Wednesday, July 11, 2012

Germany reforms: reality and myths

WSJ this weekend interview is with previous german chancellor, the man that promoted the structural reforms in Germany, claimed to be the reason for the present well being of its economy. It makes  interesting historic reading and it points to some lessons: see "Gerhard Schröder: The Man Who Rescued the German Economy".
Conclusions from the interview:
1. The structural reforms programs costed him his job - but they were embraced by his successor. This continuity of public policies between different governments is unfortunately not very much apprecited in meridional countries.
2. In the german case there was much more than austerity, lower taxes,and reform of labour laws. Schroder does not mention the differences in economic climate in europe and world at that time. The same reforms would have very different results in the present environment. But he makes an important statement about the importance of union and labour relationships in Germany - and these points have not been changed. "Agenda 2010" policies in Germany were not anti-union and anti-work policies:
  • Mr. Schröder does note that Germany's present economic vigor isn't solely the result of Agenda 2010. Work-sharing programs are common in Germany. During the financial crisis, this has allowed employers, with the help of government subsidies, to keep workers on reduced hours instead of laying them off. Mr. Schröder also notes that Germany's unique system of "co-determination," under which union representatives occupy permanent spots on corporate boards, ensures that labor and management are able to negotiate terms with both sides' long-term interests in mind. 
3. Reforms without strong domestic demand do not work, and this is the drama of present "austerity" policies:
  • Aware of the political and historical sensitivities, Mr. Schröder counsels that Germany and the European Union shouldn't be encouraging Agenda 2010-style reforms as a cure for Southern Europe without concurrent measures to promote domestic spending and forestall immediate collapse. He echoes the suggestions of Mr. Hollande and others that the EU should invest in wobbling economies via the EU's regional development funds and project bonds for infrastructure. Too much pain without enough reward risks "destroying domestic demand," Mr. Schröder says. And even perfectly executed structural reforms will not yield results right away.
4. Most important of all, he recognizes how important it has been for Germany to ignore EU rules about public deficit:
  • His own attitude toward Greece is more sympathetic. ... He points to his own experience with Agenda 2010. In 2003, just as his reforms were beginning to be implemented, the European Commission deemed Germany and France to be in violation of the EU's deficit and debt ceilings. Mr. Schröder's finance minister at the time, Hans Eichel, proposed €20 billion (around $24 billion then) of additional spending cuts to put Germany in compliance with EU law.
  • Mr. Schröder refused. "I said, 'Hans, that won't work. We can't push through these reforms, for which we need to devote all our power and take every risk, and also save €20 billion on top of that.'"
  • That Germany and France were never punished for their debt transgressions is still seen as evidence that no EU rule is so important that the Continent's largest members cannot get around it. Many blame Berlin and Paris's original sin for, in effect, licensing the Mediterranean governments' borrowing sprees. But Mr. Schröder says that fiscal rules ought to be negotiable "in countries where structural reform is really taking place—where, if you like, an Agenda 2020 is being implemented."

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