“We must invest in education, research and innovation”

April 2015

Conversation with Hans Eichel, former finance minister, Germany, on building a competitive economy, beginning a global economic government and creating productive assets.

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Here is the transcript of the video

Building a competitive economy

Emmanuel Daniel (ED): You were putting in place the disciplines that enabled the German economy to sort of take off after you left. In the period of 2000 to 2006, what did you think were the most important objectives that you set yourself for the German economy?

Hans Eichel (HE): As finance minister, I introduced a budget into German politics in 1999. It was very successful until the economy slowed down. Then, we had a longer phase of stagnation and recession. That means in such a situation, you can’t counter rebate the budget. This was my problem, but it required a lot of effort. Second, we made tax reforms because Germany was a very high tax country. Therefore, we reduced tax rates, but on a broader basis. This meant that it was a better system than we had before with quite a lot of exemptions. We reduced the rate especially for those people with low income. That meant this part of our reforms was on the demand side where most of the other reforms were on the supply side. But the mixture, I think, was successful.

ED: What sort of disciplines did you create in the economy especially with regards to the Labor Force and consumption in Germany in that period?

HE: At that time, the newspapers wrote Germany was the sick man of Europe. It was half of the truth because the former government of 16 years refused to make reforms. This was a pitfall for us. The other problem was how to finance the reconstruction of the Eastern part of Germany, which was unified with the Western part in 1999. This was a communist society, as you know. They had no money to invest. Therefore, it was a very expensive task to restore the Eastern part of Germany. These were the two main challenges we had.

ED: Lower tax and a balanced budget. So where did the plug come in to grow investments?

HE: No, we did not have a balanced budget. It was impossible because we had quite a lot of public debt to reconstruct the Eastern part of Germany. This was a very big disadvantage for Germany’s economy. Therefore, it was very hard to achieve.

ED: Did you see capital investments go up as a result?

HE: Yes we did, and we gave big subsidies to private entrepreneurs to take over the enterprises in the Eastern part of Germany. Most were successful but, after a longer period, not all were successful. As we had seen, the economy in the Eastern part of Germany was a very weak one. Although the entire world thought it was the 10th mightiest industrial economy, it was not.

ED: On top of that, you had your commitments to balance out as well. How did you think about German productivity with the rest of Europe being a marketplace? How did that factor into your thinking of it?

HE: I thought our main task was to regain competitiveness. We lost because of reunification. We must restore the economy of Germany. This was a longer period to work for. But as you have seen, after 2005, Germany was coming up as if from the ashes.

ED: Now, fast forward to the present with the whole concept of a low-cost economy and a high-cost economy; the concept of raising wages as an antecedent to its better GDP growth, instead of just population growth and so on. What do you think Germany’s agenda should be today? What do you think the so-called rich countries need to do to keep the GDP machine?

HE: On one side, you must have a very competitive economy, and very competitive product that means highly qualified products. It means highly qualified workers. That means high wages. The product must be better than the products of the other competitors. I think this is the German way, therefore, now we must invest in education. We must invest in research. We must invest in innovation. If we do this, we’ll be successful. We can support higher wages to strengthen domestic demand. In the past, this was the weak part of our economy. We are very strong in exports yet relatively beat in domestic demand.

Beginning a global economic government

ED: In the time that you were putting in place the balance sheet elements to make the German economy competitive, the US was pursuing a different agenda. They were making the economy cheaper and flooding the market with credit basically maybe trying to generate asset inflation. That would be one description. What did you see taking place in the US between 2000 and 2006?

HE: This was the beginning of the financial crisis in 2008. There was a housing bubble in the United States. Therefore, I thought this was the wrong way. Every time we came together in G7, G8, or within IMF, we told Alan Greenspan and to my American colleague that this was the wrong way. As you and I had seen, it was a big crisis coming for the United States.

ED: The IMF was actually more critical of Germany at that point in time than it was of the US What were some of your altercations with the IMF?

HE: This was in the beginning. IMF had been said to be more of an American institution than a global one, which was a problem. Then IMF screwed up, and had since made remarkable reforms. I think you can no longer say it’s an American institution. It’s not more or less an institution of the whole world, but you need more influence of the emerging markets within IMF. This was not fulfilled until now because the United States and part of Europe were against it, but not Germany.

ED: Having said that, you are described as being one of the architects of G20. In the early years, what did you see about the G7 that you thought was a limiting factor, and that needed to include a broader segment of the global economy? What are the events that led to the formation of the G20?

HE: There were crises in Asia and Russia, and it was clear that you couldn’t have a stable global economy if you didn’t work together with the emerging markets such as China, India, Indonesia, Russia, and so on. Therefore, on one side, G7 became G8.

That means G7 plus Russia. Then we founded G20, an American idea. It was created by the United States, Canada, and Germany. I hosted the founding meeting of G20.

ED: Was the G20 more of an investment club or more of a trade driven club?

HE: No. The first time it was a dialogue; two common views between ministers of finance and central bank governors all over the world because the 20 most important economies were then G20. That meant to produce common perspectives however it should develop. This was the first step we did. In 2008 when the crisis reached its peak, we had real danger that there would be a very deep depression of the world economy. Then, the heads of state and government of the G20 came together. At that time, the G20 worked very well because nearly all the members of G20 were invested against a dramatic slowdown of the world economy.

ED: How representative was the G20 of the regions?

HE: There are in every state, but the question was which are the most economic dealing states. We are all over on all continents. This was the main question. Therefore, we looked for these 20 countries. It’s a problem that Africa alone is represented by South Africa, but this is the economic rarity of Africa at the moment. Maybe later on, we will have additional members of Africa.

ED: Do you think it’s a moving target type of a club? Would you call it a club?

HE: No. It’s the beginning of an economic government of the world. When the crisis went down, the efforts of the G20 went down, too. This is a problem. You need engaged leaders. Sometimes I think they are not. Looking to the last meeting in Brisbane, I think other economic questions were the center of the discussion.

For example, Ukraine isn’t a big problem for the development of the world economy. I think that China is making remarkable changes. That means slower but more sustainable growth. That means that China being in a trial stage of economic growth is no longer as strong as it was in the past. This we must manage together. It is not an economic problem at present, but it will become a major economic problem if we can’t solve this. Therefore, as we can see, G20 is the beginning of an economic government but must look to other problems that have influence through the economy.

Creating productive assets

ED: To some extent, the general populace thinks that quantitative easing is a mechanism now available to central banks. There was the American experiment on quantitative easing, and a European experiment. The Japanese experiment is puttering out right now. Why does it work in some context, and why does it not work in others?

HE: I think the European central banks do it. I’m not so in favor of this, but the European Central Bank, I fear, must do it because the governments are not doing enough. We need more structural forms on one side in Europe and especially in the Southern part of Europe and in Germany now too. We need a new agenda. The last agenda in 2010 had very good results, but now we need a new agenda. Then, we need a big problem for investors especially in the Southern part of Europe, because you can’t be successful in making the structure reforms that are painful for the people if you don’t give them any hope, and hope means to invest in the countries, especially into infrastructure.

ED: Now, what did you see taking place in Europe during the European Crisis? This is a very interesting phenomenon for a former minister of finance, because here you’re seeing bank credit and bank investment in government debt going in a cycle affecting each other, especially in the Southern European states.

What sort of mechanism do you think governments need to have in place today to avoid this destructive cycle, especially the European model where the banks were the investors in government debt?

HE: Not only do governments need a mechanism in place, but now we are making a banking union. Banking unions all over the Euro. It means that the dependents of the banks and the national governments will no longer be so strong. This is the main goal of the banking union.

ED: What levels does the minister of finance have today at the local level to create productive assets?

HE: Italy, for example, is private. It varies in each country, but it has a high public deficit. That means you must take from the richer ones in Italy and you can solve the problem. To take money from them to invest in Italy would be the main task for the Italian government, but I feel that the richer ones are too influential to allow this.

ED: On the discipline of issuing of government debt itself, what do you think needs to be put in place in order for it to be a sustainable working model?

HE: I think that we need more solidarity between the different member states of the eurozone. The stronger ones should invest in the weaker ones. I also think this is Germany’s task, to strengthen the investment for infrastructure in Germany and to invest and show some solidarity for the Southern part of the eurozone. In the end, you can’t have a common currency without every mechanism out to help the weaker ones.

ED: Today, as we speak, global leaders and economic ministers around the world are thinking a lot about how to kickstart the global economy. You have China slowing down. China is, as you say, entering a stable phase. Japan is sputtering. Europe, what’s the problem right now? What needs to happen?

HE: I think that at the moment a kickstart is very difficult. I do not believe in it. The best way would be to minimize the global risks. For example, the Ukraine crisis ought to be clear that this is not to make sanctions. Sanctions are damaging the Russian economy and damaging the European economy. That means damaging the world economy. Therefore, this crisis must be solved. All the heads of state and government must be clear not to take sanctions as an instrument to solve their problem, because it will not solve the problem. ISIS, as you see, is another problem. Ebola is such a problem. There are some long economic problems to solve. Then, I think we have a better view and a better chance for the global economy.

ED: So, you’re a firm believer that some of these – Ebola in a way is a localised problem.

HE: No. You saw that many people refused to go to Western Africa at first. That meant private enterprises there were negatively affected. The World Bank was very concerned about this, saying this will be a big economic crisis if they were not quick in solving the problem.

ED: What is the right shape of government for Europe today? Is it conservative? Reagan-type?

HE: It’s both. You must do structural reforms; otherwise, you will not have a competitive economy in Italy, Greece, and Spain. They are doing so very much in Greece. Spain’s efforts are very successful, while in Italy until now, not so successful.

ED: But what you are suggesting is that Italy and Spain need to look a little bit more like Germany.

HE: On one side, yes. Germany, on the other side, must show more solidarity and invest in Italy and Spain. Otherwise, the Eurozone will not survive.

ED: Going forward, the financial sector is a destabilizing factor in the global economy because global trade or financial assets is now a big theme. As a founding member of G20, what do you think the G20 and the financial stability agenda should be for financial stability?

HE: I think there must be a very strong regulation. Now, it seems that we have strong regulation more or less in the banking sector. The G20 Summit in Brisbane made an additional step, but now most of the risks are within the shadow banking system. Therefore, shadow banking must be regulated. Otherwise, we have a new problem.

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