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German Labor and EU Integration

Interviewee: Mehrdad Payandeh, Director of Economic, Financial, and Tax Policy, Confederation of German Trade Unions
Interviewer: Roya Wolverson, Staff Writer, CFR.org
February 3, 2011

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As European leaders gather this week to discuss eurozone reforms (FT), questions remain about what role Germany--the eurozone's strongest member--will play in shaping the economic bloc's future. Despite German Chancellor Angela Merkel's push for measures to save the euro, many of her own constituents remain unconvinced about European integration's benefits. U.S. policymakers also worry that Germany's export-led economic rebound is exacerbating global imbalances that hamper U.S. growth. Mehrdad Payandeh, director of economic, financial, and tax policy at the Confederation of German Trade Unions, says raising comparatively low German wage rates--which would help spur German consumer demand--is key to European and global rebalancing. Greater European integration is vital to Germany's long-term economic growth, he says, because German exports have increased since adopting the euro. But Payandeh adds that German austerity policies risk increasing economic inequality and "tipping European and German economy back into recession."

Why has the U.S. unemployment rate fared worse than Germany's during the economic downturn?

During the financial and economic crisis from September 2008 until end-2009, Germany's "short-work" policy showed the world how to survive a recession without losing jobs. The government and social partners (trade unions and employer organizations) have done a great job keeping unemployment in check during the recession. There's no doubt their policies have been a tremendous success.

In the United States, the unemployment rate reached a twenty-seven-year high (10.1 percent) in October 2009. In Germany the comparable rate fell to 7 percent, a seventeen-year low.

Germany had 1.1 million workers participating in short-time working programs, known in German as Kurzarbeit [when employees undergo recession-related reductions in working hours for training and/or receive government support for lost income]. They received 80 to 90 percent of their wages, partly paid by the German government. In addition, working-time accounts [programs that adjust workers' schedules to match capacity] and employment alliances provide German companies with unique flexibility. The fact that many German companies did everything possible to keep their core workforce had to do with experiences from the previous upturn, when there was suddenly a shortage of skilled workers. In 2010, German companies had their workers "stand by," and because of that they were able to restart selling their goods worldwide.

Is the EU's approach to budgetary crises in Greece, Ireland, Portugal, and other indebted eurozone countries ultimately good for EU workers?

The crisis has resulted in a massive transfer of private debt to public debt as a result of the bailing out of the banking sector. European citizens are paying a high price through massive cuts in public spending. From a trade union point of view, these cuts in public expenditure, wages, pensions, and social programs to pay for the crisis are socially unjust and economically unsound.

Public support to protect work places is not the problem; it is the solution to keep jobs and part of the solution to being economically successful.

These cuts will serve to increase inequality. Nominal wages have been frozen in many European countries. Spain has cut public-sector wages by 5 percent in 2010, Portugal by 10 percent, Estonia by 8 percent, Ireland by 13 percent, and Greece by 20 percent. This policy risks tipping EU economy back into recession.

What is the benefit of the European Union to German workers, and do you think it outweighs the costs of membership?

Since the beginning of the eurozone and the end of the deutsche mark, Germany started to sell more and more goods into the other countries of the eurozone.

The difference between imports and exports from and into the eurozone was continuously increasing from year to year. As an export nation, Germany is one of the European countries that profits strongly from the common currency. The benefits of the euro for German workers, their companies, and Germany as a whole are, at large, positive.

Many consider Germany's economic policies to be a major part of the eurozone's problems, because its lower wage rates leave other European exports less competitive. But would higher German wages compromise German export competitiveness?

Germany is the biggest and strongest economy of Europe. During the last fifteen years, German trade unions tried to achieve better salaries for their workers by collective bargaining. But the wages decreased as a whole, based on political decisions that expanded the low-wage sector. To solve the actual problems in the eurozone, German wages must strongly increase to push consumer demand in Germany. At the same time, the deficit countries must try to stabilize their economies and expand their exports.

Higher wages would not lower German competitiveness, but would increase domestic demand for national and foreign products and reduce economic imbalances. German export competitiveness can be predominantly traced back to foreign demand for high-quality products, especially engine construction, automobiles, and other capital-intensive goods. German exports depend enormously on the business-cycle development of its international trade partners and not on price, wage level, or exchange rate. In 2010, 43 percent of German exports went to eurozone member countries, 19 percent to non-eurozone EU countries, 10 percent to BRIC countries, and 7 percent to the United States. A growing global economy will expand Germany's exports.

Do you support Sarkozy and Merkel's proposal to harmonize taxes and labor regulations throughout the eurozone? What about European Commission President Jose Manuel Barroso's push for expanding the eurozone bailout fund and German responsibilities to it?

From a trade union point of view, the eurozone must harmonize taxes and economic policy. These policy instruments could help to fight imbalances. An internal market cannot function with different social systems, different taxation, and seventeen different economic approaches. We strongly support European solidarity. Germany, as the biggest economy in Europe, has a special responsibility to stabilize the common currency. We support the idea of [Luxembourg's Prime Minister] Jean Claude Juncker to sell one single Eurobond instead of seventeen different national bonds.

The United States has criticized Germany for its unwillingness to fuel global demand with fiscal stimulus. Should Germany be spending to boost the German consumer and if so, why is the government pushing back?

German trade unions called for massive public spending in infrastructure programs, public education programs and higher wages (demand for a legal minimum wage of Ä8.50 per hour) to stimulate domestic demand. The conservative/liberal German coalition government wants to reduce the public deficit. Trade unions are afraid of this austerity policy, because of the risk it poses of tipping the European and German economies back into recession.

In the wake of the eurozone crisis, U.S. politicians are criticizing Europe's welfare state for dangerous overspending. Is Europe spending too much on public support to its workers?

Definitely not! Public support to protect work places is not the problem; it is the solution to keep jobs and part of the solution to being economically successful. The German "labor market miracle" is based on innovative working time regimes by social partners, and the miracle is strongly based on public support during the crisis.

In Germany, public debt accounts around 70 percent of GDP, similar to the United States. Since German private wealth is five times bigger than public debt, in our opinion, there is no reason for anxiety about indebtedness.

The European welfare state model stands for social security and economic success.

For trade unions, social Europe does not start with a job only. It is also about good work and quality jobs paying fair and decent wages with strong worker's rights and strong collective bargaining protection. For trade unions, the EU is much more than just an internal marketplace. Social societies and welfare states are not possible to have free of charge.

How then should Germany go about funding its growing welfare obligations, especially since the markets are looking to punish profligate European countries for overspending, which makes borrowing and spending more expensive?

In our view, a growing economy is the immediate requirement for paying down debts. Misleadingly, German politicians and conservative economists predominantly argue the other way around.

In Germany, public debt accounts for around 70 percent of GDP, similar to the United States. Since German private wealth is five times bigger (Ä8.8 trillion) than public debt (Ä1.8 trillion), in our opinion, there is no reason for anxiety about indebtedness.

In fact, long-term interest rates for German governmental bonds have decreased since the beginning of economic distortions in the eurozone. Institutional investors buy German bonds as important collateral securities for their portfolios. As a result, the German government pays less for borrowing than before. Conversely, countries like Greece, Ireland, or Portugal are forced to pay higher interest rates than one year ago. These different developments shelter enormous risks for the stability and ability of the whole eurozone. One proposition of the German Trade Union Confederation is therefore the implementation of a conjoint Eurobond with just one interest rate for all countries in the eurozone. These Eurobonds would reduce the costs for refunding in these flagging countries.

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