Michael Wohlgemuth: Why the EU cannot bank on Germany’s economy

Open Europe Berlin Director Michael Wohlgemuth has written an interesting piece for World Review, looking at the current status of the German economy. Here it is:

The German economy is showing clear signs of weakening. GDP declined by 0.2 per cent in the second quarter of 2014 and German business sentiment fell for a fifth straight month in September to its lowest level in 17 months. Manufacturing orders dropped during August to the lowest level since May 2013.

Germany’s problems will remain and get worse.

Much of the resilience of the German economy during the last years can be attributed to harsh labour market and social security reforms. These were introduced by the Social Democrat Chancellor Gerhard Schroder (1998-2005) in 2003 with his ‘Agenda 2010’.

The new centre-right / centre-left coalition led by Chancellor Angela Merkel has rolled back many of these reforms by reintroducing early retirement, granting extra pensions for mothers and installing an unprecedented legal minimum wage - of 8.50 euros per hour - in all sectors and all regions of Germany.

The German government has been forced to admit that the minimum wage will increase labour costs by 10 billion euros. It is still unclear how many jobs will be lost after its introduction in 2015.

The new pension benefits will cost around 200 billion euros until 2030. Early retirement could take up to 250,000 elderly off the job market over the coming years when skilled and experienced labour is becoming increasingly scarce and valuable.

Demographic decline will be Germany’s greatest challenge in the long run: coming decades could see Germany’s workforce shrink by about 200,000 every year. The old age dependency ratio - between those older than 65 and those of working age - could increase from 31 per cent in 2013 to 57 per cent in 2045.

Immigration to boost the workforce would be essential. Experts calculate that net-migration of around 400,000 people a year - preferably young and educated - would be needed to avoid demographic decline.

So where should Germany’s future economic growth, desperately needed to pay for pensions and somehow to rescue the eurozone, come from?

The answer is from productivity and innovation, in short: smart investment. Labour participation rates, labour productivity and entrepreneurial ingenuity would have to increase dramatically.

However, Germany’s productivity growth is lagging behind almost all other economies in the world.

The established German Mittelstand - its economic backbone of small and medium-sized enterprises - and some big exporting firms, are still good at innovation. However, Germany holds a dismal 111th place in the World Bank’s ranking for ‘ease of starting a business’ and its service sector is under-developed and over-regulated, while Germany’s education system fails to produce enough matching skills.

Germany’s capital stock is depreciating faster than new investments are replacing it. A declining capital stock combined with a declining workforce, leaves no hope for a growing economy.

That does not mean Germany’s government must add more public debt to the mix.

Many observers are demanding that the government abandons its ‘austerity obsession’ and take advantage of the historically low interest rates for more debt-financed ‘stimulus’.

But the Merkel government is still in the position to do the right thing and increase investment without abandoning the new constitutional balanced budget rule. German politics should also provide better regulatory and tax environments for private domestic investment and lower barriers to entry for its service sector.

Domestic industrial investment is also increasingly discouraged by the ‘lonely revolution’ to wean Germany off both fossil and nuclear energy.

This policy may cost consumers, taxpayers and business up to one trillion euros over the next two decades, according to Peter Altmaier, the former minister for the environment, who is now chief of the Chancellery and minister for special affairs.

German energy costs are now more than double those in the US, while Germany’s greenhouse emissions have increased.

German entrepreneurs and foreign investors have always had these negative factors on their radar.

Germany’s problem is not austerity, but demography and complacency. The message is you cannot bank on Germany.

Otmar Issing: EU will only live up to expectations when tendency toward centralisation and bureaucratisation resisted

This post is part of a series of interviews carried out by our sister organization, Open Europe Berlin. To read the original interview between Otmar Issing, the former Chief Economist of the European Central Bank, and Open Europe Berlin in German click here.

Otmar Issing addresses the audience at the Open Europe Berlin launch, Oct.2012

OEB: What does Europe mean to you?

Issing: Following the terrible wars and dictatorships of the past, for me, Europe means a continent of peace and freedom.  The freedom to travel, and particularly for young people -- to learn, study, and to make friends beyond national borders. The single market, a barrier-free market serving over 500 million people, is the economic dimension, and the prerequisite for prosperity and employment in Europe. 

OEB: What does the European Union mean to you?

Issing: The European Union embodies the institutional structures, which preserve the aforementioned achievements.  The European Union will live up to expectations only when the tendency towards centralisation and bureaucratisation are resisted. 

What does the euro, the shared currency, mean to you?

Issing:The euro represents a promise of a stable currency to the citizens of the euro area.  During the first 14 years of the euro, the central bank fulfilled this promise by way of its obligatory price stability policy.  However, the existing economic policies of many countries continue to be contradictory to [the ECB's] policy, which is absolutely necessary to the guarantee of long-term stability for the euro and the eurozone. 

"If the euro fails, then Europe fails!" To what extent do you agree or disagree with this statement?  

Issing: Europe is far more than the euro. It is more than currency and economy. But a collapse of the euro, which I consider rather unlikely, would indeed cause considerable economic and political turbulence and it would set European integration back. 

'More Europe' in which form of the EU? In which policy areas should the European Union (a) do more; (b) change its practice; or (c) do less? 

Issing: ‘More Europe’ is a mantra, which in my opinion, lacks concrete content and easily leads to the misguided adoption of ever further centralization.  Should the EU wish to realize its aspiration of becoming the leading voice for Europe on the global stage then it must:

• Create the preconditions for growth and employment;
• Encourage the individual member states to take responsibility for the implementation of necessary reforms;
• Accommodate the principle of subsidiarity, rather than continuing to shift competencies to the European level. 

Open Europe Berlin: One year on

With the first anniversary of the founding of our sister organisation, Open Europe Berlin, fast approaching, it seems an appropriate time to look back at its achievements over its first year. Following an impressive launch in Berlin featuring a keynote speech by former ECB Chief Economist Ottmar Issing, under the expert guidance of its Director, Professor Dr Michael Wohlgemuth, and Deputy-Director, Nora Hesse, OEB has been making waves on the German EU policy scene and beyond. Its influence is sizeable and growing continuously.

Just last week, leading German daily, Die Welt, described OEB as having a growing influence on the German media, and commended it, in particular, for its success in using social media to contribute cutting-edge research and market-orientated concepts to the debate about the future direction of the EU. The piece notes that OEB research and proposals have "even received responses from the European Commission."  In the past 12 months, OEB has become a fixture in both the German and international press, and for many, OEB became the go-to source for information, analysis and comment in the run-up to the German elections, including internationally broadcast interviews with the BBC and Reuters (see here for a compilation of OE and OEB's best #btw13 hits).

OEB research is already proving to be a leading source of analysis on key European issues including EU regulatory policy; banking union; the EU budget and the EU’s current democratic deficit. Research and media commentary aside, it has also managed to secure interviews with important German figures, including the renowned German economist Hans Werner-Sinn, and Bernd Lucke, leader of the anti-euro Alternative für Deutschland party, whose rapid rise has commanded attention around the world. The OEB blog is also a regular source of interesting information and comment, including guest posts from esteemed figures such as former FDP MP Frank Schäffler, Barenberg Chief Economist Holger Schmieding and Charles B. Blankart, an advisor to German Economy Ministry.

Fundamentally, however, Open Europe Berlin has, and will, continue to play an important role in helping to understand the role of Germany in the future of Europe. And as we have been arguing for quite some time, there is great scope for cooperation between the UK and Germany to agree on strategic and systemic changes to the way the EU operates. How this dynamic plays out, will, no doubt, have an important role in shaping the future of the European Union and both countries' places within it.

New OE/OEB poll: Significant support among German voters to slim down EU

There is no doubt that Germany is strongly wedded to the idea of ‘more Europe’ -- at least rhetorically. But when it is boiled down specific EU policies, as the new Open Europe, Open Europe Berlin and YouGov Deutschland poll shows, there is significant support amongst German voters to slim down the EU.

Key findings of our poll illustrate that the European Commission and the European Parliament are the least trusted of the 13 different national and European institutions tested. Only 33% and 30% of German voters trust the EP and EC respectively.

On the other hand, the highest ranking institution is the German Constitutional Court (trusted by a whopping 71% of Germans). Interestingly for Brussels, this is of course, the same Court which has been throwing up barriers to further eurozone integration based on its interpretation of the German Basic Law and the EU Treaties.

There is also significant support among German voters to devolve powers from the EU back to the member states: 50% agree that it’s a good idea, only 26% don’t. Similarly, 41% think that the EU should have less powers, 36% are content with the status quo – and only 23% think the EU should have more powers.

Moreover, a majority of Germans want less Brussels involvement in at least eight policy areas:

When it comes to the question of Britain in the EU, the Germans overwhelmingly want to keep Britain inside.  63% think the UK and Germany could be strong allies in reforming the EU.

  
France is by-and-far still seen as Germany’s most important ally in Europe. It is ranked first by 61% of respondents, being followed by Britain on 19%. However, David Cameron inspires more trust among Germans (ranked first by 30% of respondents) than French President Francois Hollande (ranked first by 26% of respondents.)

Germany is a conflicted country when it comes to Europe – while it is ‘pro Europe’ in temperament,  when it comes to the actual policies, German support for 'more Europe' is heavily caveated.

Stop me if you think you've heard this one before...

The Director of Open Europe Berlin, Prof. Dr. Michael Wohlgemuth, has dug up this old quote, which has a great deal of relevance for where we're at today. 

It's taken from the third Jean Monnet Lecture delivered in Florence by Ralf Dahrendorf - in 1979 (Dahrendorf was Member of the German Parliament, Parliamentary Secretary of State at the Foreign Office of Germany, European Commissioner for External Relations and Trade, European Commissioner for Research, Science and Education, Member and life peer of the British House of Lords, director of the London School of Economics, Warden of St Antony's College at the University of Oxford and Professor of Sociology at a number of universities in Germany and the United Kingdom...).

Pay attention:

"It is emphatically not the desire of some of the founding fathers to create another superpower; to have as much decentralization as possible and only as much centralization as necessary, is a prescription for a humane society to which many, including myself, would subscribe today."

He continues:

"The policy of the British government is to express its commitment to the Community – which is appreciated – to assure its partners that it does not propose to break the law – which is more than can be said of some others, though it remains to be seen what exactly the British Government has in mind – and to demand a « broad balance » of contributions and benefits. It will be for politicians to try and find out how much room for manoeuvre the notion of « broad balance » allows; at first sight, it certainly does not seem unreasonable. To say that we have to start again in order to build Europe would be wrong; there is much in the acquis communautaire which is worth preserving. But what we need is more than mere adjustments and reformlets; we need a fundamental reappraisal." 

 Then he absolutely hit the nail on the head:

"I have often been struck by the prevailing view in Community circles that the worst that can happen is any movement towards what is called a Europe à la carte. This is not only somewhat odd for someone who likes to make his own choices, but also illustrates that strange puritanism, not to say masochism which underlies much of Community action: Europe has to hurt in order to be good. Any measure that does not hurt at least some members of the European Community is (in this view) probably wrong. In any case it is regarded as unthinkable that one should ever allow those members of the Community who want to go along with certain policies to do so, and those who are not interested to stay out. The European interest (it is said) is either general or it does not exist." 

Full lecture here.

As they say, most things that are being said today, have been said better before...

Friends in high places

We've just come across an interesting new IP/Forsa poll, courtesy of the German Council on Foreign Relations, on German attitudes to Britain's membership of the EU.

Here are the highlights:

• Of those over 18 surveyed by opinion pollsters Forsa, 64 percent said they were in favour of Britain staying in the EU. Just 22 percent said that the EU would be a better place without its island neighbour.
• The younger generation was particularly keen, with 69 percent of 18- to 29-year-olds saying they wanted the UK in. Of those over 60 years old, a smaller 56 percent said the same thing.

Here's a link to the pdf (in German).

Only one poll. But it does go to show that the continent isn't quite ready to let Britain go quite yet - at least not the people of Germany, and that, if the Government plays its cards well, a new Anglo-German bargain on the future of Europe is there to be struck.

Open Europe in 2012: a short summary of our achievements and a review of our eurozone predictions

2012 has been an important and very successful year for Open Europe, with Prospect Magazine judging us “International Affairs” think-tank of the year in recognition of our research and analysis’ increasing influence in the UK, Europe and beyond. This year, many of Open Europe’s research publications and ideas have had a direct influence on policy and decision making regarding the UK’s relationship with the EU.

We also hosted prominent figures from the world of politics, economics and business in our 2012 events programme, discussing a range of topics from the UK’s future role in Europe, Anglo-German relations to the finer points of the eurozone crisis. Perhaps the icing on the cake, in October this year, was the launch of a new independent partner organisation in Germany, Open Europe Berlin gGmbh.

To read the full review of our year, click here. Below we would like to focus on some of the predictions we made about the eurozone over the last 12 months (always a dangerous undertaking). Here is how we fared in predicting some of the key developments:

The bailouts for the Spanish banking sector and Spanish regions: In April, Open Europe’s Head of Economic Research Raoul Ruparel argued that Spanish “banks may be forced to tap the eurozone bailout fund” and highlighted that the build-up of debt by Spain’s regions would mean that they too could require bailouts. In June, Spain announced that it would request €100bn from the eurozone’s bailout funds to recapitalise its banks, while in July, several Spanish regions requested bailouts from the state which sent sovereign borrowing costs to record highs.

Second Greek bailout falling short...: In March, Open Europe predicted that, coming in at just 2% of GDP, the debt write-down of Greek debt under the country’s second bailout would be “far too small to allow Greece any chance of recovery”, with further assistance required in the future. In July, it became apparent that the second bailout had failed and in October, Greece received a two-year extension to its bailout programme, duly confirmed in late November. 

...but with Greece staying in the euro for now: While others put the risk of Greece imminently leaving the euro at 80%, Open Europe’s Mats Persson argued in January 2012 that “I doubt eurozone leaders will have the nerve to force Greece out this year.” 

Credit rating of France and eurozone bailout funds downgraded: In January, we predicted that “France could well be downgraded at least one notch…this would [also] hit the creditworthiness of the euro bailout funds”. On January 16, S&P downgraded France’s triple A rating, with Moody’s following suit on November 19, and on November 30 it also downgraded the eurozone’s two bailout funds.

LTRO would run out quickly: In December 2011, in a briefing looking at the potential impact of the ECB’s programme bank liquidly provision (LTRO), Open Europe’s Raoul Ruparel argued that while it may be welcome in the short-term, “hopes, and plans, that this funding will lead to a boost in purchases of sovereign debt look misguided.” By the summer of 2012, both Spain and Italy were seeing their funding costs rise quickly, and eventually the ECB would have to take additional action. 

Monti would struggle to fundamentally reform Italy’s labour market: In March, Open Europe’s Vincenzo Scarpetta warned of the risk that Mario Monti’s lack of a popular mandate could undermine his efforts to reform Italy’s labour market. With Monti set to step down in the coming months, the OECD has recently highlighted that Italy has undertaken limited labour market reforms, with its labour costs now amongst the highest in the eurozone. 

So not a bad record for 2012, click here to check out our predictions for 2013.

Britain has the perfect chance to work out how to loosen its ties with Brussels

Open Europe Chairman Lord Leach of Fairford has an op-ed in today's Times, where he argues,

If Britain pulls out of the EU, that will be as much due to our condescending Eurozealots, who have called every turn wrong for 30 years, as to UKIP. Both alike tell us that radical change in the European structure is out of the question.

Moderate sceptics, who want to stay in the EU but might want “out” if the Government can’t negotiate a changed relationship, are the majority of the electorate, but their voice is too seldom heard. The BBC neglects them, presumably calculating that pitting Nigel Farage against Denis MacShane does more for its audience ratings than analysis of the most important issue facing the country.

Circumstances, however, have conspired to deliver our fate to the moderates. While the eurozone faces a polarised choice between economic union or break-up, Britain has three options: “more Europe”, exit or renegotiate. And since “more Europe” has become unthinkable, the effective option is exit or reform. In a word, the Europhiles have lost. The sceptics, however, have not yet won. For this, the coalition is to blame for its failure to articulate a constructive vision of a Europe that would meet the aims both of the integrationist countries and of those that put self-determination first.

Whether Britain withdraws or remains, it will have to negotiate terms with an EU that has lost its way after the triumphs of its first 50 years, when tariffs were cut, enemies reconciled and a haven given to victims of dictatorships. Its icon, the euro, has awakened resentments unknown since the Second World War. Unemployment in the South is at 1930s levels, with nothing but depression and endless financial chicanery in sight. The region has slid inexorably down the global economic league tables.

Brussels treats the catastrophe predictably as a pretext for “more Europe”, but Germany’s reaction, caught between the appeal of European solidarity and reluctance to be the milch cow for Mediterranean indiscipline, has been cautious and ambivalent. There is nothing in Berlin’s response to suggest a closed mind to a new deal with the countries outside the eurozone. They know that a British government that signed up to deeper economic integration wouldn’t last a week. They also read the polls, showing UKIP neck-and-neck with the Lib Dems. It is not in Germany’s interest to drive Britain to withdraw, depriving the EU of its financial centre, its principal advocate of democracy and free trade, and one of its two foremost military powers, not to mention its highly lucrative market.

Germany is ripe for change. After two thirds of a century’s atonement, it no longer has to disprove a wish for domination or to pretend that without uniformity there can be no peace in Europe. It can admit that the proudest European heritage - German music, Italian painting, French civilisation, English literature - is utterly removed from the integrationist obsessions of the European political class. Liberated from guilt, Germany begins to recognise again democracy’s ability to reconcile voters to political defeat, to repeal unworkable laws and dismiss bad leaders, and to tackle difficulties with the grain of national traditions, institutions and instincts, not by the imposition of one-size-fits-all European-level solutions.

The shape of a new Europe therefore writes its own script - a neighbourly alliance, partly federal, partly by treaty between independent states, in which those who want to share a currency and economic sovereignty and those who just want co-operation would be equally welcome. Only trade, the bedrock of the original Common Market, would be universal.

In truth, it is not the eurozone that is the “core” of Europe - it is the single market. In the new, flexible model for EU integration, the UK would remain a full member of the customs union and single market and maintain its vote on making Europe’s trading rules. But it could limit Brussels’ involvement in areas such as policing and crime, fisheries, farming, employment law and regional policy. 

The EU’s institutions would be adapted so as not to discriminate against countries who have chosen to be less integrated. Likewise, the UK would not vote on EU laws that did not apply to itself. The presumption of travel towards a common destiny would cease to apply, since all forms of EU membership would be equally legitimate. 

 Instead of institutional tinkering and going round in circles on the euro, national democracies would start working out how to succeed in the globally networked modern world. Each country would find its own way back to prosperity. That, after all, was how Europe became rich and civilised in the first place. Relieved from unwanted legislation and desperate sacrifices for the euro, we would rediscover the amity of neighbours. 

We might even find that a confederate EU had become a magnet for Norway and Switzerland. That would be a delicious irony - sceptical Britain bringing about a strengthening of Europe that has eluded the zealots. 

Open Europe Berlin: one to watch!

This is exciting stuff. As we've argued repeatedly, the future of Europe will largely be decided in Germany, as that country goes through a very dynamic, internal debate.

Which is why Wednesday's  launch of Open Europe Berlin gGmbH, Open Europe’s new independent partner organisation, was so incredibly timely. 220+ journalists, policy-makers, business leaders, academics, diplomats and others crowded at a packed Hotel de Rome in Berlin, to listen to OEB Director Prof. Dr. Michael Wohlgemuth and the keynote speaker Otmar Issing, former chief economist at the ECB.

The message from the podium no doubt struck a chord: the future of Europe isn't alternativlos – without alternatives to ever more centralisation. In his welcome address, OE Berlin Director, Prof. Dr. Michael Wohlgemuth argued that:

“We stand for a Europe governed by the rule of law and a Europe of citizens, not of bureaucrats… We are Europe-friendly but we place emphasis on measures that made Europe free & prosperous, not central planning… the current crisis measures will lead to institutional sclerosis & harmonised lack of responsibility, a clear case of ‘moral hazard’… Instead we stand for a liberal & competitive Europe; a democratically controllable decentralised arrangement within a clear rules based system.” 

OE Berlin Director Prof. Dr. Wohlgemuth delivering his opening remarks

In a keynote address entitled “More Europe – what kind of Europe?”, the former ECB Chief Economist Otmar Issing noted that “A think tank contributing fresh thinking on Europe is sorely needed and deserves support.”

Otmar Issing and event moderator Karen Horn

In his speech, Issing argued that:

“Placing too much value on a currency, whether it is the D-Mark or the Euro is not a good idea. It cannot be maintained at any cost...I welcome solidarity when it is about helping the weak get back on their feet. However, the fiscal union is a false interpretation of solidarity…The fiscal union is a clear case of wrong incentives. I do not believe that ‘more Europe’, a political union, is an alternative to the present state of affairs.” 

Instead, he said that failures within the euro were structural and were not caused by ‘financial speculation’, and that member states had to deal with their own problems rather than trying to move them to the European level. Issing also criticised the EU Commission’s “deeply absurd” rush towards establishing a banking union. He added that the proposed ‘Chinese wall’ between supervision and monetary policy at the ECB was “illusionary”.

The full video of the launch event is available here (auf Deutsch).

The crowd mingles at the Hotel de Rome

For German media coverage of the launch, see here.

Open Europe London Director Mats Persson outside OE Berlin office on Oranienburger Strasse in Berlin's Mitte district