Ankel Hassel gives PERG guest lecture on Germany´s export dependency and the future of the Eurozone

Prof. Hassel at PERG

  The European sovereign debt crisis has exposed deep structural disparities in the economically and politically fragile Eurozone. While states on its periphery -but also a number of core states- are struggling, Europe’s leading economy, Germany, has been thriving. Low wages, limp domestic demand and a large current account surplus are widely regarded as major ingredients of Germany’s success. At the same time, these ingredients are seen as a stumbling block to the recovery of other European economies. International calls have therefore demanded that Germany should correct these tendencies. Is there any indication that this will happen?

On Monday, Ankel Hassel, professor of Public Policy at the Hertie School of Governance in Berlin, explored this question in the PERG opening lecture of this academic year. She draws a complex web of Germany’s political economy, where persistent imbalances between the domestic service sector and export-driven manufacturing are the reason for both Germany´s export strength and its dependence on demand from abroad.

Particularly crucial for the German model, it seems, is the role of the welfare state. It finances the highly skilled workforce the German economy relies on so heavily, and is increasingly paid for by employees (especially the low-skilled ones). Together this has the effect of suppressing wages, decreasing labor costs, while keeping employment high. Interestingly, Germany´s adherence to the current social security system is closely linked to the fiscal structure of government, as Hassel suggests. As much as 38 per cent of all tax revenues come from social security contributions. There are thus few incentives for German politicians, neither on the level of the central government nor on the states level, to reform the social security system which sustains many of the imbalances in the current German political and economic system.

According to Hassel, perceptions also play an important role: ‘In theory, it is right that Germany should embrace the European Commission´s recommendations to boost domestic demand in order to tackle the economic imbalances in the Eurozone. Within Germany, however, there is a broad consensus that the country´s export model has proven to be a great success.’ Asked about the minimum wage (that looms in face of ongoing coalition talks between the Christian Democrats and the Social Democrats) and its capability to correct for imbalances in the German and European system, Hassel cautions against over-optimism: ‘Signaling that there are wages that are not acceptable, a minimum wage can create certain expectations regarding what a decent wage is. However, experience has taught us that the implementation of a minimum wage is rather difficult because there are so many ways to get around it.’

What do the persistent imbalances in the Eurozone mean for its future? Numerous seemingly unsuccessful efforts to ‘rescue the Euro’ engender the suspicion that the current model of the Eurozone is unsustainable, both for the region and for its leading economy. If Germany adheres to its economic strategy, unable or unwilling to act as a benign hegemon, as CEU founder George Soros has repeatedly called for, are there any remaining options for keeping the Eurozone in its current form alive? If not, will it eventually be the best for Germany’s neighbors to edge it out of the Eurozone?

by Juliane Sophie Stein (2nd year MA student, Political Science)

 

--The related working paper by Prof Anke Hassel can be found here.
--Find the full interview with Prof. Anke Hassel here.