February 22, 2015

Germany's Collective Denial

Heiner Flassbeck says Germany has played a devastating role in the European Monetary Union and the "Greece guilty and Germany innocent" narrative is completely false
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Dr. Heiner Flassbeck graduated in April 1976 in economics from Saarland University, Germany, concentrating on money and credit, business cycle theory and general philosophy of science; obtained a Ph.D. in Economics from the Free University, Berlin, Germany in July 1987. 2005 he was appointed honorary professor at the University of Hamburg.

Employment started at the German Council of Economic Experts, Wiesbaden between 1976 and 1980, followed by the Federal Ministry of Economics, Bonn until January 1986; chief macroeconomist in the German Institute for Economic Research (DIW) in Berlin between 1988 and 1998, and State Secretary (Vice Minister) from October 1998 to April 1999 at the Federal Ministry of Finance, Bonn, responsible for international affairs, the EU and IMF.

Worked at UNCTAD since 2000; from 2003 to December 2012 he was Director of the Division on Globalisation and Development Strategies. He was the principal author of the team preparing UNCTAD's Trade and Development Report, with specialization in macroeconomics, exchange rate policies, and international finance. Since January 2013 he is Director of Flassbeck-Economics, a consultancy for global macroeconomic questions ( Co-authored ACT NOW! The Global Manifesto for Economic Policy published in 2013 in Germany.


Germany's Collective DenialPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay.

In the Greek Eurozone crisis, most of the narrative in the press is innocent Germany, well-managed Germany, and mismanaged and guilty Greece. Well, is that the truth? Is in fact Germany violating some of the rules and regulations that helped create Eurozone?

Now joining us to talk about all of this is Heiner Flassbeck. Heiner was the director of the Division on Globalization and Development Strategies at the UN, known as UNCTAD. He's coauthor of the new book, Against the Troika: Crisis and Austerity in the Eurozone, which he wrote with Costas Lapavitsas, who's now a new member of the parliament in Greece.

Thanks for joining us, Heiner.


JAY: So you've written recently and you mentioned in our last interview on The Real News Network that actually Germany is violating some of the policy or regulations of the Eurozone. What exactly is that?

FLASSBECK: Well, let me say first Germany's violating, so to say, the unwritten rules of Monetary Union from the very beginning. The German mercantilist approach to trade with the attempt to accumulate surpluses, surpluses, surpluses, always higher surpluses, is clearly detrimental to the idea of a currency union. And Germany has done that by violating the main target of the currency union, which is the inflation target. Germany has been undercutting with its wage increases, but unit labor cost increases all the time, the generally commonly agreed inflation target in the Eurozone. So this was the first big violation. And now Germany has a current account surplus that is going beyond any limits. It's now 7.5 percent, the surplus, in percent of GDP, which is clearly a violation of a limit that is set by the commission in legislation that says you should not have more than 6 percent. But even the 6 percent is, so to say, a very funny decision, because the deficit countries should not have more than 4 percent deficit. But the surplus countries can have 6 percent surpluses. So this asymmetry is already ridiculous. Germany's even violating that. The current account surplus is now, for three years, above that limit.

JAY: Alright. Well, let's break this down, because people listening to this will say, well, why should there be any limit on Germany having a surplus? 'Cause doesn't that show good management and efficient economy and productivity and so on? And it's reasonable to demand a control over deficit, whereas it isn't reasonable to demand the same thing on surplus. What do you say to that?

FLASSBECK: Yeah, this is totally misguided approach. Look, what is important for the international competitiveness of a country is not productivity as such, but is productivity in relation to wages. This is the concept of unit labor costs. So if your productivity is increasing by 5 percent, that's wonderful. But your wages in a currency union, with an inflation target of 2 percent should increase by 7 percent, because then only you are at par with the neighbors, where, for example, your productivity is rising, not by 5 percent. So this is a very simple rule. This rule has to be respected. Everybody has to adjust to its own productivity. And even--and to the commonly agreed inflation target.

Germany has violated this rule, not by being more productive--that's, by the way, not true; they were not more productive, for example, than France--but by putting enormous political pressure on wages. So Germany brought about a real depreciation, so to say, without having a currency anymore, but it has exactly the same effect. It was a depreciation of what economists call the real exchange rate, and so an improvement of competitiveness. And this is clearly something that cannot be repeated by others, because not everybody can depreciate, because depreciation's relative concept is always, in comparison to someone, you can depreciate, but not all countries of the world or not all countries in the currency union can depreciate. And if they try so, and if they try, the result is deflation. And this is exactly what we have now. And so far the German concept from the very beginning was disastrous and was really a false decision by the government at that time, the beginning of the 2000s, the red-green government in Germany to put this enormous pressure on wages to improve competitiveness was exactly the wrong time to do it.

JAY: I mean, this is part of the accusation. Much of German economic public opinion hurls at Greece, that they allowed wages to go up something like you're in the realm of 20 percent going up in Greece while they're going down in Germany. And this, they say, is an example of efficient Germany, inefficient Greece.

FLASSBECK: Yeah, that's a wonderful example, because 20 percent is exactly something--what is needed, depending on your productivity. But let me take the example of France. You'll see France is much more important than Greece. Everybody is focusing on Greece, but the real problem is France. France did everything right. France had a productivity increase of 1.5 percent. French wages increase increased by 3.5 percent. So the difference was exactly the 2 percent inflation target. And so France was perfect. But France is in the same difficulties as Greece--in principle not has acute, but in principle they have a huge gap with Germany in terms of competitiveness. Why? Well, because German productivity was also 1.5 percent, but German nominal wages only increased by 1.5 percent and not by 3.5 percent like in France. So they did nothing, they did everything right, but they're in trouble anyway. And this is where the unfairness comes in and where it is absolutely clear that if you do not tackle this root problem of the currency union, it was not tackled in the first ten years. But if you don't tackle it now, then you will never find a solution for the Eurozone. Forget about Greece. If France and Italy have to do the same thing as Greece did, it goes through a Great Depression. Could you imagine what it means politically? It will be a disaster. It will not be a radical left-wing government that comes to power in France, but a right-wing, and in Italy also.

JAY: Now, you talk about the difference in the wage levels. But how did Germany keep wages down? Is not like it's a state-run economy. I mean, why couldn't the German workers fight for higher wages?

FLASSBECK: Well, this is easily explained. It was, first of all, in agreement. In Germany we have a long tradition of having tripartite negotiations or agreements between the government, the employers, and the unions on wages. So that was the first step, that it was an agreement where everybody agreed that now we have to, so to say, keep our wages low to reduce unemployment, and nobody thought about the currency union. It was only by chance that the currency union started exactly at that moment of time.

And then the second step was that indeed the right-wing government passed a lot of legislation that weakened the unions dramatically. And this package of legislations are not one measure, but ten, 20 measures that all weakened the negotiating power of the unions, all in the attempt to reduce unemployment in Germany. But what nobody thought about: that this is the classical begger thy neighbor policy for the rest of the European Union and for the rest of the world. Don't forget the United States. The United States have a permanent, huge deficit with Germany, because Germany is hidden, so to say, is protected by the low value of the euro. So if there would not be euro, then clearly the D mark would appreciate against the dollar. But with the low euro, the euro is, so to say, the average of weaker countries and stronger countries. Germany has a wonderful, wonderful goal to increase its surplus with United States and begger the neighbors, because it's absolutely clear that the country that is increasing its current account surplus all the time--and it did so for the last ten, 15 years--this country has huge absolute advantage from international trade, where all its trading partners have negative effect. It's not trade as something that helps everyone; if there is absolute advantages through rising current account surpluses in one country, the other countries have negative contribution from trade. And then the whole idea of free trade is useless and the whole negotiations about TTIP, this agreement between Europe and Germany, is absolutely useless. And I saw it was now discussed in the United States and Congress, and rightly so, if there is no clear idea about the exchange rates.

JAY: So, I mean, does this mean the Eurozone really doesn't make any sense, that as long as you've got these different nation-states and at heart they really are competitive--how can they exist within the same monetary union?

FLASSBECK: It could have made sense. You see, if everybody would have obeyed to this rule that I mentioned, wages in line with national productivity, plus commonly agreed inflation target, well, it would have been a nice idea. But if one country goes for a totally mercantilist approach, then there is no chance to make sense of it. Then there is no way to bring it back, or it's very difficult to bring it back, because the other countries would need absolute cuts in wages. But absolute cuts in wages lead to deflation. So if Germany is not moving, nothing will happen. And that is why the book Against the Troika, the German title of it is Only Germany Can Save the Euro--nobody else.

JAY: And doesn't seem like they're--at least when it comes to Greece--are so intended. In fact, they have this counsel of what they call wise men, these group of economists who issued a statement--I think it was today--apparently saying, let Greece go, we'll be better off, the better defense of the Eurozone is actually to let Greece go.

FLASSBECK: Yeah. Well, these people are stupid. You know, I do not not even think about them. This is a club of extremely radical conservative economists with no clue about the world and all the important relationships in this world. So don't even--ignore it.

But what is really dramatic is the collective denial of Germany's position in the currency union from the very beginning. In Germany we have--in the mass media and the important media, everybody's trying to defend the German position along the lines--all the others are wrong, only Germany got it right from the very beginning. And this is a disaster. You know, if a society that is now living in a--has a democracy for more than 50 years and understands itself as an open society, as an open society where everybody can discuss freely everything, and then you see that you have such a collective denial of a very simple fact, then really it's getting critical, and then many people are really frustrated about this.

JAY: Alright. Thanks very much for joining us, Heiner.

FLASSBECK: You're welcome.

JAY: And thank you for joining us on The Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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