By Thomas Jung
Heiner Flassbeck is one of very few Economics professors with a dissenting voice on mainstream neoliberal economics in Europe. For years he has been publishing articles and giving speeches and lectures against various neoliberal dogmas. In his latest book “Against the Troika – Crisis and Austerity in the Eurozone” (co-written by the Greek Costas Lapavitsas) he is taking them on again, with the focus being specifically on the Euro Crisis.
The upcoming weeks and months could become crucial for the future of the Euro. In Italy a referendum about constitutional reform lead to the fall of the government, which potentially could lead to new elections in which anti-Euro forces could prevail. Italy’s banking system is on the verge of collapse. In France there is a slight chance that Marine LePen could win the next election and that would mean the end of the Euro. The reason these forces could win is the continuing high unemployment and deficits in all southern European countries. All this shows that the Euro-crisis is far from over. But how to solve it? Austerity measures clearly did not help, they actually exacerbated the crisis.
According to mainstream opinion in Northwestern Europe, the crisis was caused by high deficits in the southern European countries. And somehow, these deficits led to the loss of economic competitiveness in Greece, Spain, Portugal, Italy and even France. The only way out is to heavily cut government spending, social security payments and wages, usually referred to as ‘austerity’.
The Flassbeck paradigm
Dissent to this mainstream view comes mainly from economists in the United States like Joseph Stieglitz. But their critique of austerity is by far not as compelling as the critique coming from Heiner Flassbeck in Germany. Flassbeck became deputy finance minister of the center left government in Germany in 1998, but was soon ousted after the right wing forces within the social democratic government took over. After that, he worked as chief economist at the UN organization UNCTAT in Switzerland. Now he is a retired Economics professor running an online blog called Makroskop.
In his latest book “Against the Troika – Crisis and Austerity in the Eurozone” Flassbeck shows how neoliberal labor market reforms and wage repression in Germany, that started under the center left government in the early 2000’s and was continued by Schäuble, had a devastating effect on the stability of the euro and the current high unemployment figures in southern Europe. Thereby arguing that not only the southern European countries are to blame for the Euro crisis. Germany also played a major part in creating it.
His main argument is that divergent wage levels in Europe have led to the current crisis. According to Flassbeck, it is on the one hand true that southern European countries lived beyond their means, by raising their wage levels too high. On the other hand, Germany’s repressing of its wage levels for more than a decade meant that the country lived far below its means. This is reflected in its historically unprecedented low inflation rate in the last 15 years. Germany wanted to solve its high unemployment in the 90s by repressing wages. And this is the main source of economic divergence that led to the currency crisis.
The convergence criteria in the Maastricht Treaty could never lead to actual convergence, and thus guarantee stability of the Euro, according to Flassbeck. Because in the end, they cannot guarantee that every Eurozone country lives within its economic means. What is crucial for Flassbeck is that every country should stick to the ECB inflation target of 2%. What every country within the Eurozone has to do is keep its wage increases in line with the country’s productivity levels.
This teaches us that it does not matter that different countries have different productivity levels or standards of living, they just have to live within their means. It does not matter how corrupt a country may be, how many holidays it grants its employees or how high its pensions and other social benefits are. The Eurozone can function, if every member state raises its wages according to their actual economic performance and productivity.
How is Germany to blame for the Euro crisis?
Strikingly, the only country in the Eurozone that stuck to the ECB inflation target and let its wage levels rise in accordance with productivity since the introduction of the Euro is France. And only because Germany repressed wages and therefore its inflation, it is in a more competitive economic position today. Germany basically devaluated within the Eurozone to regain competitiveness, at the expense of its fellow Eurozone partners.
Since Germany could not devaluate its currency to regain competitiveness, it lowered its wages, something economist call a “real devaluation”. On the contrary, France let wages rise in proportion to productivity, and is now called “The sick man of Europe”. Flassbeck demonstrates that although the productivity of the French economy is actually higher than in Germany today, France can still not compete with Germany, because of the latter’s wage dumping in the last years.
Flassbeck argues that in a currency union you cannot start outcompeting each other, instead of the rest of the world. By devaluating within the Eurozone, Germany outcompeted its fellow Eurozone members. That explains to a large part why despite of all austerity measures and wage cutting in southern Europe, there is no increase in employment there. The competitiveness gap to Germany is still too high. Germany basically exported its own high unemployment to the southern European countries. The unemployment problem in Europe shifted from the northwest to the south.
Germany’s stubbornness will mean the end of the Euro
So what to do now? According to Flassbeck the only way out is for Germany to raise its wages a little above productivity in the next 10 to 15 years. The wages of the southern Eurozone countries need to stagnate or grow a little below productivity. Only in that way can the competitive gap within the Eurozone be closed.
If that were to happen, Germany would export less to Europe and the rest of the world, but it would make its domestic economy flourish, which has been suffering due to the wage repression of the last years. This wage repression led to a trade surplus of 8% in Germany. According to IMF rules, Germany will have to be put under supervision for this huge imbalance. If Flassbeck’s paradigm were adopted, the peripheral countries would become more competitive and would export more. That would drastically reduce their current trade and budget deficits, which have brought these countries to the brink of bankruptcy.
But Flassbeck is not optimistic about the prospects of this happening. He foresees the end of the Euro, because Germany will probably not give up its still ongoing suppressing of wages domestically and in the south of Europe. It is a popular belief in Germany that because austerity “solved” the unemployment crisis in their country, it will work the same miracles for the rest of Europe. But not everyone can at the same time increase their competitiveness. That is just against any reasoning.
He predicts that the country that will probably first leave the Eurozone is France, should Marine LePen win the next election, which he thinks is not unlikely. Recent events like the election of Trump make that prospect more probable.
Flassbeck appears regularly on TV talk shows in Austria, Switzerland and even on The Real News Network in the US. But he never appears on German TV. He himself says that is because he cannot explain his opinions on the Euro in a few minutes, but he is probably to vain to admit that he is just not invited. Dissent on the current Euro policy is marginalized and suppressed in Germany. Let’s hope that this will change soon.