HEINER FLASSBECK: I'm going to go straight into the core of the matter and touch some
of the things that have been mentioned this morning by passing, but not going into it
so much.
The question that we have been asked is why these problems in the eurozone, and I think
there we have to go a bit deeper into economics.
Why this problem in the eurozone?
And let me first say what many people do not understand, why we do have a currency union
in the eurozone or in Europe.
This is one of the core questions that we have to answer before we come to why we have
a problem in that eurozone, in that monetary union, in the eurozone.
We have to answer the question, was there a rationale for going into a currency union.
And I think, yes, it is.
Some people say it was purely for political reasons and so there was no economic rationale.
I think that's wrong.
What happened before we went into the eurozone, so into the monetary union, was that we had
a strange arrangement in monetary affairs in Europe, which was an arrangement where
many countries absolutely fixed the exchange rate to Germany, to the D-mark.
The D-mark was clearly the anchor of that system.
So they fixed the exchange rate.
Austria, for example, [incompr.]
fixed its exchange rate forever.
It had never changed its exchange rate after the Bretton Woods system collapsed.
So, immediately, the Austrian schilling was pegged to the D-mark and never changed.
And many other countries followed, for the very simple reason that they didn't want to
have, let me say, be blunt--and my French colleague will not fully agree, but let me
say it like that--they didn't want to have high inflation anymore.
They wanted to be as successful as Germany, not only in terms of inflation, but also in
terms of inflation.
And inflation was, so to say, the medium, the means by which they thought they could
get as successful as Germany.
And in this arrangement, only one thing is really a bad institution or is a bad setting,
so to say, namely, that you have--in such an arrangement that could go on forever, you
have all the advantages of trade, you have to exchange money.
But what's the matter if I go to Austria and change my D-marks into schillings and back
to--at a fixed rate?
It's nothing.
So that is not important.
Important is, in such an arrangement, that you have monetary policy that is monetary
policy of the anchor country and nothing else.
It is monetary policy of the anchor country.
And you want to go a step further, you want to go step further, so not stay with the Argentinian
arrangement, where you have fixed your exchange rate unilaterally to the dollar--then your
monetary policy is American monetary policy, but you have no influence on that policy.
If you want to go a step further, then you have to go into something like a monetary
union, because this gives you only the seat, the seat in Frankfurt.
Who mentioned the seat in Frankfurt?
At least you have a seat.
Whether it's used or not is a different question, but you have a seat.
And this was a big achievement.
It was a big achievement to jump from an anchor, purely anchored system, vis-a-vis the D-mark,
into the eurozone, because that gave Austria and the other countries a seat and a voice
in the system.
And that's an achievement.
And there's no way back, no simple way back, to, say, do it with flexible exchange rate
and such things--I don't want to say nonsense, but it is nonsense in my view.
And if you look around the world, you see how badly flexible exchange rate work and
how much distortions they create.
And we have--just in the G-20 this year, we had a long debate about that.
I do not want to go into that.
So what happened?
Why did it go so wrong?
What is so--monetary union is a union of countries that want to have the same inflation rate,
but not only for one moment of time, but forever.
That's the critical thing, hmm?
They want the same inflation rate not only for the year 1997, when there was a criterion
that you should reach, so to say, the German inflation rate of 2 percent, but forever.
And this is the critical thing.
And there we look briefly into the matter and we see--.
So what happened is very simple.
Namely, what we have is we have different inflation performances in this currency union.
We have Southern Europe.
And, by the way, it's not a big problem, huh?
The problem in Europe has nothing to do--well, nothing is an exaggeration, but close
to nothing with Greece.
Greece is just one of the countries in this blue line.
And this blue line, the countries in Southern Europe, including Italy--and you see the name
Greece, Italy, Portugal, and Spain.
These countries had inflation performance in the last ten years--this is all from '99,
from the beginning of the currency union--of something like 2.6 percent.
That's not bad, huh?
If you have 2.6 percent, it's not an accelerating inflation or a big problem.
You see, one country got it absolutely right, if you take the target that we had in this
monetary union.
[incompr.]
the target was exactly 2 percent.
It was the German target.
The old German target was the target for everyone in Europe, and there was one country that
got it right, namely, France.
Hm?
France was very much criticized, but France was the only country that got it right.
They were exactly on the target.
And the whole of the European Monetary Union was also on the target.
You see?
The EMU as a whole was absolutely on the target.
But one country got it absolutely wrong, more wrong than anyone else.
One country got it more wrong than anyone else.
And that country was not Greece.
It was Germany.
That country is Germany.
They got it more wrong--the deviation of Germany from the inflation target, if you look at
the end in 2010, is bigger than the Greece deviation from the target.
So what did we have?
We had an arrangement, we had an institutional arrangement that said you should reach an
inflation target of 2 percent, and the country that most violated this arrangement--.
It was a common arrangement.
Everybody agreed about 2 percent, not below 2 percent, but 2 percent, for many reasons
that I do not want to go into.
All the country agreed to it, to the 2 percent.
But Germany deviated more than anyone else.
And if you deviate downwards, it's as bad as if you deviate upwards, because there is
no rule to say the one is worse than the other.
What you only--the only argument that we have is that deflation is worse than inflation,
so it was--it's even worse.
Behind this was the inflation target.
I don't want to explain this further, but it could be shown very clearly.
Behind this were deviations in what is called unit labor cost.
And unit labor cost is the deviation of your nominal wages to your productivity, to the
national productivity.
So what is asked for: that you have nominal wages that rise in line with productivity
plus 2 percent in all countries.
That's a very simple rule.
And I was--when I was deputy finance minister in Germany, which I was for a short time,
I tried to impose that rule on all European countries.
And we even created an institution, which was called Macroeconomic Dialog, to do exactly
that, namely, to give countries guidance in imposing such a rule.
Again, the only country that got it right was France.
In France, wages were rising--at least, they were rising.
Maybe just statistics that were wrong, but as far as we believe in statistics, France
got it right and the real wages were rising with productivity.
That's the rule: your real wages should rise with your own productivity, not with the productivity
of Germany or something like that.
That's nonsense.
With your own productivity.
So you have to live according to your means, not above your means, but not below your means.
You should live according to your means.
That is in the core of the matter what a currency union asks.
And that's not very much, hm?
That's not such a big thing, to get that every country adjusts, given the inflation target,
to its own means.
That you have to do anyway.
In the end, you have nothing else but your means.
You have your productivity and nothing else.
So the United States have to adjust to their means.
The only question is how they distribute their means.
That's a different question I come to a bit later.
So what happened and why was this now?
Why did this happen?
Was it, so to say, an idea by Germany to say, now we have the currency union, now we can
exploit, so to say, our new--not our--it was not German traditional policies, but new belt-tightening
policies to gain market shares in Europe?
Well, some people may have thought like that.
I think in the German industry community there were surely some people who were in favor
of the monetary union because they thought this is right.
But the most--for most of the people, including most of the people in the government, this
was not the crucial point.
The crucial point was quite different and totally independent of the euro.
And so far this is the tragic and--the tragedy of the situation, that Greece is now collateral
damage of the euro.
But the euro itself is collateral damage of something bigger, of a much bigger fight that
took place in Germany and that's taking place every day elsewhere.
What is that bigger fight?
Well, the bigger fight was that at the same time, or a bit, even, before the euro was
installed officially, the German government, including the Social Democrats and including
the German unions, which were at that time still quite strong, decided to go for a unique
historical experiment, for a unique historical experiment.
And that experiment was called: we cut the wages, we do not raise real wages in line
with productivity anymore, as we have done 40 years before, to bring down our unemployment
rate.
This coincided with the euro.
I can tell you I was in the first red-green Social Democratic Green government, and although
I was fired rather soon, when my minister, Oscar Lafontaine, left, but even at that time,
nobody--nobody--in the German government thought about killing the euro or something like that.
Nobody thought about killing the euro.
But they all thought to bring down German unemployment, because Germany was really in
the worst situation of all countries.
It had the lowest growth rate.
It had the highest unemployment.
Unemployment was rising.
And so they took a desperate measure to bring down the unemployment.
Unfortunately, the whole experiment failed or--well, it did not fully fail, but it failed
to a certain extent.
And this is extremely important to understand.
It's extremely important to understand, for economists in particular, what happened there.
What happened was that two mechanisms came into play.
The first mechanism was that due to German wage cutting, with given productivity--productivity
went on rather unchanged--with given productivity, Germany started into a beggar-thy-neighbor
experiment.
And this is what you see here.
All products that were at EUR 100 in 1999 are now--have now a cost or a price of EUR
107 in Germany and EUR 133 in Southern Europe, and EUR 117 in France or EUR 120 in France--oh,
a bit more than EUR 120.
By the way, that's why France has positioned itself on the wrong side.
That is the main mistake of Mr. Sarkozy.
He has never understood where he should have sided.
He should have sided with the Southern Europeans, because he is as much in trouble as the Southern
Europeans, because if the French products all cost EUR 125 and the German cost EUR 105,
forget about France.
It will be wiped out, as the others (it takes only a bit longer), if we do not change fundamentally
this system.
If this system is not changed, you can be absolutely sure--I do not want to go into
showing you the figures of the trade flows--it can be shown crystal clear that this system
sooner or later wipes out the export industry of all the countries that are north of Germany,
all the countries that are north of Germany.
And so far this is absolutely unsustainable.
But, again, coming back to why was it--what was the second channel, so the first channel
that Germany relied on, namely, the channel through export, was absolutely successful,
and this everybody could have told.
I mean, every good, let me say, Keynesian or Kaletskian or such kind of economist could
have told you that this is one channel that would happen.
If you have one big country that tightens its belt dramatically, forces wages to remain
below productivity, and there is no reaction on the currency side, there is no appreciation
of the currency of that country, [it] would be a winner in the competition of nations
and would gain huge current account surpluses.
There's no doubt about it.
But the other channel--and this is the critical thing--.
Unfortunately, I do not have the--I only have the trade imbalances; I do not have the other
chart here.
The other channel, namely the channel that was mainly thought to be the important channel
for the good-willing part of the German people, who thought we are going for this unique experiment
of wage cutting, the other channel did not work out at all, and that was the neoclassical
nexus, that you cut real wages, and through the cutting of real wages you change the production
structure, you reduce productivity, and through the reduction of productivity you employ more
people, you work more labor-intensive than before.
This did not work out at all, and it can be shown that it didn't work out at all, because
what happened at the same time when German exports exploded, German domestic demand was
absolutely flat.
It remained absolutely flat over the last 15 years.
So the exchange of wages against the trade-off of wages against domestic demand never happened.
It was just a beggar-thy-neighbor strategy and nothing else.
And this is the crucial thing to understand, because here we come to the question [of]
how this can be settled.
I do not want to go into that.
My time is over in a minute.
But the point is, if you go for such a strategy and you do not have the neighbors that are,
so to say, accepting your economic imperialism--for a time, at least, till they are bankrupt--and
that is where we are now--till they are close to bankruptcy, then you have no chance to
go for such a strategy.
And that is the important thing behind this, because what we have, the big battle that
we have in this world is not between Germany and the other Europeans, is not between South
and North, China and Germany, or so.
The big battle is still, believe it or not, the battle between labor and capital.
This is still the big battle.
I know it's fashionable in the United States to a priori dismiss arguments by calling
them a class warfare argument, hm?
Republicans like that very much, to say this is class warfare.
I tell you, what happens in this world is class warfare, because what we have--look
at the United States, my last sentence.
What happens in the United States right now?
For the first time, if you look at U.S. statistics carefully, for the first time in history,
in the modern history since the Second World War, we have two years, we are two years in
a recovery, and in the United States the wages, the nominal wages, the nominal wages are rising
by absolutely zero.
They're not rising at all.
We have for the first time not only a jobless recovery--that's a normal thing.
For the first time, we have in the United States a wageless recovery.
Wageless recovery.
And that is exactly what Germany did 15 years ago, wageless recovery.
And I can tell you how this experiment will going to end, because in the United States
there is no market that they can occupy, there are no markets and no partners that they can
exploit, there is no currency union that they can use.
The experiment will end in disaster.
It will end in disaster because if you do not have a regime that allows the systematic
participation of workers in the productivity increase--and this happens for the first time
in the United States [incompr.]
not at all there.
And this is what the people are talking about when they talk about 99 percent.
But it's worse than ever.
It was worse already ten years ago, but now it is worse than ever.
And if you have such a regime, capitalism hits a wall, it hits dramatically a wall,
because no economy can grow successfully if the people only have to rely on bubbles that
sooner or later burst to consume, and if they do not, can expect that they will participate
in the success of all.
Thank you very much.