Tuesday, March 16, 2010

Christine Lagarde is right

It is surprising how harsh the reactions were from the German side when French finance minister Christine Lagarde told policy-makers in Berlin to step up domestic consumption. German enterpreneurs suggested other Member States "do their homework" and step up their own competitiveness so that they wouldn't need additional German investment. The government and Commissioner Günter Oettinger agreed that German products should remain cheap as not to compromise its export revenues.

But in my view, Christine Lagarde is absolutely right. As I have expressed here, Germany's so-called "competitiveness" is essentially a public bailout of the enterprises on the shoulders of the working population. Of course it is true that Germany has the strongest economy in Europe and contributes much to growth in other Member States. But that can be increased by shifting resources back from the businesses to the consumer: A legally imposed minimum wage as practiced almost everywhere in the EU would raise aggregate consumption - and note that people have proven on various occasions throughout the crisis that they did not save the money they had at their disposal - which then means
  • more consumption of domestic goods and services
  • more consumption of foreign (inter alia European) goods and services
  • more possibility to invest in enterprises at home and abroad, and thereby a greater involvement of the citizens into economic decision-making and a greater democracy in some enterprises
Yes, it also means that enterprises have less financial room for manoeuvre and investment. It means that some enterprises will relocate, to European states with a lower labor cost (beneficial for inter-EU trade) or to extra-European states (bad for the EU). But as the high-skilled services sector is taking ever-increasing importance and businesses have already come back from Asia in fear of technology theft, a large part of enterprises will not compromise the conditions that they find in the education level, social climate and infrastructure of central Europe.

Therefore, Christine Lagarde is absolutely right. For the last ten years, German entreprises, withholding pay rises of the employees despite inflation and higher product revenues, have benefitted from a society that does not take to the street except against nuclear power and right-extremists. They have benefitted from a disunited, individualized workforce that can be easily put under pressure. They have benefitted from state contributions if they employed a recipient of social security.

Let's not talk about repaying those ten years. But it is about time the employees/consumers obtained their rights for the benefit of the rest of Europe.

Update: Couldn't say it better than Robert von Heusinger in this article (translation: Google Languages/myself):

"Let's take the economic growth as the epitome of wealth and power of an economy. Here the matter is clear: France grew by an average of 1.5 percent in the last ten years, while Germany only grew by paltry 0.8 percent. Also in terms of employment as the epitome of participation and self-esteem of the people, the country across the Rhine performed better: while France's employment grew by 0.8 percent per year on average, in Germany it only climbed by 0.5 percent.

Where does this French success come from? From domestic demand, private consumption. It averaged 2.2 percent, four times as high as in Germany (0.5 percent). How did France achieve this - in spite of globalization? Through higher wages, that's the simple answer. The slightly more sophisticated one: it was achieved through an economic policy that recognizes interrelationships instead of blindly reducing national debt, shrinking the state sector, and relying merely on competitiveness."

Update 2: Christine Lagarde is completely wrong, on the other hand, if she suggests to finance consumer spending through tax cuts. That would take money away from state services like education and research and development that dearly need it. Consumer spending has to be financed through the real economy. The money has to be shifted from the enterprises to the citizens, not from the state to the citizens.


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