© REUTERS/Leonhard Foeger

How would you put the FAZ letter signed by 154 German economists into context? What does this letter signify? We have three camps in Germany by now when it comes to Europe. We have those who have a very anti-European ordoliberal, neoliberal view. You have a second camp with politically left-wing, very Keynesian, occasionally extreme views demanding a true European republic. And then you have those who are more pragmatic and less dogmatic (I would put myself in that camp).
The call by the 154 economists is a very strong euroskeptic message that basically rejects any progress on integration—and even worse, I believe, it is actually calling for an unwinding of some integration measures, for example by making it possible to exit the euro. But if you do that you’re creating something that’s akin to a fixed exchange rate system where members can leave at a whim. If that happens, markets will react and speculate against this or that country.
I’m concerned about the letter, not only because I feel the proposals are wrong-headed, but also because of the crisis it can lead to. Take Italy, where the political situation is extremely uncertain and euroskepticism is gaining ground. To demand, in such a situation, that we should be tough on Italy and force them from one day to the next to reduce debt and repay loans is to run an incredibly high risk of triggering a crisis. That’s not good economic policy; rather, it exemplifies a nationalist view on Europe that’s potentially damaging.

How influential are these economists? They are a minority even in the ordoliberal camp that had its heyday perhaps 20 years ago. And if you look at the demographics of this group it’s male-dominated, older, with a traditional outlook that lacks a European perspective. The right-wing populist Alternative für Deuschland (AfD) immediately said, “Finally a group that’s confirming and supporting what we’ve been saying”’ I don’t really want to comment on that, but it does say a lot. In short, this group is certainly not representative of German economists. It’s not even representative of German euroskeptics.

The letter warns again a “Haftungsunion” (liability union) and a “Transferunion” (transfer union), the latter implying that Germany is paying too much for Europe. Isn’t that a widely-held perception? First, Germans are very pro-European, young Germans in particular. You see that in every survey. And Germans on average understand the need for more integration, more so than people in central and eastern Europe or southern Europe. That’s an encouraging signal. Second, some people are stoking fear by saying, “All the other Europeans want is our German money.” Haftungsunion is a manipulation aimed at scaring people. It’s triggering the sentiment that we are the paymaster of Europe, that everyone else is misbehaving and all they is our money. And that’s just not the case.
If you look at the last ten years, what has Germany actually paid for? Germany has given loans. The ESM (European Stability Mechanism) has lent money to Greece, to the Greek government. What has Greece done with that money? To a large extent they have repaid their credits with German and French banks; in other words, they have protected German taxpayers. You can now complain that German banks shouldn’t have been bailed out—and I would agree with that completely—but it’s not correct to say German taxpayer money has been transferred to Greek taxpayers who are lazing on the beach, living off German money. That’s the impression a lot of people get when they read these texts but it’s simply wrong.
The third point I wanted to make is on the Haftungsunion, which one perhaps can translate as liability or insurance union. It’s about sharing risks; that’s the whole idea of Europe, the whole intention of integration. Everyone benefits from an insurance union. Take health insurance. Of course people who are healthy, who live well, who exercise regularly, eat well, and are lucky enough to be less exposed to genetic illnesses will contribute more than they will receive in benefits. Others who may have bad luck because of an accident, or because they are more exposed to specific risks, will get more money out than they pay in. So should we not have health insurance because some people benefit more than others? Of course not. Everyone benefits from it. Even if I’m the healthy one, I’m happy to pay more money knowing that I will be taken care of if I fall ill. That’s also the whole idea of Europe: risk- sharing means all of us are better off, so Haftungsunion is not a bad thing. It’s actually what Europe is about.

Yet in the run-up to the next European summit in June, this seems to be the only issue making a big splash; there’s no other real debate in Germany. Do you share that impression?  We need to have more of a debate, I agree. In January, I was one of 14 French and German economists co-writing a paper about which European and monetary union reforms are needed to balance interests and make progress. And to be honest, if the FAZ letter is the best the euroskeptics and the nationalists can come up with, then I’m not worried. If that’s the best shot they have, I think we’ll be in good shape in Germany to do the right thing, namely to have a sensible reform of monetary union.

Does that mean that you’re quite optimistic for the upcoming European summit in June? I don’t think the June summit will see a breakthrough. I think it’ll be a starting point for the French and German governments to get together and to work over the next half year to really put in place sensible reforms of monetary union, and of the EU as a whole. There is a sense of urgency if you look at Italy or at Brexit. There’s a window of opportunity now, before the European elections next spring. It’s the right time to do it. Europe is doing well economically, so now really is the time.
That’s why I’m not too optimistic for the June summit, by the way: the economy is doing too well. People don’t understand why we should undertake tough reforms now, at a time when Europe is recovering. And my answer is precisely because we’re living in relatively good times. You fix the roof when the sun is shining; you don’t repair it once it starts raining. Then it’s too late and the damage is done. But I hope and think that the German and French governments are well aware of that and that they will have made progress by the end of this year.

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© REUTERS/Kai Pfaffenbach

In the German campaign, economic issues have been notable so far by their absence. Do you think they’re being discussed enough? Economic issues play a big role in an indirect way. Yes, Germany’s economy is doing well, the employment rate is very high, and many have enjoyed wage increases over the past few years. All this explains why topics like unemployment, growth, and income are on the back burner. But there are important indirect links to other topics, as inequality and social justice are indeed big issues. For instance, both the Social Democrats (SPD) and Angela Merkel’s Christian Democrats (CDU/CSU) have put forward proposals on lowering the income tax burden by €15 billion with different constituencies in mind. In other words, economic issues aren’t unimportant, they just manifest themselves in a different way.

Do the parties differ much in their approach, or are economic affairs another example of Germany’s consensus politics? There has been a high degree of consensus in German politics over the last few decades, and the differences between the major parties are relatively small. Divisions are much starker on issues like migration, questions of identity, family values – and I’m not just talking about the right-wing party Alternative für Deutschland (AfD) here, which obviously is very anti-immigration, very anti-foreigner.

Germany is one of the richest countries in Europe, but as you and others have pointed out in the past, we are witnessing rising poverty, especially in the lower-income sector. There certainly is a widespread feeling that not everyone has benefited from Germany’s positive development to the same extent, and some have not benefited at all.

Is it a feeling or a fact? Both. Regarding the factual basis, there is a debate among economists, with some saying: “More people have jobs today, so everything is fine.” Personally, I take a more critical view. If you look at the bottom 40 percent of income earners, their wages in real terms today are lower than in 1995. In other words, the bottom 40 percent have not benefited in terms of income. Yes, lately there have been increases, but if you take a longer view, there are clear signs that they’ve been excluded. And people feel that. In polls, 70 percent say they consider social and economic inequality to be too large. This view is widely shared even by people who consider themselves comfortable economically, but they see inequality around them and say: “It has risen too much.” Politicians should address that. Otherwise, the polarization of society will continue.

How? The most serious challenge is to ensure more equal opportunities for people, which has a lot to do with education and qualification. But we also see that the number of people in “atypical employment” – those who are working full-time or part-time at low wages – has increased markedly. Statistically, more than one in five people is in atypical employment. Qualification is the key here. There are more than one million vacancies in the German job market, but mostly for the well-qualified. Therefore, the next government should focus on getting people into the labor market, on deregulating the services sector to improve competition, and on abolishing unfair competitive advantages for a few privileged groups.

Whom do you have in mind? In the German services sector there are many who enjoy protection, from lawyers to real estate agents to pharmacists – something that has been criticized for years by the European Commission, by the OECD, by the IMF, by our own DIW research institute. This is largely about abolishing privileges so that less advantaged groups are also given a fair chance to compete, find jobs and have good incomes. Protectionism hampers competition, hurts economic performance, and ultimately lowers welfare for everyone.

The coming technological changes and the increase in automation will be leading to significant job loss. Do you think German politicians are even beginning to prepare for this shift in the labor market? The first priority is to improve the education system, to have better qualified people to participate in and benefit from digitalization. Secondly, as you say, technological change is a key driver. Attempting to restrict technological change would be the wrong answer as it would fail. Rather we need to embrace technological change as the catalyst for creating new jobs. But we’re not doing very well in this area. Germany is very good at old, traditional industrial manufacturing, but very poor in the really promising fields, in information and communication technologies, where US companies are leading in almost every area, followed by Asian companies from Korea and Japan. The big challenge is how to embrace digitalization, how to improve investment, how to help start-up companies develop ideas and transform their business models. We need to further improve German research and development, in particular in the sectors of the future. That is of the highest priority. The government is doing too little. If you look at digital infrastructure, Germany’s is very poor – one of the worst digital fiber-optics infrastructures in the Western world – and that certainly will be an impediment to growth.

Is Chancellor Merkel pointing to the size of the challenge when she suddenly talks about the end of the combustion engine? Yes, in a way. This transformation is very hard to achieve, because the German export companies, above all automobile companies, have been doing very well. But in five, ten, fifteen years their current business model will be massively under threat. From autonomous driving to electro-mobility, German car manufacturers aren’t well equipped to drive those changes, and the next government urgently needs to prepare the economy by providing a first-class infrastructure and by setting the right regulatory framework, for instance by pushing electro-mobility.

What should be the new government’s priority at the European level? Merkel’s and Wolfgang Schäuble’s names are closely linked to “austerity” policies, even though the term is often misleadingly used. The German government needs to understand that all of the issues mentioned earlier – digitalization, infrastructure, trade – those are all European issues. In the past Berlin has been doing things too much on its own – there’ve been too many Alleingänge, we didn’t properly coordinate policy with our European partners and the EU institutions, be it on the Energiewende and the push for renewables, or on refugee policy. I can understand that a lot of our European neighbors are upset with Germany for always arguing that everyone needs to stick to the rules and do their homework, but when it comes to us Germans, we are above the rules and can do whatever we like. I think we need to be more self-critical – and a little bit more modest and honest with ourselves. We need Europe, and the German government needs to take greater responsibility in Europe. I hope the next government will interact more with our European partners and find common solutions, in particular with the French.

Working with France in particular, what should be top on the list? The first priority should be to reform the monetary union, making the euro sustainable. This includes improved policy coordination at the European level, on macroeconomic policies, on fiscal policy, on financial markets, on banks, but also areas I mentioned earlier: digital infrastructure, energy, etc. Second, Europe has to act in a more united fashion at the global level. Be it G7, be it G20 – the EU, Germany included, is punching massively below its weight if it doesn’t speak with one voice. At the moment it’s too easy for the Americans, the Chinese, and others to play one European country off against the other.

Is Brexit a worry? From a European perspective, I wouldn’t put it at the top of the list; for the United Kingdom of course it’s the number one issue for years to come. I think the objective of any agreement with the UK must be to not weaken the EU. The aim shouldn’t be to punish Britain, the EU should pursue a very objective approach. But the bottom line should be that a future agreement with the UK does not undermine the EU. Otherwise my big worry would be Italy, where not only the Five Star Movement or the Northern League but also Silvio Berlusconi and his Forza Italia have started talking of leaving the euro, of having a referendum on EU membership – we must make sure those forces aren’t encouraged, as that would be a big threat. The EU cannot function if everyone is pursuing narrow national interests.

Now that the United States under President Donald Trump is no longer championing free trade, can Europe – with Germany at its core – step into this void? And should it? Yes. Europe, and Germany in particular, are benefiting from free trade much more than most other countries, certainly more than the United States; the US is a far more closed economy. But trade policy is set by the EU, and Berlin shouldn’t meddle with it as it did recently by trying to regulate foreign direct investment (FDI) on the national level. That’s another example of the German government ignoring EU competences. My worry is that Germany itself is protectionist as is expressed by the huge trade surplus which is causing a great deal of concern internationally. Germany needs to take this criticism seriously. Protectionist tendencies are mostly prevalent in the services sector, but if you look at what’s been happening in the automobile sector, the German government has certainly been acting protectionist there too, by not holding the big companies accountable, by not making them stick to the rules. So we should champion free trade. The opportunities for European and for German companies are huge, in particular in Asia which is where the future lies. The EU should push for trade liberalization by concluding new bilateral trade agreements through multilateral trade agreements even with the US. TTIP may be a political non-starter right now, but in the long run a US-EU agreement is absolutely inevitable if you want to secure jobs and prosperity.

― interview conducted by Victoria Campion and Henning Hoff

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