Germany is already suffering from weak European demand. So it’s in the German interest to support a growth-oriented strategy. Higher wages in Germany would help to narrow the gap in price competitiveness between the countries in the euro area. This would also strengthen domestic demand in Germany and would thus allow other countries to export more commodities to Germany. Similarly, fiscal programmes in Germany would not endanger public budgets but would help to increase domestic demand and imports.