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.

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.