Monday, March 15, 2010

Germany rebuffs Lagarde criticism

Germany rebuffs Lagarde criticism
By Gerrit Wiesmann and Quentin Peel in Berlin

Published: March 15 2010 19:28 | Last updated: March 15 2010 19:28

German politicians and industry leaders on Monday closed ranks in the face of criticism from France that years of moderate wage rises had raised the competitiveness of Europe’s largest economy at the expense of its neighbours.

A representative of Chancellor Angela Merkel said Germany’s success was based on strong companies, which was why the question “How can other states do this, too?” was more relevant than asking Germany “to somehow stop” its export-driven economy.

Christine Lagarde, French finance minister, said in an interview with the Financial Times that Germany should raise long-stagnant domestic consumption, helping weaker eurozone nations to boost exports and shore up their finances.

Germany’s BDI industry association dismissed the suggestion as “obsolete in an age of globalisation and open markets”.

In Paris, Ms Lagarde said she had not discussed specific proposals for reducing imbalances with Wolfgang Schäuble, her German counterpart, declaring it “a very sensitive issue” and “not one we discuss readily”. But, far from appearing to be on the defensive, German officials have consistently shown themselves unimpressed by pressure from abroad, which is often seen to be a way to distract from their partners’ domestic problems.

One government official on Monday told the FT the debate about German stability policy had been “going on for decades, [but] we will not give in”.

Werner Schnappauf, BDI general-secretary, said Germany’s success at exporting was not the result of “some planned model”, but reflected “the competitiveness of German companies on global markets”.

Instead of falsely accusing Germany of “wage dumping” or following “a beggar-thy-neighbour policy”, countries that had trouble competing should “improve their competitiveness through tough reforms and wage policy founded on productivity”.

In order to save German manufacturing from losing its markets to cheaper Asian and eastern European rivals, the country’s companies and employers spent the opening years of the century agreeing moderate pay deals in order to raise productivity.

The policy – encouraged by the government – led to a revival of Germany as an exporting economy, but also to years of consumer torpor as the nation’s workers saved for a rainy day.

The country’s trade surplus grew for years, a development that became an issue again last year when the US government said export champions China and Germany had to stimulate domestic demand to reduce so-called economic imbalances and help pull the world out of recession.

Michael Meister, finance expert and senior member of parliament for Ms Merkel’s Christian Democratic Union, said: “Balance of payments surpluses are reflections of corporate competitiveness. Open markets allow companies from all countries to win market share at any time they choose.”

Ms Merkel has recently been more open to arguments that after years of wage moderation, domestic consumption may again need a shot in the arm.

Her government this year cut the annual tax burden by €5bn ($6.8bn, £4.5bn) and is still eyeing a cut of €19bn a year – if this does not wreck her plan of reining in the public deficit by 2012.

Dirk Schumacher, an economist at Goldman Sachs in Frankfurt, said the German government was trying to cut taxes to address the “not really sustainable” problem of stagnant consumption.

But he also warned Berlin’s eurozone partners not to over-estimate the effect on their trade balances if German government policy were to bring about a resurgence of domestic spending.

Germans against Lagarde

From Euro Intelligence

This comment from Rainer Bruderle, the German economics minister, is very typical for the way Germans are regarding their own current account surplus. In an interview with Frankfurter Allgemeime, he said that the German surplus was not a problem for anybody, merely a sign of success, the foundation for growth, employment and well-being. (The whole interview shows that the minister, in line with every other German politician who is publically commenting on this issue, has no understanding of what imbalances in a monetary union imply. It also shows a misunderstanding that Germans consider as their success is primarily the result of real revaluations elsewhere in the eurozone, which makes Germany’s good relatively cheaper. A first pre-requisite for the solution of any problem, let alone any problem as complex as imbalances, is the recognition that this is a problem in the first place.)

Les Echos, which reports on the same story from a French perspective, has spoken to a German exporter who also peddle the same line. Our advantage is not the price, but the quality.

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