Rehn: Germany must act to aid recovery

German money fuelled the credit and housing bubbles of the eurozone’s periphery states and now must act to aid recovery, Ollie Rehn, economics commissioner warned.

Mr Rehn is expected to officially warn Berlin to make changes when he delivers his recommendations on the draft budgets from all eurozone countries not in a programme on Thursday.

He notes that a third of Germany’s current account surplus comes from returns on loans and investments outside the country while the rest comes mainly from exports of goods that are currently in demand.

Mr Rehn repeated his advice of last July that the eurozone’s largest economy needed to boost wages, especially of the low-paid, through cutting the high tax rates and social payments. This would help reduce the inequalities in the country where 20% of the workforce are on minimum wage.

Germany has not been investing in its own economy and now spends less than other eurozone countries. This needed to be reversed and it would help boost growth in the euro area.

The commission has been looking at the best way to create a win-win situation for both Germany and the eurozone as a whole, he wrote in the prestigious German newspaper Frankfurter Algemeine Zeitung, and published in English in his blog.

A strong defender of the austerity policies pushed by Berlin, Mr Rehn said the strength of the German economy was built on the growth of the euro, the low interest rates that accompanied its creation and the cheap, well educated labour for German industry following EU enlargement.

The money made by Germany and other core economies “instead of boosting productivity-enhancing investment, which would have enhanced sustainable growth, they largely ended up fuelling the credit booms and subsequent asset and housing bubbles in recipient countries“, he said.

These “catastrophic busts” hit both core and periphery economies, including German banks, he said in the article.

Now, as well opening up the bottlenecks to the growth of domestic demand through increased wages, they should increase competition in services and boost investment in infrastructure including energy, which Mr Rehn described as a “pressing challenge”.

Mr Rehn criticised the country’s current account surplus — in monetary terms the second highest in the world after China. This balance of exports over imports under EU budget rules is supposed to not exceed 6% on average over three years, but has been much higher for twice that long in Germany.

“All this would enhance Germany’s economic performance and welfare and could help reduce the inequalities that have accumulated in recent years. But it would also have a significant positive impact on the eurozone economy. For, while a rise in demand in Germany might not lead directly or immediately to a large rise in exports from southern Europe, the reforms the EU is advocating for Germany would facilitate a genuine and mutually beneficial rebalancing in the eurozone economy.

“Crucially, a rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery,” he said.


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