Berlin should lead Europe in calling for a better monetary system
One side-effect of the comic opera that is the Hollande presidency of France is to knock it out, at least temporarily, as a serious counterpart to German strength in Europe. That is a coming challenge for the whole international community, not just for the European Community.
Germany is always portrayed as the strong man of Europe. At least, in economic terms. What is often not realised is that it has enormous potential strengths that have yet hardly been tapped. Precisely because the German government has done little to improve its competitiveness or to increase domestic demand, since the financial crisis, that means its potential is that much greater.
For example, there are manifold restrictive practices and restraints throughout many professional services such as accountancy, engineering and so forth. Germany has not had its “Thatcher moment” in these fields. Liberalisation of such restrictions would strengthen domestic demand and contribute to the vital rebalancing of the economy. So far, so good. But it would at the same time increase the competitiveness of the German economy, and further its exports.
Critics call for a Keynesian boost. It is true that Germany has not done much in this direction and that some increase in infrastructure spending is called for. Yet with wage levels set autonomously by the social partners there is not much the government can do to ensure that this flows through into higher wages and costs. No government in Germany can direct wage rates, except for the public sector. Raising minimum wages would probably raise unemployment. This points again to the case for structural measures – and there is plenty of scope for them.
Such policies would, however, make Germany an even more attractive location for investment – both for German savings and for inward foreign investment – and in the long run even more competitive. The tendency for German savings to stay at home will have been increased by the experience of German investors in losing money in the sub-prime and southern European crises. German money was used to finance a real estate bubble, and to finance government deficits in the peripheral countries and all this undermined the competitiveness of countries like Greece, Spain amd Portugal by driving up wages. Better regulation of risk-taking and sounder capital flows in Europe – indeed, better financial regulation generally – would increase the attractiveness of Germany as a place to invest. If fundamental factors count for more in future, less German capital will be invested overseas and more in Germany, resulting over time in a further increase in its economic weight in Europe.
The geo-political implications of a further accretion of Germany’s dominance in Europe will be further underlined if the UK moves to de-link from other European economies, and at the extreme if the UK were to leave the EC. Germany is set to outgrow the eurozone, bursting out of its constraints. Nobody, least of all thoughtful German observers, want the country to become a loose canon again.
Such considerations make it all the more important for leading governments to put in place a strong, coherent framework to govern international economic and monetary relations at the global level – i.e. a proper international monetary system that would apply symmetrical disciplines to deficit and surplus countries alike.
What a shame that no government has the vision or wisdom to float such ideas. Over to you, Mrs Merkel.