23 May 2013

Bundesbank/Weidmann: Opportunities and challenges arising from the crisis in the euro area

The benefit of stable government finances is generally recognised. They provide room for manoeuvre without burdening future generations. However, there are differing opinions as to the pace at which fiscal consolidation should be pursued. On the question of the extent to which consolidation hampers growth, a number of factors come into play. Some empirical studies indicate that, in a phase of economic weakness, the negative impact on growth may tend to be greater. On the other hand, there is broad consensus that a high level of debt has negative consequences for growth. That is particularly the case if the monies borrowed are used to finance current expenditure rather than public sector investment.

Structural reforms in the services sector may provide further growth impetus. Since the outbreak of the crisis, opening up access to closed professions has often been discussed as a proposal for increasing productivity in the crisis countries. However, it is not only the crisis countries which need to take action. In a cross-country comparison, the OECD found that the services sector in Germany is particularly strictly regulated. There are good reasons for regulating service professions, especially from the perspective of consumer protection. But overly strict regulation can restrict market access and weaken competition. Reforms in this area may therefore have a significant impact, boosting investment, productivity and wages alike.  By contrast, the current account surplus would be reduced if reforms focused on non-tradable services. Structural reforms in the services sector would thus allow Germany to contribute towards the adjustment process in the euro area.

In contrast to the “flexicurity” model favoured by the Scandinavian countries, Germany’s approach is based on “internal” flexibility. The flexible use of working time accounts allows employees to build up credit when times are good, which can then be depleted during slower spells. This avoids having to make workers redundant. The in-house agreements designed to safeguard employment, which were signed by German trade unions and employers as part of the “Pforzheim agreement” in 2004, for example, work according to this principle. The constructive role played by the trade unions in Germany was thus key to restoring competitiveness.

At the end of the day, European countries are not only the architects of their own success, but also influence the outcome of European integration as a whole. Germany and France have a particular responsibility in this respect, not least because of their economic importance in Europe. The situation is like a rowing boat: unless both individuals row at the same pace, the boat will spin in circles instead of moving forward.

Full speech

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