September 16, 2013 6:55 pm
Ignore the doomsayers: Europe is being fixed
Fiscal and structural repair work is the bais for sustainable growth, writes Wolfgang Schäuble
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The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days. While the crisis continues to reverberate, the eurozone is clearly on the mend both structurally and cyclically.
What is happening turns out to be pretty much what the proponents of Europe’s cool-headed crisis management predicted. The fiscal and structural repair work is paying off, laying the foundations for sustainable growth. This has taken critical observers aback. It should not have, because, in truth, we have seen it all before, many times and in many places. Despite what the critics of the European crisis management would have us believe, we live in the real world, not in a parallel universe where well-established economic principles no longer apply.
Take Germany. In the late 1990s it was the undisputed “sick man” of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline. After a boom-and-bust cycle following reunification in 1990 and its adoption of the euro at a very high exchange rate, unemployment in the country rose, hitting 5m in January 2005.
Investment fell and public finances deteriorated, while politicians seemed unable to react. The decision to break this trend was a collective one, bringing together almost all parties along the political spectrum as well as employers and organised labour.
The government, while striving to consolidate the public finances, reprioritised spending. Between 2010 and 2013 the German government raised spending on research and education by €13.3bn, while staying committed to its fiscal course. At 2.8 per cent of gross domestic product, German public and private R&D spending only ranks below that of Sweden and Denmark in the EU. Thanks in part to its education system, which is attuned to the needs of business, Germany has a youth unemployment rate below 8 per cent – the lowest in Europe.
As much as policies matter, Germany’s competitiveness, its integration in the global economy and its ability to create jobs were not the fruit of government fiat but of the myriad decisions we call the market. Companies began investing and hiring and people started working again because it was possible and made sense. Employers and employees struck sensible wage and working-time deals that buffered the cyclical downturns.
More than 2m Germans who had languished in unemployment found work – mostly good, secure jobs with decent pay and generous benefits. With the labour market tightening, wages and consumption are now growing robustly. Domestic demand is the main driver of growth in Germany today.
What happened in the eurozone early in the decade is only contextually different. In the “boom” phase, several of its members let labour grow expensive and their share of world trade shrink. As the bust came, jobs vanished and public finances deteriorated.
The reaction was not only the produce of a European consensus – backed in many cases by national parliaments – but it followed a well-established recipe, not just by Germany but by the UK in the 1980s, Sweden and Finland in the early 1990s, Asia in the late 1990s and many other industrial and emerging countries.
The recipe worked then and it is working now, somewhat to the chagrin and bemusement of its numerous critics in the media, academia, international organisations and politics. The adjustment was ambitious and sometimes painful but its implementation was flexible and adaptive. The European safety nets have provided a well calibrated mix of incentives and solidarity to cushion the pain.
In just three years, public deficits in Europe have halved, unit labour costs and competitiveness are rapidly adjusting, bank balance sheets are on the mend and current account deficits are disappearing. In the second quarter the recession in the eurozone came to an end.
So what lessons can we draw from the German adjustment of the 2000s and the more recent example of the eurozone? I see two.
First, structural reforms take time to work. Those responsible for them need patience and an aptitude to ignore the siren calls of quick fixers and the protestations of special interests. Signs of improvements are no reason to backtrack – they are a reason to persevere.
Second, but no less importantly, however bad the times, we should fight the human tendency to extrapolate the present forever into the future. Systems adapt, downturns bottom out, trends turn. In other words, what is broken can be repaired. Europe today is the proof.
The writer is finance minister of Germany
Copyright The Financial Times Limited 2013
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