Peter Bofinger, (Prof.), German Council of Economic Affairs Advisory Board
European Seminar, June 11 2010
ELIAMEP: Professor Bofinger thank you very much for giving us this interview for ELIAMEP’s blog and welcome once again to the 7th annual European Seminar that is organized with the cooperation of BRUEGEL and the support of the Jean Monnet Actions of the European Union. And since our topic is to draw lessons from the crisis on economic governance in the eurozone, I want to ask you what is your opinion on the fact that for many observers the ongoing crisis has highlighted on the one hand the growing unease inside Germany regarding developments in the EU and on the other a mounting criticism outside Germany concerning its approach towards the situation in the eurozone. So, how do you assess this situation and what further challenges do you expect?
Peter Bofinger: Well, the situation is indeed difficult especially in Germany. This is due to the fact that the euro never arrived in the hearts of Germans. Germans still feel the loss of the Deutschmark as a major lack. And so there is not much sympathy in Germany. The problem in Germany is certainly that while our economy is profiting so much from the euroarea and from the stability of exchange relations within the euroarea, this is not communicated sufficiently enough from our politicians to the citizens, I think. This is certainly a very very serious problem. I must say that from the perspective of other countries, I can to some degree understand the criticism of what is going on in Germany. In Germany the domestic demand of all consumption has remained stagnant in real terms for the whole decade and this is certainly not a model for the euroarea. If all countries had behaved like Germany is, keeping their domestic demand stagnant for ten years, German export wouldn’t have gone up. So I think that the criticism is really warranted. On the other hand, one must also say the criticism of some Germans with what is going in Greece is also warranted. I think there is no justification for the fiscal indiscipline in Greece during the last ten years, even economic growth in Greece it was excellent, was one of the strongest growing countries and the problem was simply that the governments or the politicians were not willing to tax incomes in an adequate way. So, in Greece, public expenditures in relation to GDP were about 45% in 2006-2007 and this was more or less the average for the euroarea so that was fine, but government revenues were 40% and this was simply insufficient. And Greece is a country which has the lowest taxes on income on profit in the OECD and this is something which was clearly wrong and must end. My fellow citizens in Germany also say well of course that all the statistical [issues are problematic, and ] this is something which is difficult to accept and of course it also makes it difficult in Germany to generate a feeling of solidarity [towards Greece].
ELIAMEP: Since you referred to the concept of solidarity, what is your assessment on the observation that the crisis has challenged this concept, which for many is considered crucial and at the core of the European project?
Peter Bofinger: Well, I think the crisis has certainly shown that the relationship of monetary union has reached some kind of middle position between purely nationalist – national policy making and between a truly coordinated approach and I thing that this middle position is not a stable equilibrium. So governments, politicians and citizens of Europe have to decide what they want. I think monetary union is an important relationship for Europe, it’s important for Europe to speak with one voice in the monetary sphere and it would be a disaster to go back to monetary nationalism. But the choice is not either to intensify the coordination in the sphere of fiscal policy, wages and also financial … I think either go ahead and this means either you have to give up some national competencies or really one has to go back to nationalism. But in my view, that would be a disaster.
ELIAMEP: So backwards or forwards basically?
Peter Bofinger: Yes, the median position is simply an unstable equilibrium
ELIAMEP: Thank you very much