Inside Track: Bayern Munich rules
The introduction of Eurobonds would amount to “a socialism of interest rates” that would mask the need for structural changes within the economies of euro zone members. That’s according a senior Bundestag representative who spoke to Business & Finance in Dublin recently.
Dr Joachim Pfeiffer, economic policy spokesman for the parliamentary group of Germany’s ruling Christian Democrat party, pictured, said that the initiatives such as the ECB’s LTRO (long-term refinancing operations) are aimed primarily at buying time for national governments to introduce much-needed structural reforms and improve competitiveness. Any suggestion from the ECB that Eurobonds are on the way could deter those governments from implementing much- needed reforms, he argues.
Pfeiffer, who was attending a reception hosted by the German-Irish Chamber of Industry and Commerce in Dublin Castle, said that the low interest rate environment from the inception of the single currency was not used productively by member states. “They didn’t use these cheap re-financing conditions to improve their competitiveness, to improve the infrastructure. I'm not talking of Ireland, I'm talking of Spain of Portugal and talking especially of Greece for example. So there was no incentive to do this because people thought we could party forever.”
He emphasised that cash-raising measures such as Eurobonds would be nothing more than a ‘sweet poison’ as they would remove the incentive to introduce changes that would benefit states in the long-term. He was eager to point out that Germany’s economy was strengthened by 10 years of restraint, specifically in the form of wage controls, and cautioned that other countries must embark on a similar path. “Now we buy the time with the ECB tender, we buy the time with the programmes we have, and then we must use it to tackle the real problems; the competitiveness problems, the growth problems, the sovereign debt problems and the financial regulation problems . . . 10 years ago, we were not very well off in Germany and we have hard work to do. Today we are in a better shape but if we do not keep on working hard, then we will lose our competitive edge again.”
Pfeiffer gave a speech to the reception delegates during a week in which the euro crisis began to creep back onto the agenda again after four months of relative calm. The creaking financial positions of Greece, Spain and Italy saw leadership changes in all three countries towards the end of 2011, and in the case of the latter two, the new men brought an initial calm to spiking borrowing costs. But as Spain’s colossal unemployment problems worsen, and dampened growth across the euro zone begins to put budgetary targets in doubt, upward trending bond yields have once more led to speculation that one of the euro zone’s big boys will require a bailout sooner or later.
This assertion is rejected by Pfeiffer who says he is not worried by what he sees as temporary setbacks. “I think [Italian prime minister Mario] Mr Monti has realised what has to be done and I see the new Spanish government is willing to do what is necessary,” he explains. “I think we are on the right path and I don't think one bailout will follow another.” Pressed on whether EU leaders should at least consider a contingency should financial assistance be required by either economy, Pfeiffer believes that adequate plans are already in place. “We have reached the final solution with the ESM and we must now find a transition solution for the EFSF and the Greek package. But you can't bail out one year with €50bn, then with €100bn then €500bn and then €1trn. You will only buy time for one, two, three years and we have reached the peak."
Aside from noticeably sedate discussion about Ireland’s upcoming fiscal compact referendum across Europe, the extent to which Ireland is viewed as the model bailout student is evidenced by the fact that talk of increased fiscal tightening measures is confined to the Mediterranean nations. On Ireland, Pfeiffer is reluctant to discuss the consequences of a No vote in the referendum apart from saying that it would send out the wrong message as to Ireland’s commitment to its obligations. He says that, although the bank guarantee complicates things in the case of Ireland, the only way to significantly eat into the sovereign debt problem is to ensure that the proper conditions are there for the economy to grow, something he says which a challenge for Germany also.
Of course, what is a challenge for Germany with its gargantuan export power looks like an impossibility for many other nations and begs the question whether Merkel and her government need to redress some of the macroeconomic imbalances that have seen German exports surge ahead of others.
After all, a decade of wage restraint in Germany led to a glut in savings which played a huge part in the asset bubbles that formed in the periphery of the euro zone.
One suggestion is to accelerate the tentative process whereby Germany’s wage restraint is being loosened and increase wage hikes for German workers. Such a scenario would lead to increased spending and could see German consumers buying more from their neighbours.
The suggestion is met with implacable opposition from Pfeiffer however, who insists that wage restraint still has a significant role to play in Germany in maintaining a healthy economy. He similarly rejected the idea that increased wages in Germany would automatically lead to an increase in consumer activity which would boost other economies.
“You can't do that artificially or over the table,” he says. “It doesn't make sense to make a strong man weaker to make an average level. You have to make the weaker man stronger. To speak in football terms, you don't make Bayern Munich or Real Madrid weaker because another club is not competitive.”