The German program for the eurozone’s southern economies has relied on austerity above all other tools. Today’s New York Times carries a story that the Germans are refusing to open up a financial lifeline to the southerners in part because of their belief that a similar lifeline to the former East Germany failed during the 1990s. Without financial transfers from Germany to the less productive countries, the alternative answer is the well-known austerity, but what the Times draws attention to is another element of the German program: liberalization.
In contrast to austerity, which is self-defeating, there is some real merit to this other part of the German program, and it seems like a legitimate tool for achieving “convergence” in the European economies. Without constant state intervention, a single currency can only work if the countries participating in the currency zone have comparable economies. Europe clearly does not, with a high-production and high-employment north propping up a low-production and low-employment south. It will require structural reform, not austerity, to make the economies of Europe converge.
Der Spiegel reports that the Germans have some concrete ideas for structural reform, namely the internal liberalization of the southern economies. A six-point draft plan includes special investment zones, divestment of state-run enterprises, education reform, and “a loosening of provisions that make it difficult to fire permanent employees and to create employment relationships with lower tax burdens and social security contributions.” The full details are not revealed – obviously these are only four items out of the six – but it gives us a sense of where the Germans are headed.
It is heartening to see the terms of debate begin to change from cutting things to growing things. Francois Hollande’s victory over Nicholas Sarkozy in the French presidential election has eliminated German Chancellor Angela Merkel’s main ally in pressing for austerity. With France flipping from pro- to anti-austerity, Germany is forced to offer up other ideas. The Germans’ relentless demand that others be like them by emulating their fiscal conservatism has been a disaster for Europe; but conversely, if others choose to adopt elements of Germany’s structural reforms, the outcome could be quite positive.
In a previous post, I defended Germany’s internal economic arrangements from criticism that the country’s service sector was inefficient and illiberal compared to its manufacturing sector. Is it hypocritical for Germany to urge service market reforms when its own service sector remains highly regulated? Yes, but unlike with austerity, they’re actually right about this, so the hypocrisy shouldn’t matter. The flexibility provided by economic liberalization can be taken too far, as it was by neoliberals who deregulated the financial markets twenty years ago, but generally speaking it is a good thing. Rejecting a generally sound economic doctrine simply because it comes from a self-serving messenger is not good policy.
Furthermore, liberalization of their own service sectors may help the southerners recover some of their own competitive advantage within the EU common market. The Germans prefer to focus on exporting manufactures while keeping services tightly regulated? All well and good – it opens up an opportunity for Spain and Italy to liberalize their service sectors for the EU market that Germany has neglected. In a way, Germany is ceding a major slice of the EU economic pie to any country enterprising enough to take advantage of it.
So it is best to ignore the messenger and focus on the message. Germany has a very successful structural model for achieving the goals it sets for itself. If southern resentment can be set aside (resentment Germany bears its fair share of the blame for stoking), the more troubled EU economies might find a way to liberalize and then grow their way out of recession. Austerity is something that has been forced on the nations of southern Europe. Liberalization is something they ought to choose.