Sunday, January 24, 2010

Germany, the poor man of Europe

Last week, Germany's finance minister Wolfgang Schäuble defended the 2010 state budget before the Bundestag. He plans an additional debt of 85,8 million to stimulate the economy, while he preferred to keep silence on plans for general tax relief (which will cost another millions of EUR in future).

As a member of the young generation in Germany, it's difficult to take CDU/FDP financial politics seriously any more. The government is selling off the future of the country in a feeble hope of rekindling domestic consumption. It is now doing something that has been neglected throughout the last decade: increasing domestic purchasing power.

Indeed, from 2000 to 2008, wage raises have been below inflation so that real income actually decreased by 0,8%. This trend continued until 2009. Proud of being export leader in the world, changing governments in Germany supported supply-side measures which would reduce wages and product prices and thereby create affordable products for foreign consumers. In other words, generally speaking, revenues for German enterprises have been generated on the back of the workforce for the last ten years. No wonder that domestic consumption broke down.

In a monetary union (MU), this kind of "beggar thy neighbor"-policy which gives one country an advantage over others due to fewer imports and more exports can only function for a few years. Afterwards, the lack in purchasing power (and thus, imports) has a tremendous impact upon fiscal stability in the rest of the MU and will start to drag the entire construction down.

Leading German economists have responded to this question over the last decade by stressing supply-side measures. If the wages remain low, the argument goes, enterprises have the room to invest and create new jobs which will increase aggregate purchasing power. However, the financial crisis has revealed that enterprises seldom used their discretion to create new jobs or invest in product development and R&D. Instead, they placed their export revenues into flawed financial products and ended up gambling away the fortune of the country.

Therefore, I think it's legitimate to say that enterprises have had their chance. They had their chance for the last ten years, throughout different government coalitions, and enterprises failed horribly in fulfilling their social responsibility. Supply-side measures were a failure, and the government finally understood it.

So it's all about boosting demand now. The best measure to increase domestic purchasing power would be a legally imposed minimum wage in Germany as it is the case in all EU countries except Cyprus. This would equalize purchasing power between Germany and the rest of the EU and prevent a race to the bottom in 2011 when the Schengen criteria are relaxed and more Eastern European workers gain access to the German job market.

However, the government is still too afraid to hold enterprises to their responsibility. Rather than financing purchasing power through the real economy, our current government prefers to reduce VAT for hotels while it finances domestic consumption through tax money. Borrowed money, mind, which future generations will have to repay.

Again, the government is bailing out enterprises like it bailed out the banks in 2009. As a young person, you cannot take this government seriously any more.

for supporting and contradicting viewpoints, see here

the political talk "Anne Will" (in German) had the same topic on Sunday evening, the audio file is here:

Update (10/02/2010): Herman van Rompuy, in a note seen by the German Handelsblatt, condemns the German beggar-thy-neighbor policy as uncooperative and calls for a model similar to the "economic government" proposed by France.

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