October 10, 2014
more than a decade, Germany has pursued a course of extreme austerity. This austerity has led Germany to excessive savings/investment
surpluses as well as to some of the lowest unemployment rates in the European Union.
But the price for these "accomplishments"
has been high. Internally, Germany devalued through wage depression. As a result, 25% of Germany's "employed" work
in part-time or so-called mini-jobs and the percentage of Germans living at or below the poverty line has risen to 15%.
What's more, Wolfgang Schaeuble, the country's Minister of Finance wishes to take this internal re-balancing one
step further. He is contemplating a tax reform that would effectively tear apart the concept of fiscal equalization, whereby
federal tax revenues of the fiscally strong states are partially redistributed to weaker ones. This is a core element of social
fairness enshrined in Germany's constitution since 1949 and it has served the country well.
In another fit
of austerity, Mr. Schaeuble plans to give "surplus" states the authority to reduce federal tax rates (there are
no state income taxes in Germany), while forcing "deficit" states to apply additional charges. According to Mr.
Schaeuble's plan, the rich in surplus states would disproportionately benefit from these discounts, while they would be disproportionately
hit by extra charges in deficit states.
Fair, right? Well, not really because rich taxpayers would simply move to
the surplus states further diminishing the tax base of deficit states. The winners of all of this? The financially well-to-do
as well as the shareholders of large corporations because the plan appears to include a similar scheme for corporate taxation.
Externally, the German government has already applied the concept of internal devaluation as well as this template
between "surplus" and "deficit" states to the countries of the Eurozone. The results? Depression-like
unemployment in many Eurozone countries.
But these German-dominated policies have also led to a depreciating euro,
which, in turn, has benefited the German export sector. It is estimated that the so-called peripheral countries of the Eurozone
have subsidized the German economy at the equivalent of 8% of German GDP because the weak euro is still too strong for them.
Increasingly, politicians of the establishment in some of the large European economies are more responsive to growing
domestic discontent. France and Italy have indicated that they will simply not make the intolerable efforts to comply with
fiscal targets set by the Eurozone. The German government has reacted in dismay.
It seems that the decline of and
social hardship in the Eurozone does not alter the self-righteous conviction of German policy-making. In a very narrow sense
that is understandable as German politicians are only accountable to their own electorate.
But there is growing evidence
that Germany itself will be swallowed by a Eurozone-wide economic permafrost. The country might soon slip into recession.
As the Eurozone appears inevitably to move from disinflation to deflation, German growth will only further contract. Left
unattended, Germany's "stellar" employment record will take a dive.
This development may indeed present
the only incentive for Germany to change course. Chancellor Merkel is not unaccustomed to abrupt policy change. In 2011, she
suddenly decided to throw over board her party's long-standing support for nuclear power after the Fukushima accident. A widespread
German recession may become her economic Fukushima.
Yet, the complexities of the situation should not be underestimated
given the constraints of monetary union, but there is a road map. First, the German private and public sectors must invest
heavily in the future: From roads to ports, railways, energy, education and information technology.
most other countries of the Eurozone must implement structural reforms in order to benefit from the resulting reduction of
Germany's current account surplus. But the word "structural reform" should not be equated with negligent impoverishment.
Reforms need to reduce red tape, hence limiting corruption and yes, they must make labor markets more flexible. But
third, each country of the Eurozone must assess their own need for public and private sector investments in physical and human
infrastructure and they must be granted the fiscal space to do so.
All Europeans, including Germans, must recognize
that no internal or external devaluation will be large enough for them to compete with low-cost producers in Asia and elsewhere.
Neither should this be their ambition. Instead they must aim at competitive innovation. They would surprise themselves as
such course of action might also create a stable and strong monetary union.
 Crisis and Recovery in the German Economy: The Real Lessons, Servaas Storm & C.W.M. Naastepad,
Delft University of Technology, The Netherlands, March 2014 p.26
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