20.06.2011
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Introduction: 

The current account deficit of ten percent in Spain is not sustainable, says Flassbeck. Instead of talking about strengthening competitivness in the Euro Zone like German chancellor Angela Merkel does one should work on closing the huge gap with Germany to stabilize the economy in Spain. The Euro Plus Pact approved by the EU summit in March doesn't solve the problem, adds Flassbeck. The same would be true for the so called "haircut", the partial waiver of debts, and the creation of a "South Euro". The trade imbalances which have caused the economic problems of the Euro zone have grown to a large extend out of the persistent wage dumping in Germany. In 1999 Heiner Flassbeck left the red-green government under chancellor Gerhard Schroeder because of the neoliberal policy.

Guests: 

Heiner Flassbeck: Senior Economist at the United Nations Conference on Trade and Development (UNCTAD), Geneva

Transcript: 

David Goeßmann: Is Spain the next candidate for rescue loans?

Heiner Flassbeck: Well, that’s hard to say, that depends on a lot of details, but aside from the details, I should refer to what I’ve already said, it is important that the basic problem be addressed. Spain had a current account deficit with the rest of the world at the height of the crisis of 10 percent, this is totally unsustainable, you can’t have a current account deficit of 10 percent, where foreign obligations make up 10 percent of your yearly income. There needs to be a dramatic increase in competiveness, but competiveness, like I’ve said, can only be increased when the most important trade partner, Germany, allows this to happen, which would mean a weakening of their competiveness. It’s just a fact, that competiveness is a relative concept and not all can improve their competiveness – against whom then?” Against the USA? They also want to improve their competiveness, it can’t work. So we have to find a solution, an inner European solution, where these countries will have a chance, over a longer period of time, to improve their competiveness, to reduce this huge gap of 20,25,30 percent with Germany. And we also need to insure that Europe grows, because the more Europe grows the easier it is to reduce these debts and eliminate this gap. Should all this end up in a recession and in deflation then this won’t work. Europe will first brake apart, but like I’ve said, we need to use this last chance and we need provide it for Spain. And that’s why we need these bridging loans, these loans from the rescue package to gain time before we find a real solution. But if we don’t start dealing with the real problem then the rescue packages will end up being useless.

Fabian Scheidler: A few weeks ago at the EU summit the so called Euro-Plus Pact was passed, which got particularly criticized by labor unions because it foresaw a further deregulation of the labor markets, including a loosening of employment protection. What is in this Pact, and what does it represent for the future of Europe?

Heiner Flassbeck: Well, that’s hard to say, that depends on a lot of details, but aside from the details, I should refer to what I’ve already said, it is important that the basic problem be addressed. Spain had a current account deficit (15:11) with the rest of the world at the height of the crisis of 10 percent, this is totally unsustainable, you can’t have a current account deficit of 10 percent, where foreign obligations make up 10 percent of your yearly income. There needs to be a dramatic increase in competiveness, but competiveness, like I’ve said, can only be increased when the most important trade partner, Germany, allows this to happen, which would mean a weakening of their competiveness. It’s just a fact, that competiveness is a relative concept and not all can improve their competiveness – against whom then?” Against the USA? They also want to improve their competiveness, it can’t work. So we have to find a solution, an inner European solution, where these countries will have a change, over a longer period of time, to improve their competiveness, to reduce this huge gap of 20,25,30 percent with Germany. And we also need to insure that Europe grows, because the more Europe grows the easier it is to reduce these debts and eliminate this gap. Should all this end up in a recession and in deflation then this won’t work. Europe will first brake apart, but like I’ve said, we need to use this last chance and we need provide it for Spain. And that’s why we need these bridging loans, these loans from the rescue package to gain time before we find a real solution. But if we don’t start dealing with the real problem then the rescue packages will end up being useless.

David Goeßmann: A few weeks ago at the EU summit the so called Euro-Plus Pact was passed, which got particularly criticized by labor unions because it foresaw a further deregulation of the labor markets, including a loosening of employment protection. What is in this Pact, and what does it represent for the future of Europe?

Heiner Flassbeck: Well, this pact is, so to say, the German solution to the problem, but it is the wrong solution, because this pact says: everyone should improve their competiveness, but as I’ve said, competiveness is a relative concept, it is simply illogical to say everyone should improve their competiveness, if one doesn’t add against whom. So everyone should do what the Germans have done for the last 10 years, everyone should tighten their belts, everyone should try to abuse their unions so that they cannot demand any pay increases - this is totally absurd. It should be, that particularly in Germany wages should rise again. That would be the more important and significant step than to cut wages in the other countries, but Germany insisted on it, Germany insisted it did nothing wrong, that it did everything right, and now the others should do what Germany has done, but this is the surest way into a deflation.

Fabian Scheidler: Until now banks have not participated in the costs of the rescue packages, neither for the financial crisis of 2008-2009, nor for the rescue loans to save the Euro, they have contributed practically nothing, even though they substantially share in the causes of the crisis. Many are therefore calling on the creditors to participate with the costs of the rescue packages, with a so-called “hair cut” for them to write off parts of their claims. Some are also calling for an orderly insolvency within the context of a fair and transparent arbitration process, like it has long been called for, for over indebted countries in the south. What is your position on that?

Heiner Flassbeck: But the states are, as I’ve already said, not the problem. The states should not be seen as the problem. The states are not the problem the banks are the problem and we still haven’t come to terms with that. We have not regulated the banks to the degree to where they stop gambling, they just gamble on, all the casinos are open, on the commodities markets, on the currency markets, on the stock markets; everywhere the markets are open, the prices are overinflated, sooner or later they will collapse. And then the bank will be in just as bad a shape as before. That should have been changed; one should have intervened by making it clear that gambling is not an activity of the banks that the state will approve. That means that investment bankers should be taken out of these banks, should return to that which Obama also intended, but did not fully follow through with, that banks should have to return to normal banking, to giving out credit loans to normal investors, and not for gambling in casinos. But this chance was missed, and it is no solution to say, the states that have saved the banks should now to be declared bankrupt to get to the creditors. The creditors of state securities are to a large extent banks, and one needs to see that a lot of products that the banks offer to ordinary citizens are based on government securities, when one makes the famous ‘hair cut’ with government securities then a lot of ordinary people get affected and then we get new problems with the banking system. This is the wrong way and, besides, the banks or whoever bought government securities up until 2008 did not receive excessive interests. The yield of a 10 year Greek government bond was up until 2008 at 4 percent, that’s perfectly normal, totally ok. So one should not want to penalize someone for hanging onto a Greek bond; that would absolutely be the wrong way. But you see this is being publically propagated by certain circles, who then want to appropriate the blame to the states again.

David Goeßmann: The withdrawal of certain south European countries from the Euro and the creation of a weak south Euro are sometimes also being discussed as a solution, do you see that as a solution?

Heiner Flassbeck: Well, that is no solution, but when the pressure in the kettle gets too big and the kettle eventually explodes, then that is what will result, namely that the countries will leave the euro zone, regardless which country, Germany can also leave the Euro, the consequences are very clear, which we can of course avoid, like I’ve said, through a long laid out mechanism regarding wages. But the consequence will be that they will devalue their currency in relation to the north Euro or to the new D-Mark or, however one would call it, and then German export markets would go bust, they would overnight go down the drain, they would become untenable. The question is only if you allow this to happen through an orderly process, or if you allow the thing to explode. The Euro has only a chance to survive when the completive gap between Germany and the other countries, and this is not just the south European countries, included is also France which has a trade gap of 15 percent with Germany, if you systematically close this gap, and not just do the crazy things that are now being gone.

Fabian Scheidler: You left as undersecretary in the ministry of finance together with finance minister Lafontaine in 1999 Schröder’s cabinet. What were your reasons?     

Heiner Flassbeck: State secretaries cannot resign, they are dismissed. I was dismissed by Mr. Eichel because Mr. Eichel evidently had a different agenda, an evidently different economic policy than I envisioned, also in the international realm. I was, above all, in charge of international questions. The funny thing is that just now in the context of the G20 – we can see this from here in Geneva – exactly those questions are now being discussed that I, back then, with Lafontaine had put on the international agenda, or wanted to do so. We had in fact done so, but encountered very little support. But today precisely these topics are acute again, namely, the international currency system is a huge issue within the G20 discussions, but not that Eichel would talk about it.     

David Goeßmann: What were the concrete differences of opinion, and what were the consequences of the financial policy that were started back then under Schröder for Germany and for Europe?

Heiner Flassbeck: Well, it was not only financial policy, what then happed under the Red-Green government was precisely this wage dumping. I had as undersecretary forcefully fought that in Germany wages should reasonably rise and that was for two years the case. From 1999 to 2000 we got reasonable contracts, but than there was this agenda, that had only one goal in mind, to keep the unions down and to prevent wages in Germany to rise. The result is that the Euro area is now destroyed, that is one of the consequences of this policy. There is no doubt about it, because no one bothered to consider that this could have Europe wide consequences. That’s what I wanted to prevent and in the international realm we are discussing again huge trade imbalances, and right after China, Germany is today the country with the second largest trade surplus, so Germany is now internationally being called to account for itself. And this also we wanted to prevent back then.

Fabian Scheidler: What in your opinion needs to happen for Europe to get onto a path of social justice and stable national finances? Wage policy you’ve already mentioned.

Heiner Flassbeck: One doesn’t have to have a top tax rate of 42 percent, the top tax rate can be 50 percent, or 55 percent like it used to be in Germany. One does not need a corporate tax of 25 percent, it can also be considerably higher. One need only have to, lets say, agree on minimal standards in Europe so that we don’t compete yourselves into the ground. That was also one of the most important points from Lafontaine, to tell me, we have to stop this competition between states, especially, in Europe, but also worldwide, and particularly in the core European states, that has to be prevented because that leads to extreme excesses. By the way, Ireland had the most extreme excesses back then, we extensively criticized that Ireland had only a corporate tax rate of 12 percent. Today after 10 years Mrs. Merkel has discovered the issue, and says, yes the Irish need to raise their corporate tax if they want to receive low interests rates from the European rescue funds. So that’s the political shortsightedness, one thinks until the next election, and forgets to develop a strategic position.    

David Goeßmann: Thank you very much Mr. Flassbeck in Geneva. The entire interview with Reiner Flassbeck can be found at www.kontext-tv.de.