Germany admits it needs to boost domestic demand

Phillip Souta

“Most of my British friends drive German cars. Stop buying them, I tell them – you’re contributing to economic imbalances in the eurozone!” Dr. Markus Kerber, the Director General of Fiscal Policy and Macroeconomic Affairs at the German Ministry of Finance opened a speech at a BNE / German Embassy roundtable, on 29 June, on the vices and virtues of the German economy with a jab at the critics of Germany’s export-led economic model.

He went on, however, to give what was perhaps the most unlikely speech one could imagine from a German government official.  And that from the man occupying the post which is said to always embody whatever-is-current German thinking on all things macroeconomic.

Germany has been accused of pursuing a ‘beggar thy neighbour’ policy in trade, trying to be Volkswagen writ large – as Philip Whyte, fellow at the Centre for European Reform suggested at the same event – exporting its way out of trouble, and ignoring the need to rebalance towards healthier (that is, more) domestic demand.

The recent G20 and G8 summits in Toronto, and George Osborne’s budget have also put cuts back at the heart of the agenda. Germany announced its own fiscal tightening a few weeks ago, provoking the now commonplace critique that Germany is taking away the patient’s life support machine.

Before embarking on the unexpected, Dr. Kerber made it clear that people had to understand Germany’s perspective.  He referred to an article in the Economist in 1999 which listed Germany’s manifest economic faults, which is why, at the time, it was in such an economic rut.

Principal among these was the fact that Germany’s wage costs were far too high.  Germany fought hard to get through the Hartz I-IV reforms, and the ‘Agenda 2010′ programme to make itself more competitive.  Gerhard Schroeder, Chancellor at the time, was so successful he lost his job.  Fast forward to 2010 and Germany has succeeded in taking a few percentage points off stubbornly high employment, which topped 10% in 2005/6.  Also, he highlighted the fact that Germans are irrational savers, and that the country has a historic aversion to high rates of inflation.  Germany’s exporting prowess is a rare thing to feel positive about.

He then significantly departed from what is thought to be the German government line.  He believes that Germany is ready to coordinate economic policy. The idea of such co-ordination was taboo in Germany in January but he said that “we are now willing to talk about it; there has been a lot of movement. This won’t be to the extent of gouvernement économique as our French friends want, but it is certainly a shift that many would have thought inconceivable a mere five months ago.”

He stated that “we accept that we need to get demand up to increase imports. We have heard the criticisms, we have considered them very carefully and we accept that we need to rebalance the German economy. Germans, unfortunately, are more Ricardian than Keynsian.”

This level of frankness, and frank agreement with the critics of the German model are not the sort of thing we have come to expect to hear from German policy makers.  This clearly indicates in shift in the German government’s approach to this.

He went on to say that Germany needs more internal investment, that Germans need to work longer and that, Germany needed to reform its service sector.  He admitted that “the large relative size of the German economy matters”, and that Germany has a responsibility to the rest of Europe not just to export goods and capital.

Towards the end of the talk, Dr. Kerber said that the EU reminded him of something that Churchill once said about the USA – “It always does the right thing … but only when it’s tried all the other options.”

If the German government takes this message out through the media, and keeps repeating it – that it has listened hard and accepts that it will have to rebalance the economy by stimulating domestic demand, reforming the service sector, investing in education and looking at the way that Germans work in next decade, it might just move the markets in Germany’s favour and help give Europe the breathing space that it needs.