Europe must borrow more

MARTIAL TREZZINI

Heiner Flassbeck, Officer-in-Charge, Division on Globalization and Development Strategies of United Nations Conference on Trade and Development (UNCTAD) speaks about the Launch of the Trade and Development Report 2005, at the United Nations in Geneva, Switzerland.

Europe must borrow more


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It is not often that you hear a minister of the economy say that Europe must borrow more, let alone a member of the German government.

Heiner Flassbeck is not, of course, your typical minister of finance or even a former minister, and certainly not a lawyer. He is an economist. Secondly, he does not share the fixation with achieving a surplus and does not appreciate the simile between the state and a household. States must borrow, in his view.

He served as the State Secretary for Finance alongside Finance Minister Oskar Lafontaine. Like Lafontaine, he opposed the now much acclaimed “agenda 2000” that paved the way for German labour market deregulation, a sharp drop in welfare spending, paving the way for the “German miracle” that took place during the crisis.

In Flassbeck’s view, this was the beginning of the European crisis.

As an economist, Flassbeck argues that politicians who are paralysed by lobbyists will not force companies to spend: borrow, invest, accept reasonable taxes, and pay higher wages. That leaves central banks with no choice but to extend the zero interest rates ever longer. Even in the US, after a long period of stimulus and near full employment, Flassbeck argues, wages remain stagnant, and inflation subdued.

For Europe, things are more serious. With its allergy to public debt, Europe is putting itself in harm’s way. Flassbeck argues that the Italian government is right because there is only one way to escape the recession in that country and that is by more government spending.

Until recently, Flassbeck’s views were not the status quo. That is, until this week. The second annual report published by the European Fiscal Board (EFB) on October 17 argued that the EU must scrap budget rules. The EFB says explicitly that the EU should get rid of the nominal ceiling of 3% GDP deficit ceiling.

Instead, the Commission should focus exclusively on reducing the debt. Vindicating Flassbeck, the EFB argues that “some modulation of flexibility and discretion across the cycle was preferable to a very strict and unconditional implementation of EU fiscal rules.”

The EU body whose mandate is to monitor economic policy and advice the European Commission argues that Italy should borrow more and Germany should spend more. The current trajectory appears wrong. “High-debt countries and countries in the excessive deficit procedure minimised fiscal consolidation, while some countries with fiscal space decided to do more than required,” the EFB argues.

As Flassbeck’s heretical ideas enter the mainstream, New Europe’s Ilia Roubanis found him at his home in France.

New Europe (NE): Strategically, Germany’s Foreign Minister Heiko Maas has been asking the question of whether an international cohort – Japan, South Korea, and Germany – can defend a multilateral trade regime while maintaining a two-pillar Euro-Atlantic security partnership. What do you think?

Heiner Flassbeck (HF): That balance seems implausible.

The countries mentioned by Maas are notorious trade surplus countries.

For trade, you need exporters and importers. That club needs deficit countries, or at least one big deficit country to have a workable partnership. Otherwise, this strategy will fail.

The key is debt. Among these states, Japan is the only state that realises that something has to give. You cannot have citizens, companies and the state being net savers. Someone has to borrow. Japan has a 250% debt-to-GDP-ratio, and no one is worried. Sure, there are special conditions, but the fundamental principle is right. Japan does not have this theological reverence to low debt.

NE: Is Germany’s surplus Europe’s problem or a national challenge?

HF: It is the biggest problem for both Germany and Europe at large.

The current European crisis is the result of silly German politics at the beginning of the 2000s. At the time, we placed pressure on wages through labour market reforms. In the context of the Eurozone and a commonly accepted inflation target of 1.9%, this wage dumping policy has been catastrophic.

Perhaps unintentionally, Germany triggered a race to the bottom. Given inflexible exchange rates in the late 1990s and later with the introduction of the Euro, a common currency where other states are unable to restore their competitiveness by means of currency devaluation. Without currency devaluation, remaining competitive requires wage cuts to the tune of 20-30% because Germany undercut the inflation target by a wide margin in the first years of the European Monetary Union.

That is a disaster and Greece is the most iconic example of this disaster. And it is still a political disaster with Italy now to run into a big conflict with Brussels and Berlin. Across Europe, a nationalistic policy agenda is grabbing the political agenda. That is not a comment on the nature of the party. It is a natural reflex. If in a European context, your economy is doomed to remain stagnant, then you have a national anti-European backlash. But, that could also spell the end of the EU.

NE: What do you think of French President Emmanuel Macron’s reform agenda? Berlin flatly rejected a European budget, harmonised corporate taxation, Euro bonds, and risk sharing. Is Germany’s objection temporary or is this a red line that will not be crossed.

HF: First of all, Macron’s agenda as such is rather weak. This set of policy measures does not address the root cause of the crisis. I am assuming this is what they believed they could ask under the German dominance, hoping that some of these policies would get through and mitigate the current dire situation.

Macron did not want to challenge Berlin, and he is taking the long way around trying to get Berlin onboard. This has been ineffective up to now. Merkel is not really moving. She is only taking small corrective steps with little effect.

The Euro crisis will not go away until we close the European competitiveness gap and that means higher wages and more government spending in Germany.

NE: In Italy, the calls for flat tax and socially redistributive policies are on the same political agenda. Is this argument coherent?

HF: That is not my main problem with Italy.

Social redistribution has its own logic. The rhetoric about the flat tax may not correspond to what is actually being proposed. I am not sure this is a “flat tax” as we know it to be applied elsewhere.

The core of the issue at hand is that Italy is right in macroeconomic terms. The government needs to spend borrowed money for objective reasons because it is the only way to stimulate the economy.

It is absurd that the Stability and Growth pact is preventing Italy from stimulating its growth after six years of recession.

In many countries including Italy, firms are now net savers in addition to private households. But, someone must spend. The German export-driven model cannot be replicated everywhere because, ultimately, someone must have a deficit; someone must drive consumption.

At this point in time that can only be the state. Italy’s 130%-debt to GDP means nothing. The fixation with the level of debt misses the point. And the main challenge for the economy is growth. In a world where firms are net savers, growth can only be boosted by government spending.

To cut the budget deficit and grow at the same time is impossible. It is that simple. Italy cannot reign over its debt unless it grows

NE: Berlin does not appear to be taking the front seat in race-to-the-bottom competition on corporate tax rates. Does Germany favour transparency?

HF: Most certainly no. The competition of nations is inscribed in the German DNA. Tax competition between EU states is viewed positively. If transparency leads to more action against extremely low taxes for companies, this does not go well with a number of people. There is a lack of political will in this respect.

Races to the bottom on taxation for companies is absolutely devastating, especially in economies where firms are net savers. The idea that you have companies that do not borrow to invest but save money is not compatible with the idea of a market economy. Firms must be net debtors for the economy to generate demand and investment.

Equally, the idea of competition between nations is a stupid idea. Competition is about productivity and advantages for those who are the best performers there. To compete on tax cuts is stupid. This race to the bottom is good for nothing. The state needs the resources, now more than ever, to drive the economy forward.

NE. Do you see similarities between Get Up (Aufstehen in German) and Italy’s Five-Star Movement? Do you think that anti-immigration energy should also infuse Jeremy Corbyn’s Momentum, Podemos in Spain, Syriza in Greece and La France Insoumise led by Jean-Luc Mélenchon?

HF. That is difficult to answer.

At the moment, it is difficult to tell what Get Up stands for; of course, I am close to Oskar Lafontaine and Sahra Wagenknecht, but they came up with a position paper that answers no question, or ignores the most fundamental of questions, namely Europe and the economy.

Perhaps it is too early, and they will evolve. But, what I see thus far does not give me hope.

Melenchon’s Insoumise and the Five Star Movement are not comparable or replicable political movements, mostly because they are too personalised. And they do not have a coherent economic programme. Therefore, I am sceptical of their ability to challenge or agitate against the neoliberal constitution. MS5 is wavering.

Corbyn is different. I share many of the ideas of the Corbyn campaign, but Labour’s challenge is still to build a new economic narrative. They have interesting things to say about ownership and taxation. They say little on government indebtedness. Alas, that narrative cannot be clear before they come up with a clear position on Europe.

For me the issue is clear. We have an ideological fixation concerning artificial debt ceilings, but at the current state of affairs, this runs against economic logic. You cannot have growth without higher government debt.

NE: What about the Bavarian elections? Do you feel they changed the German electoral landscape?

HF. Yes, but they affected the Social Democrats more than the Conservatives. If you add all the conservative forces, they still altogether gathered 70% of the vote. The crisis is on the left. And if one party is going to be challenged, it is the Social Democrats.

NE: There is talk of Germany going after one of the two big jobs this year: either the President of the European Commission or the President of the European Central Bank (ECB). If you are right and Germany plays a destabilising role, which of the two positions would be more destabilising?

HF. That is a funny question.

The next President of the European Central Bank will not be Jens Weidmann. Obviously, it has been made clear to Merkel that neither France nor Italy is willing to consider this application.

What remains is the Presidency of the European Commission. The leader of the European Peoples Party (EPP) Manfred Weber is in my view a weak candidate. But, it could happen.

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