Germany’s trade surpluses built on holding down labor costs may be unsustainable for the other countries in the eurozone, France’s finance minister said in an unusually blunt warning to Berlin.
Christine Lagarde said Berlin should consider boosting domestic demand to help deficit countries regain competitiveness and sort out their public finances.
Her comments break a long-standing taboo between the French and German governments about macroeconomic imbalances inside the 16-country bloc which have been dramatically exposed by the Greek debt crisis.
“[Could] those with surpluses do a little something? It takes two to tango,” she said in an interview with the Financial Times. “It cannot just be about enforcing deficit principles.”
“Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labor costs. When you look at unit labor costs to Germany, they have done a tremendous job in that respect. I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence.”
After Wolfgang Schäuble, her German counterpart, last week proposed a European Monetary Fund associated with much stiffer penalties for breaking the EU’s fiscal rules, Ms Lagarde outlined her own thinking about closer economic policy co-ordination, laying bare the different visions of “economic government” held by Paris and Berlin.
While not ruling out an EMF, she said it was not a priority for the eurozone. The bloc should first focus on ensuring that debt-laden Greece followed through on promised austerity measures and then show “a bit of creativity and innovation” to find scope within the existing EU treaty for beefing up budgetary surveillance and discipline.
Rather than amending a treaty to set up an EMF – “an adventure that could take us another three, four, five years” – the eurozone should adopt its own “soft laws” to strengthen discipline.
Ms Lagarde said much tougher sanctions as proposed by Mr Schäuble were “worth exploring”. But she preferred faster surveillance procedures and less painful but more realistic penalties, pointing out that the existing threat of a fine under the EU’s fiscal rules “is so far away and unlikely that it is not really a deterrent”.
Ms Lagarde made clear the biggest difference between Germany and France – and other eurozone members - is over whether Berlin should boost internal demand to give a lift to its partners’ export industries.
It was a “very sensitive issue”, she acknowledged. “I talk to Wolfgang [Schäuble] on an almost daily basis at the moment. The issue of imbalances is not one we address readily.”
The rest of the eurozone could not expect too much of Germany, Ms Lagarde said. France and other governments had to make efforts to increase the competitiveness of their economies and reform their public sectors to reduce deficits. She paid tribute to Ireland which was “driving hard”.
“You can’t ask one player, as big as it is, to pull the whole group. But clearly there needs to be a sense of common destiny that we have together with our partners.”
Ms Lagarde defended a proposed EU crackdown on credit default swaps on sovereign debt, which some believe has been used to manipulate the price of Greek debt.
She said she had “no evidence” of price manipulation using sovereign CDS but added that the “rapidity of movements is intriguing”. There needed to be a closer watch on a “narrow and shallow market with very few players”, she added.
A complete ban on “naked selling” – trading the CDS without holding the underlying asset – would be an “oversimplication”, she said.
She said Greece’s debt problems underlined the need to step up efforts to overhaul the market in CDS more generally. The standardisation of contracts and the shift from over-the-counter to trades on organised exchanges – as agreed by the G20 group of leading economies – should be completed by the end of next year rather than by the end of 2012.