German Finance Minister: Markets Out of Control

“First one must say: Why is Germany so prosperous? Because it has more advantages from European integration than any other country.” Christine Lagarde, the French finance minister and a close friend, who called for Germany to boost growth and spend more on imports from the rest of the euro zone, was partially right. “The problem is not the German surplus,” he says. “I respect the reproach, which I also hear from [US Treasury secretary] Tim Geithner, that Germany must do more for growth. We have a role as a locomotive. But then I must ask: what should we do to grow faster? It cannot be by building up bigger deficits, contrary to the recommendations of the [EU] stability and growth pact. That is crazy. I must reduce my deficit.”

Instead, he adds, Germany must act to boost its rate of employment. One way would be by better integrating immigrants into the German economy. “We must not cut spending on education and care services, or on the creation of equal opportunities in the labor market.”

He criticizes the effects of Germany’s long-term unemployment benefits, which raise the hurdle for job-seekers returning to the labor market. “We have to change that,” he says. “It is hard, but it is a key.” That could be one source of savings in Mr Schaeuble next round of budget cuts. “But even more important is to increase the employment rate among a shrinking and ageing population.”

Mr Schaeuble is asking for painful action from the euro zone members with the largest budget and trade deficits – such as Greece, Portugal, Spain and Ireland. If any of them were forced to ask for support from the stabilization mechanism, they would have to comply with strict conditions set by the IMF in conjunction with the European Central Bank and the Commission. Any decision to give credit guarantees must be unanimous, giving Germany an effective veto.

All face the need for more fundamental structural reforms to make themselves more competitive, he said. “Spain, for example, must solve its labor market problem. Because of regulation, it has a completely divided labor market, with a youth unemployment level of 40 per cent. Italy must solve its Mezzogiorno problem. Italy has no problem in the north, as far as growth is concerned, but it has a problem of regional differences.

“I am not giving advice for other countries, but I am just saying that everyone has a specific problem, and everyone also has specific budgetary room for maneuver to boost growth.”

But is Germany not simply trying to get the rest of Europe to behave like the thrifty Germans? “Nonsense,” he says. “I have studied a little about the world as it was before the beginning of the last century. Germany did not help the world become a better place, and that has not done the Germans any good. So we have a European responsibility. We must take Europe a bit further.

“Europe needs leadership. Any organization needs that. Germany cannot lead alone – that would be nonsense. France and Germany can do a great deal together. It would be better if Great Britain were also part of the leadership, but that is up to the UK, if they want to, or not.”

Indeed, far from reflecting a growing German Euroskepticism, Mr Schaeuble and Ms Merkel have both revived calls for closer political union to underpin economic and monetary union. “When we introduced the euro in the 1990s, Germany wanted a political union and France did not. That is why we have an economic union without a political union,” he says. “Political union naturally means a bit of federalism in the German sense of federal. It means that one can no longer take certain decisions on a national level. That is very hard for the UK. It’s often not so simple for France, but France finds it easier to take European decisions.

“Germany has a lot of experience with federalism, more than the UK or France. If you want to create a federal organization, you must be ready to have a certain amount of redistribution within it. You can dismiss that by rudely calling it a ‘transfer union’. But strong and weaker states both have their responsibility. We are asking a lot of the weaker ones, but the strong also have their responsibility, and we must explain that as well.

“We must say very clearly to Germany: we can play our role, but we must know that means there will be decisions taken against us. The weekend before last [in the negotiations over the euro zone stabilization mechanism], we saw that it was not in the German interest to be standing alone. That is also a good learning process for the German public.”