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Interview: Horst Köhler, head of the International Monetary Fund, talks about ways out of the world economy crisis.
manager magazin (mm)
June 20, 2003
mm: Mr. Köhler, you have been following developments in Germany from abroad for several years, first from London and now from Washington. Are you still able to comprehend what is happening here?
Köhler:: Only to a certain extent. However, it is crystal clear that we can only maintain our high standard of living in Germany if there is a great deal of change.
mm: The Bundesbank recently warned that the plight of Germany also has a mental aspect: excessive focus on preserving entitlements and collective inertia.
Köhler:: Excessive focus on preserving entitlements is certainly true, inspired above all by trade and professional association officials. I would not choose the term "collective inertia." The key problem is false incentives in the German labor and social system. Changing these takes the political courage to undertake original leadership. Look at Asia, for example. The economies there are under enormous competitive pressure, especially from China. However, they do not let themselves be discouraged. The Finance Minister of Malaysia recently told me: "We must move on" - we must become more competitive and technologically better. Germans still command respect abroad. However, that respect is crumbling quickly.
mm: The Economics Minister, Mr. Clement says that he only realized how difficult the situation was once he took office in Berlin.
Köhler:: That is a good sign for the future.
mm: Evidently the German political class has a serious problem recognizing the situation.
Köhler:: It is not so much a problem of recognition as one of implementation of change.
mm: Is the German disease curable?
Köhler:: Of course.
mm: Do you see any signs of recovery?
Köhler:: Yes, young people are becoming self-employed earlier than ever before; works councils are allying themselves with company management; a woman, a highly qualified scientist, Angela Merkel, is the leader of a major political party; and Federal Chancellor Gerhard Schröder, too, has now reached conclusions with the "Agenda 2010" economic reform package that point in the right direction.
mm: Will Schröder's "Agenda 2010" be enough?
Köhler:: No, but it is a remarkable start. The reforms must go much further. And there is really no more time to lose.
mm: What should be the priority in your opinion?
Köhler:: The over-regulation of the labor market must be ended and above all more differentiation in wage agreements should be permitted at the company level. Then pensions and health insurance must urgently be freed from the burden of unpayable claims. And finally, education and training must be reformed. That is true above all for the universities. We need more competition between the universities, and university teachers who have time for students. Germany will only have a chance, if it is a leader in science and technology.
mm: The left wing claims that such demands will lead to cuts in social benefits and the creation of elites.
Köhler:: It is a question of making the welfare state fit for the 21st century, not of abolishing it. We need elites to be able to hold our own in a world of global competition. They just have to be open elites, both at the top and at the bottom. Social hardship cannot be totally avoided in the long-overdue overhaul of the labor and social system. Any further delay to the reforms will only lead in the end to greater social hardship.
mm: So do we understand you correctly: you are optimistic that Germany can actually be reformed?
Köhler:: Yes, although the resistance to reform particularly from the various associations must still be overcome.
mm: Which associations do you mean?
Köhler:: Not just the labor unions, but also the employers' and various industry associations are not exactly excelling at far-sightedness. They take what they can get in the short term. Take the dismantling of subsidies for example. I have to admit that Hans Eichel is right; every one of his initiatives is immediately flogged to death by the associations.
mm: The inability to reform - the long, slow decline - it all sounds dangerously like Japan.
Köhler:: There are some fundamental differences, but also a few parallels in that comparison.
mm: Do you think the problems faced by the German banks are as serious as those faced by the Japanese banks?
Köhler:: No, however, the German credit institutions should improve their profitability significantly and quickly. It does make me think when I compare the macroeconomic trends. The Japanese economy has been stagnating for a long time now and prices are falling. The German economy has been stagnating for almost three years and a study produced by the IMF Research Department on Germany is warning of the risk of a mild (!) deflation. Despite all the differences Japan is a sobering example. If fundamental structural reforms in Germany fail now, stagnation could take hold. I don't even want to imagine what this could mean for the labor market.
mm: You were one of the architects of the Economic and Monetary Union. Germany was then the power defending a stable Euro. Now the German disease is challenging the political structure of the Monetary Union - especially as we are breaching the rules of the Stability and Growth Pact. Can the Economic and Monetary Union go on working in the long term with Germany in this state?
Köhler:: Germany is certainly in a particularly difficult position with regard to its fiscal situation. However, no one need doubt its allegiance to the aims of the Stability and Growth Pact.
mm: The government is in actual fact not adhering to the stability pact rules.
Köhler:: Germany is in a great dilemma. Due to failings of the past, not least by the previous government, the government finances are in structural imbalance. And now, cyclical reductions in tax revenues and increases in spending, in particular on unemployment, are added to this, taking the deficit above the 3 percent limit prescribed in the pact. My advice for economic policy reasons is not to react to this situation by further short-term austerity measures.
mm: More debts for the recovery? Surely Japan acts as a warning against this too.
Köhler:: In this regard, there is a fundamental difference. In Japan in the 1990s, a series of expenditure programs to stimulate the economy were financed with debt. It is clear that these did not help the economy and ruined government finances. In Germany it is today a question of allowing the automatic stabilizers to work. I consider this compatible with the aims of the Stability and Growth Pact, if - as the EU Commission is also proposing - legislative measures are taken simultaneously to reduce the structural budget deficit in the medium term. Hans Eichel has presented proposals to this end and that is also the aim of "Agenda 2010." Nevertheless, I believe that the reform debate in Germany is still being conducted by all parties with blinkers on.
mm: And on top of this, the Euro is now rising sharply. For German companies the sudden increase in the exchange rate of the common currency is a further burden in an already difficult situation.
Köhler:: There is some truth in that. On the other hand, the Germans - rightly - always wanted a strong Euro.
mm: The European Central Bank has just lowered interest rates. Should it do more if the Euro continues to rise?
Köhler:: Wim Duisenberg himself has not excluded this possibility. The trend in prices and economic activity must continue to be watched very closely.
mm: How far will the dollar fall?
Köhler:: No-one knows that exactly. A devaluation is consistent from the economic point of view in the light of the enormous U.S. current account deficit. So far it has been gradual and is thus within the normal frame of events. It would be a problem if the dollar were suddenly to take a massive and abrupt plunge.
mm: And the prospect of this does not worry you?
Köhler:: I think it is premature to write off the dollar. The short-term growth outlook for the U.S.A. is markedly better than that of the Euro area and in the long term, too, the U.S.A. is likely to continue to be an engine of growth in the world economy.
mm: The current exchange rate turbulence reminds one of the 1980s. A rapid fall in the dollar began in 1985. At that time the major economies tried to stabilize exchange rates. Is it not high time that the Europeans, Americans, and Japanese made a joint effort to prevent a dollar crisis?
Köhler:: In the event of a further and faster fall in the dollar the governments and central banks must and will come together. Regardless of this each country must get its own problems under control. If the governments of the major economies show they can do this, it will also stabilize currencies.
mm: If things get really bad, how quickly could the governments and central banks act to support the dollar?
Köhler:: In the event of the risk of an acute currency crisis, decisions can be made very quickly, within hours.
mm: Some analysts already think there is a competitive devaluation taking place, believing that the Americans and the Japanese might be trying to solve their problems by depressing their currencies. Only the Europeans have not realized it yet.
Köhler:: I do not believe that this is the prevailing philosophy. Competitive devaluation, in which everybody tries to improve his own export prospects at the expense of everybody else, would in the end help no one and hurt everyone.
IMF EXTERNAL RELATIONS DEPARTMENT