SHOULD GERMANY JUST PAY UP?
The clamour is growing for Germany to pay up to solve the seemingly endless problems of bank debt and unsustainable interest rates for government debt in the southern Eurozone countries. Yet it is also obvious that Germany is simply not capable of bailing out all these economies without ruining herself. But, the argument goes, Germany has done very well economically out of the Euro zone, the Euro operates at a competitive exchange rate compared with the Deutschmark and Euro Zone competitor countries are unable to devalue to restore competitiveness. In addition, German banks contributed to the profligacy by lending to countries like Greece. So Germany should pay up and shut up.
There is superficial merit in this argument. German politicians were extremely poor at explaining to their voters just what the benefits of the Euro were to the German economy. It is only right that German banks pay for the mistakes that they made by adopting the practices of the Anglo-American banks. But in a way all of this is beside the point. Germany could not rescue the Mediterranean economies even if it stumped up far more than it already has done.
Furthermore, it is not unreasonable for the German government to demand that there should be some conditions attached to European loans. Why should unregulated banking, large tax-free black economies, under-taxation and excessive public sector salaries based on debt continue? Why should a Keynesian approach which aims to stimulate demand without addressing the deeper problems of the productive resources of the ailing economies be applied as a panacea? On the other hand, some complaints against the debtor countries do not seem so reasonable. It is perverse, for example, to rail against high youth unemployment and a low pensionable age at the same time. High youth unemployment is a huge economic, not to mention social and personal cost to a country. But the solution cannot be to make older workers work longer, thereby closing off chances for younger ones. Even when they are retired, pensioners will be paying income tax, which is more than can be said for unemployed youth.
Here, though, comes the underlying problem. Keeping a low retirement age for older workers does not, of itself, solve the problem of youth unemployment. For that you need a good general and vocational education system which provides the economy with productive workers who will enable an economy to compete on high specification and quality goods and services. It is no coincidence that countries like Germany and Austria, which have very strong apprenticeship based systems, also have low youth unemployment. Short-term economic stimuli will do nothing to solve underlying problems of dysfunctional economies. That would require serious structural reform and the taking on of powerful interests opposed to change in their preferred ways of doing things.
Again, it is all very well to talk about freeing up labour markets to deal with problems of unemployment. This ignores the fact that the Germans rely on high levels of regulation to ensure the quality of their labour markets. Abandoning regulation facilitates the black economy and the injection of unskilled labour into a bubble economy as happened in Spain. It is also rather silly to talk about freeing up businesses if this means that they follow low skill business models and fail to demand a skilled labour force. Some elements of structural reform will have the opposite effect of reinforcing dysfunctional tendencies that got countries like Greece into trouble in the first place. And, it goes without saying, banks need more regulation, not less. It is not surprising that messages about what needs to be done to restore economic health in countries struggling with public debt do not sound very coherent.
About six years ago German politicians seemed to have lost their confidence in the German model and were looking at ways of deregulating their banking system and even rolling back industrial democracy. The 2008 financial crisis changed their perception of the virtues of the Anglo-American model. Angela Merkel and others started to speak favourably about the ways in which industrial democracy enabled German firms to weather the economic storms and how agreement between employers and trade unions on what was necessary for economic survival through, for example, keeping labour costs under tight control, was a good thing. A good example of this attitude can be found in a speech by the spokesman for the CDU employers federation in May 2010 which praises the contribution industrial democracy has made to maintaining jobs and promoting business and social stability. So the Germans have got over their fascination with the ‘dynamic’ Anglo-Saxon economies and are able to regard with horror the devastation wrought within the Eurozone by unregulated banking and other evils.
There is little doubt as well that they regard their model as one that could work outside Germany. This may sound surprising since the way in which German calls for austerity sometimes come across sounds as if they are saying that countries should simply tighten their belts and squeeze the poor. It is important to note that this is not what the Germans think – so why don’t they say that sensible growth strategies should play a role in economic recovery? After all, Germany benefited from foreign investment in the aftermath of the Second World War. Here we get to the source of the problem of growth strategies in the Eurozone. The Germans and everyone else who lends money should be entitled to assurances that it will be spent responsibly, as it was in Germany post-1945. But how could this condition be met in Greece and possibly in some other countries? For the Germans to be satisfied, the Greeks would not only have to want to, but actually be able to invest responsibly and productively. Lecturing from the Germans would not do anything either for the Greeks or the Germans. On the other hand, insisting on EU commissars overseeing responsible investment would be regarded as unacceptable interference in the affairs of a sovereign state.
It is not surprising therefore that Germany is not advocating the adoption of a social market approach from the rooftops. Telling the rest of Europe to become more like Germany as the only means to salvation does not look like a good idea. It is easier to just insist on fiscal and budgetary responsibility. It is even hard to avoid the appearance of inflicting austerity on others out of self-interest. Although there is a good case to be made out for punishing irresponsible banks by writing off some of their loans there are also perils in taking this too far by encouraging the Greeks to default on all their loans including those that have been made recently in order to save the Greek economy.
It is hard to avoid the conclusion that fiscal union within the Euro zone is the most viable way out of this mess. A fiscal union would establish common rules for rates of taxation and tax collection and could even oversee and approve or disapprove of national budgets and the Euro Zone could help Greece to improve its revenue collection system and take steps towards eliminating a colossal black economy. Together with rules for common taxation policy, there will in due course need to be regulations that prevent the problems that arose in the first place.
There is thus little evidence either that Germany wishes to neoliberalise Europe or that they wish to vigorously push for wider adoption of the German model, even though it is likely that the adoption of elements of the German model would be very good for some of the struggling countries. It is certainly true that, under the influence of Blair and Brown, the EU was engaged in the first decade of the century in a thoroughgoing attempt to develop the European economy along neoliberal lines. But that strategy has been abandoned by the most powerful country in the EU under the impact of the devastating consequences of the boom that ended nearly five years ago. There are two difficulties now for the Germans and their attitude towards Europe’s economic problems. First they do not wish to be seen as imperialists telling everyone to adopt the German way, although they are confident about its virtues and often scathing in private about the vices of Anglo Saxon methods. Second, they recognise that there are specific features of German culture to do with social solidarity and responsibility which may be difficult to replicate in other countries.
There is little doubt that they are justified in asking countries in difficulties to collect taxes properly, to bear down on the black economy, to regulate banks and insist on separation of utility and gambling activities and to restore public finances to good health. They are also right in suggesting that Keynesian demand stimulation strategies and lack of control of labour costs are not a good way forward. They are on less strong ground when they appear to suggest that this can be done without adopting regulatory measures like control of labour market entry; levy grant systems for Vocational Education and employment protection; reducing the pensionable age to allow access of young people to the labour market and industrial democracy and the imposition of some controls on capital to suppress the speculation that is undermining the Euro Zone. If Germany adopts social market policies to secure its own fiscal integrity and competitiveness successfully, it is hard for it to argue that other countries should not do the same.
One problem for them is that they will need some encouragement from others to promote the German model before they feel safe enough to do so themselves. Unless this is done, measures that look like neoliberal structural adjustment will be in fact what is offered, even though this is not the intention that lies behind them. But such measures are unlikely to provide in a long-lasting way the changes that will make such countries more competitive.
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