"If the German economy tried once again to squeeze its European trading partners with wage cuts, this attempt would turn into suicide. Not only would it cause enormous damage to German domestic demand, but it would also stifle European partners forever, who are desperately fighting for their economic survival," writes the great German economist Heiner Flassbeck. A very interesting reflection on the great challenges that the German government will have to face in the coming months; the hope is that unlike in 2008 they have learned their lesson and this time they are not working exclusively in the German interest. An excellent Heiner Flassbeck from Makroskop.de
Everyone would like to go back to normal - even economically. Most people, however, still do not want to admit it: pre-crisis normality will never return. The post-crisis economy will no longer be the economy we knew before. The situation has developed in a very different way from how politicians and probably also virologists and epidemiologists had imagined it. Operation Great Festivities, after which in three or four months the world would simply have to return to its old life, failed dramatically.
We do not want to talk again about the reasons for the failure. What matters now is that we do not make new serious mistakes that could damage economic development in the decades to come, both in Germany and in Europe.
A model is already emerging that leads us towards completely wrong decisions. Just as happened after the financial crisis of 2008/2009, the coalition partners in Berlin are overwhelmed by panic and fear. After they had managed to successfully combat the financial crisis at the time thanks to public debt, they immediately chose instead to include a balanced budget in the Constitution and so the Schwarze Null objective was pursued for years - to the detriment not only of the German economy, but also of the partners in the monetary union.
The debt relief mechanism set up at the time is already casting its shadow over the current crisis management. And the second major issue, which will be equally decisive in determining the long-term economic damage that the crisis caused by the Coronavirus will produce in Germany and Europe - the wage agreements for the next 12-24 months - already seems to be moving in a fatal direction.
Repaying the public debt quickly?
The CDU is already raising the first voices calling for a tight deadline for repaying the public debt. Paul Ziemiak, Secretary General of the UNHRC, is already talking about a maximum of ten years in which all public debts, which have been added in the meantime, will have to be repaid in full. He justifies this request by saying that the policy of the Schwarze Null would bear fruit during the current crisis, since Germany at this stage would have "earned" a margin of manoeuvre "for which other states today envy us".
The macroeconomic nonsense that emerges from these words undoubtedly fits in perfectly with the expectations of potential CDU voters, which makes this position understandable from a political and partisan point of view. Unfortunately, this does not change the total lack of macroeconomic logic. Throughout the coalition government, in fact, there is talk of reducing debt as if it is only a matter of political will whether or not it can be done.
But this is by no means the case. It is simply impossible for the state to expect a growing economy, which is essential to bring the budget deficit to zero and repay the public debt, at a time when the industrial sector is very thrifty. It is time to take note of the situation: there is no longer a business sector that invests so much that it has to go into debt.
In Europe as a whole, it will be very difficult to reduce public budget deficits or even repay old debts. Families and individuals have traditionally saved money, and the business sector has been doing the same for about 20 years. Saving, however, must be accompanied by debt if the economy is not to decline at the same time. Anyone who ignores this simple macro-economic logic and tries to adopt economic policy measures that explicitly violate this logic will achieve the opposite of what is hoped for: it will cause the crisis to worsen and prolong at the expense of large sections of the European population.
Which sectors in Europe can still get into debt to rebalance the private sector's willingness to save? There are only national public budgets and countries outside Europe. But the latter will never allow Europe to have such high current account surpluses with the rest of the world that, on the one hand, the national public budgets of the European countries will no longer have to record deficits parallel to the willingness of the private sector to save and, on the other, they will never allow Europeans to make such large surpluses that they can reduce the old public debts made in the days of the coronavirus. Before that happens, we would have a trade war between Europe and the rest of the world or a race for devaluation between the euro and non-European currencies (which is practically the same thing). Both scenarios would lead the world even deeper into a serious economic crisis.
And this applies not only to Europe as a whole, but also and above all to Germany as a single country. In a completely different way from what Paul Ziemiak's quote at the beginning of the article suggests, a country has only one way to save all three domestic sectors without the economy collapsing: to push foreign countries into the role of debtors. And it can only do so through a systematic reduction in prices on international markets, which can in no way be offset by currency appreciation.
In other words: Germany should repeat its current account surplus strategy of the last twenty years at the expense of its partners in the monetary union. But it will no longer be able to do so, because the economies of its monetary union partners are now on their knees. The first professional and realistic forecast available for the first half of 2020, presented last week by the DIW, assumes that the German current account surplus this year will fall to €80 billion (after more than 200 billion in 2019).
Unless it wants a total destruction of Europe, Germany will have no chance to return to the old situation of a high current account surplus. If the German economy were to try once again to squeeze its European trading partners with wage cuts, this would turn into suicide. Not only would this do enormous damage to German domestic demand, but it would also stifle European trading partners forever, who are desperately fighting for their economic survival.
Wage moderation is suicide
But it is precisely this suicidal variant that is already manifesting itself - in addition to the politicians' desire to reduce the public deficit immediately and even to turn it into a surplus to be used to reduce the debt. Not only the German trade unions are hearing nothing, apart from the demand for employment levels to be guaranteed. Rather, there are already sectors in which there is open talk of workers giving up part of their wages in exchange for guarantees that employers would maintain employment levels. The case of Lufthansa is of course exemplary: the pilots have proposed temporarily giving up 45 % of their salary to help the airline overcome the crisis.
There is no doubt that Lufthansa pilots are a special case: they earn very high salaries (which makes a partial waiver easier), have undergone very expensive training (reflected in their salary level), are highly specialised and therefore have little chance of finding an equivalent alternative to their current profession in Germany. In this situation the renunciation of a part of the salary is reasonable because from the point of view of microeconomic rationality it is the only possibility they have to save their job and avoid a social collapse.
This applies to a much lesser extent to Lufthansa cabin crew. They receive lower salaries, they are not so highly skilled and it is therefore easier to redeploy them elsewhere. For them, even if they are laid off, but the economy as a whole gets back on its feet, the collapse is much less dramatic because they have a much better chance of being able to change sector without suffering huge losses of income.
However, even the enormous renunciation of pilots will not be able to save all their jobs if commercial flights were to be replaced on a large scale by videoconferencing and other possibilities for virtual communication and cooperation.
Perhaps the shock caused by the coronavirus was not the real cause of the crisis in the aviation sector, but it could turn into the trigger and accelerator of a profound structural change in the globalised economy, which cannot be stopped by the sacrifice of part of the salary.
But one thing must be absolutely clear: for employees as a whole, salary reduction is not a temporary game as in the case of pilots, but an instalment suicide. The eloquent silence of the trade unions, however, raises the suspicion that this is exactly what will happen. The wage renunciation, i.e. the renunciation by the workers of a wage increase of about 3% for the next 3 years, will lead in the short and medium term to a weakening of economic growth and thus to the destruction of many jobs, and in the long term to deflation.
What are the German unions up to? The graph shows that collective agreements over the last ten years have come very close to the inflation target of 1.9 %, i.e. actual real wages have increased only slightly or not at all. Anyone intending to fall below this level or not to increase wages at all creates competitive pressure on the whole of Europe, and this pressure will inevitably turn into deflation at European level.
What would seem to be an exchange at company level between 'wage concessions in exchange for job security', is in fact at macroeconomic level a programme to destroy jobs. And this means that, despite the crisis and the general weakness of the economy, every effort must be made to keep collective wage increases at a minimum of 3%.
To make it clear once again: this is not a left-wing or right-wing policy shift, there is no regulatory wish list on what could be improved in terms of social policy. No, this is about the naked economy, i.e. the macro-economy, which, in order to be able to protect everyone - from the less well-off to the well-off - must be defended from the risk of being crushed on the wall of ideological madness.
What's a state to do?
It is the state that is directly responsible for the fact that the security of employment levels has become the most important thing for trade unions today. Because of the Hartz legislation, introduced by the Red-Green coalition at the beginning of this century, the economic decline, and therefore also in terms of social status, of a normal worker who becomes unemployed is enormous. After just one year of unemployment, in fact, he ends up at the level of the poorest in society, namely in Hartz IV.
If this is not (yet) the case, because he may have previously accumulated some wealth thanks to the efforts made to save, or for example if he managed to repay part or all of the mortgage on his property, he will have to use some of this wealth (on the asset limits for Hartz IV benefits, see here) before the state can help him with basic security. And this has always been questionable from the point of view of social justice. Considering that overcoming the crisis caused by the coronavirus should instead concern the stabilization of expectations, the calculation of available assets in the case of Hartz IV beneficiaries will be a major obstacle.
Among other things, this also and especially applies to the self-employed and freelancers affected by the crisis, who do not have any entitlement to unemployment benefit and are therefore completely dependent on Hartz IV for their direct livelihood (apart from some regional programmes that have tried to help them with benefits). Although the asset test has been suspended until 30 June 2020, the probability that the self-employed affected by the crisis, already in the second half of the year, will be even partially in conditions similar to those before the lockdown, is very low. This means that, before they can continue to receive basic assistance from July, they will have to use the few savings they have accumulated. Expectations for the future of this group of people should therefore be far from positive.
The collapse in the social status of the long-term unemployed, as provided for by the state through Hartz legislation, has led to a significant drop in the willingness of trade unions to strike in favour of reasonable wage agreements. The risk of losing their social status when they lose their jobs is so great that any threat from employers to close production facilities and relocate production is taken seriously, thus prompting trade unions to make concessions in wage negotiations. This legislation, which is explicitly based on the idea that the unemployed should be encouraged to do more to find an existing job, was already more than questionable when it was introduced. Today it is much more dangerous.
If, on the other hand, the state leaves the current legal framework for unemployment insurance and basic security unchanged and focuses only on preserving old structures on the capital side (e.g. Lufthansa), or on promoting investment in new, more environmentally friendly structures, it will not be possible to escape the accusation that it wants to put the interests of investors above those of workers. The belief that all wealth in the long term comes mainly from companies was already questionable at a time when the corporate sector was still getting into debt, and therefore took on the macroeconomic task that one would expect from this sector. Today that is clearly wrong.
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