DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: Bernhard Eschweiler - In-between the lines
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Key word(s): Miscellaneous
Silvia Quandt&Cie. AG, Merchant&Investment Banking: Bernhard
Eschweiler - In-between the lines
25.02.2011 / 08:57
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- France's plan for G-20 and Germany's pact for competitiveness face
resistance
- Germany's own case shows both initiatives fail to address root causes
- Rest of Euro area needs deeper reforms to close gap with Germany
- Yet Germany cannot rest either
France and Germany are trying hard to make the global economy a better
place. So far, their efforts had limited success. Germany struggles to
get support from other Euro area members for its so-called 'pact for
competiveness'. The six-point pact (see table) is not officially off the
agenda, but only a much watered-down version is likely to have a chance at
the EU summit in March. Meanwhile, France's proposed global imbalance
indicators were decimated at last weekend's G20 Finance Minister meeting.
The current account balance, foreign reserves and the real effective
exchange rate were taken off the list. Those indicators that remained (see
table) are meant to provide guidelines for monetary and fiscal policy, but
no agreement has been reached what marks an imbalance and what should be
done about it.
Germany's own case demonstrates that neither indicators nor prescriptions
go to the bottom of the problem. Yes, Germany has a large current account
surplus, but that has little to do with monetary or fiscal policy. On the
other hand, Germany's prescription for the rest of Euro area was hardly
what made itself so competitive. The risk of both plans is that they
invite only more government intervention, yet fail to trigger true reforms
and build a firmer financial framework.
Germany's success is not about policy
One can argue how much China's currency policy is the cause of its large
current account surplus. In the case of Germany, however, monetary policy
has little to do with it. For the last twelve years, Germany had no
monetary policy sovereignty. Indeed, judging by the Euro area's overall
current account, ECB policy has been fairly
balanced, which means the Euro was neither significantly over- nor
undervalued. Yet, Germany's current account has shifted from a modest
deficit to a large surplus, while the rest of the Euro area moved from a
modest surplus to a sizeable deficit. Indeed, much of the deficit of the
rest of the Euro area was with Germany. The reason for that was not
monetary policy or even fiscal policy but changes in relative
competitiveness.
This is best seen in the real effective exchange rate changes (REER
adjusted by unit labor cost). Germany's REER depreciated 16% since 1999
despite a sizeable nominal appreciation of the Euro (NEER). Falling
relative unit labor cost more than offset the impact of the Euro's
appreciation. This was not true for most of the rest of the Euro area. In
fact, only Austria also managed to lower its REER, although less than
Germany.
The 'pact for competitiveness' is not enough
Some prescriptions of the 'pact for competitiveness' are sensible, but they
would not have made Germany as competitive as it is today. Germany's
competitive advantage is the result of deep restructuring at the corporate
level and labor market reforms, that involved employees, their unions,
companies and the government. Furthermore, German companies took better
advantage of globalization, both in production as well as distribution. An
example is the change in the direction of exports. The share of exports to
the Euro area and the US declined markedly since monetary union, while the
share of exports to the rest of Europe - especially eastern Europe and the
CIS countries - and Asia - notably China - increased significantly.
No matter how effective, a problem is also enforcement if the 'pact for
competitiveness' is not to share the same faith as the 'stability pact'.
Furthermore, what will happen if the pact is really implemented, but the
rest of the Euro are fails to catch up? Calls for state intervention,
protection and subsidies will probably increase and Germany will likely
find itself providing more fiscal support to weaker Euro area countries.
Some measures also risk becoming counterproductive. Harmonizing corporate
tax bases and educational qualifications could lead to minimum standards
and a loss of competition, both inside and outside the single market.
Competitiveness is about reforms
Instead of trying to model themself after Germany, each Euro member should
decide where its own competitive advantages lie and then develop them.
That typically starts at the corporate level and not the state.
Governments can help best by not interfering, reducing subsidies and
barriers to competition, making labor markets more flexible, enhancing
education, promoting strong financial regulation, being fiscally prudent
and last but not least maintaining price stability, which is not just the
responsibility of monetary policy, but also fiscal policy,
especially in the case of the Euro area. Germany has taken more than a
decade to turn itself around. Closer integration through the 'pact for
competitiveness' will not make the others catch up faster, but risks making
the whole Euro area less flexible and resulting in more fiscal transfers
from Germany.
Finally, Germany itself has no reason to be complacent. Its current 'sweet
spot' will last a few years, but not forever. A key challenge is the
rapidly aging population. That means those left working need to become
even more productive. Services, for example, is a sector where
productivity growth and competition has trailed the overall economy. Entry
barriers, state protection and subsidies are some of the reasons. Labor
market reform is also not yet finished. Unfortunately, not many at the
government are currently paying attention.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 24. February 2011, Silvia Quandt Research GmbH,
Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German
Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439
Frankfurt.
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Number of recommendations Thereof recommendations for issuers to which
from Silvia Quandt Research investment banking services were provided
during
GmbH in 2010 the preceding twelve months
Buys: 92 30
Neutral: 37 2
Avoid: 3 0
Company disclosures
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in combination with the German regulation concerning the analysis of
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113473 25.02.2011
Datum: 25.02.2011 - 08:57 Uhr
Sprache: Deutsch
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