The policy advice of ex-political leaders always needs to be taken with a large dose of salt. All too often the message is less about genuinely forward-looking recommendations and more about backward-looking justifications, namely of the writer’s own action while in power.
So it is with Gerhard Schröder, who gives his take on Europe and especially France in the FT under the unambiguous headline: France should copy Germany’s reforms to thrive.
The piece starts off well enough. He calls for greater European integration to avoid geopolitical irrelevance between a still pre-eminent and increasingly Asia-fixated US and a rising China. What he has to say about the need for greater integration within the euro area without entirely disaffecting non-euro area members (especially the UK) is not especially insightful, but it is not wrong.
But as inevitably as the “amen” in church – to coin a German phrase – he turns to the need for structural reforms at national level. He compares, approvingly, the current situation, in which the EU Commission is easing up on fiscal austerity while insisting on structural reforms, to the early 2000s when Schröder, along with French president Chirac, loosened the Stability and Growth Pact and Germany implemented the Hartz labour market reforms. While diplomatically avoiding making explicit his criticism that France omitted to do the necessary reforms that he pushed through in Germany, Schröder ends pointedly: he is now confident “that our friends in Paris will act accordingly”. Translation: wield the axe and do the nasty business that made me so unjustly unpopular, but is the reason why Germany is now the dominant power in Europe, while France risks joining the Club Med. This will, so his conviction, not only be good for France but will make Europe overall more internationally competitive and thus strengthen its position in the world.
Of course this is all wrong. On a generous interpretation the Hartz reforms did substantially improve German competitiveness and, after a long, now largely forgotten valley of tears, this contributed to robust German labour market performance in the face of the crisis. (Alongside some very un-Hartz-like measures such as short-time working.) But even more inexorably than cometh the amen in church – indeed as a simple logical necessity in a currency union – Germany’s historically unprecedented, persistent and aggressive wage moderation worsened the competitive position of everyone else. Simply because competitiveness in a monetary union is a relative concept and if it is achieved through income restraint, rather than faster productivity growth, it is not welfare-enhancing overall. The widening competitiveness and current account imbalances were at the heart of the euro area crisis. France, meanwhile, did not by any means go on a spending spree. In particular its nominal unit wage costs grew almost exactly in accordance with the requirements of monetary union; in that sense France, not Germany, was the correct role model (see here).
In calling upon the second-largest EMU economy, France, to repeat the beggar-thy-neighbour policies of the largest economy, Germany, Schröder is effectively condeming the euro area to a permanent roundabout of booms and busts, with poor aggregate outcomes. Like in a game of musical chairs, aggregate demand is always inadequate, so at any one time one large country or a set of smaller ones lacks a chair: they impose deflationary policies, drive down domestic demand and wages, dismantle welfare states, suffer high and rising unemployment, rising inequality, deteriorating social and technical infrastructure. (Meanwhile others boom thanks to low real intersst rates.) After years of pain, the common currency ensures that price competitiveness gains are not offset by exchange-rate adjustment, net exports rise to such an extent that the weakness of domestic demand is offset, the labour market stabilises and improves. And then it’s the turn of another country. First Germany, now Spain, Portugal and Greece. France is next. In Germany musical chairs is called more colourfully “the journey to Jerusalem”. But in this euro version “the journey to hell” would be a more appropriate title.
Competition between companies is a motor for increased productivity and wealth. But Schröder’s pious wishes notwithstanding, Europe will not prosper and European integration will not succeed for as long as the mindset of cut-throat regulatory and wage competition between nation states dominates the thinking of former and, more importantly, current political leaders. Europe needs economic governance structures that permit balanced growth throughout the currency area and cooperative national economic policies that maximise positive externalities across borders, not beggar-thy-neighbour competitive policies.