Die Wacht an der Oder

Worried grumbling is a bit of a national sport here in Germany, and let me just say as a spectator that the game has rarely been as good as it is right now. Tune in any Sunday night to Christiansen for an action-packed match. Or, if you haven’t the time, let me give you a pr?cis that fairly sums up pretty much every week’s exchange:

Sabine Christiansen: We desperately need to reform, yet we can’t. Why not?

CDU/CSU/FDP (to SPD/Greens): it’s your lot’s fault.

SPD/Greens (to CDU/CSU/FDP): no, it’s your lot’s fault.

[repeat ad nauseam, week in, week out.]

Far be it from me to stand in the CDU’s corner. Still, as it’s the SPD that is in government, it’s they who’ll receive my brickbats for the moment. So here I go, nervously mindful that the only likely result is Scott von M. pounding me on the head while Edward edges carefully away, lest he be branded a neo-liberal by association.

As everybody knows, the German government (unlike a section of the German people) was quite gung-ho about the EU’s recent eastward expansion. Expansion brings with it a small problem, though. Lots of the shiny new member states are charmingly cheap places to do business. In Germany, by contrast, ‘cheap place’ and ‘to do business’ are terms that do not normally abut. If, like Germany, you were a country desperate to generate jobs and revenue, you might be tempted to look at your new comrades with a gimlet eye.

And indeed, the German government is stamping its little feet over those vexing easterners, with their low corporate taxes and labour costs. Gerd Schr?der has been making noises about the ‘unfairness’ of lower corporate taxation elsewhere, and I have just seen a poster protesting against the nefarious practice of ‘wage dumping’ (Lohndumping). Schr?der has also attacked managers who broach the possibility of relocating their works to cheaper eastern EU countries as ‘unpatriotic’.

As a political matter, I suppose he has to say that. And, as in all these matters, a cardinal rule is: it’s not that simple. What’s more, managers threatening relocation are probably engaged more in a ritual chest-thumping exchange than any real speculation about wholesale corporate emigration. Still, they’re closer to right, and Schr?der closer to wrong. All else being equal (a crucial assumption, often ignored in TV-soundbite rhetoric), a manager would be a fool, and a poor steward of his shareholders’ capital, if he didn’t consider putting his business where it could be run cheaply.

So, yes, there is something for the government to worry about. (There usually is.) But how does it propose to respond to the threat? What worries me is that they don’t want to respond to it; they want to neutralise it. Wouldn’t it be grand, goes the thinking, if other member states had to tax like we do? If it cost as much to hire a Pole or Czech as it did a German? You can even make this sound rather lofty and noble, by evoking images of level playing-fields and the like.

I can certainly understand why Schr?der would be upset about cheap corporate tax regimes. My sympathies for the Germans are limited, though, and my vicarious sympathies for the easterners great. It’s a pity the German economy is sclerotic and all; but the Germans are still richer by miles than the easterners. Now, another EU country (though rather a western one), Ireland, was historically a pretty poor place. It’s much richer now than it used to be. To be sure, part of its recent prosperity is the result of EU cash infusions. But a lot of it is down to having found a way (low taxes, primarily) to persuade firms to come in and set up shop. If the new member states can pull off the same trick, fair play to them.

Ditto for labour costs. Germany has, over the years, made certain choices as a result of which it’s expensive to hire and fire workers (and to employ them in the time in between). Whatever about the wisdom of those choices (and remember, on a historical scale they have served Germany pretty well), other countries may see the wisdom in adopting a different approach. If they do, and it works, more power to them.

What must Germany do, then, in the face of these challenges from the East? The answer is easy: it must make itself more competitive. The hard question is, how? But I don’t think that doing so inevitably condemns Germany to a race to the bottom. Competition will put pressure on the Germans to reduce the cost of doing business. That doesn’t mean that Germany is going to have to, say, match Polish labour costs euro for złoty. The firm I work for is hardly the cheapest place to come if you need the services we provide; but significant numbers of clients come to us rather than going to a less expensive competitor because they are convinced they get good value for the premium. Do our competitors’ rates affect our own? Of course they do; absent competition we’d probably be able to charge much more. We can’t ignore their pressure, but nor must we ape their model to compete. A country is not a firm, of course, but I hope economists will not condemn me as hopefully na?ve for thinking that, in a big-picture sense, the same rules apply.

But what I am hearing from the German government is not questions about improving competitiveness; what I am hearing is the monopolist’s whine: protect me from competition. Nice work if you can get it; but Germany should not be surprised to find other countries reluctant to play along. They can offer what Germany cannot. Rather than hobbling them just as they leave the starting gate, let the German government instead strive to provide compelling alternative reasons to invest in Germany. If the Germans can make their country attractive enough, they might find that businesses are willing to hire people and make things here for reasons other than ‘patriotism’.

7 thoughts on “Die Wacht an der Oder

  1. Mrs T,

    thank you for that “A shorter Christiansen”! It’s strange to understand how the ARD can justify funding it through its “entertainment” budget, as they happen to do.

    Actually, for me, competition is one major advantage of the EU enlargement. Did you read this week’s Economist’s special on “reforming Germany”?

  2. Did you read this week’s Economist’s special on “reforming Germany”?

    Read it? Ah, sure, Tobias, no doubt I was channelling it. Like every good liberal, I imbibe whatever the Economist serves up and internalise it as though it were the Word of God Himself.

  3. And, oh yeah: it’s okay to fund Christiansen through the entertainment budget because it’s very entertaining.

    My favourite moment: Mutter Beimer shares with the nation her insights on the thorny abortion issue; insights she gained when one of her fellow-characters on Lindenstrasse was thinking about having an abortion. Bishop Dyba (the Lord have mercy on his soul) was also a guest that night, but I thought that, since Sabine was interviewing a fictional TV mother, she might have done better to replace Dyba with a fictional TV clergyman – say, Onkel Ludwig Drombusch or der Fahnder – for the spiritual side of the question.

  4. Thought some of you out there
    might find some interest in this little
    gem of Eurodemocracy…..

    This Wednesday the Irish Presidency of the EU went for a bypass of
    the democratic process in the EU Parliament and managed to “secure
    a qualified majority for a counter-proposal to the software patents
    directive, with only a few countries – including Belgium and Germany –
    showing resistance. This proposal discards all limiting amendments from
    the European Parliament and reinstates the laxist provisions from the
    Commission, adding direct patentability of data structures and process
    descriptions as icing on the cake.”

    For more details, see http://swpat.ffii.org/news/04/cons0507/

    The Irish Presidency of the EU proudly announces it is sponsored by
    Microsoft and Dell: http://www.eu2004.ie/sitetools/sponsorship.asp

  5. Oh come now, Mrs. T, you’ve taken a sarcastic stance towards the CDU, the SPD, the Greens and The Economist, why on earth would I give you a drumbing for that? Really, applause would be a better response. Especially since you’ve pointed to the real flaw in the entire international competiveness argument: competitive labour costs means either raising productivity per unit labour costs or making everyone poorer, and unsurprisingly most folks prefer option 1. Furthermore, protectionism in a rich country generally doesn’t impress me. If moving your operations saves money than surely it should raise national income enough to pay off the people put out of work.

    National competitiveness, however, doesn’t do much for me. This is something the States went though in the 80’s during the peak years of deindustrialisation, and the US undertook hazy “reforms”, especially in the labour market, and did get a race to the bottom, one which it keeps losing, since it turns out that Amercans resist the Malthusian bottom edge of the international labour market.

    Indeed, I have neither an in principle objection nor a pragmatic problem with industries moving east. The easterners clearly need the jobs and, as Joan Robinson put it, the only thing worse than being exploited by capitalism is not being exploited at all. What I question is whether industry is really as mobile as people claim it to be, whether other causes for poor German growth aren’t just as great, whether poor German growth is really as big a problem as it appears to be and whether nebulous reforms that appear to mean shifting the tax burden to lower income households while gutting pensions is really a solution.

    I might ask, for example, if GDP per capita growth statistics for Germany were used in lieu of GDP growth, if the German economy would appear quite so poorly off. Furthermore, I have to ask whether rapid unification isn’t just as much the cause of Germany’s difficulties, since the western part of Germany is performing a good deal better than the east. Alternatives to the way unification was originally handled might have essentially eliminiated this question as a poltical problem, since if the problem was west German indstries moving to east Germany, I doubt people would be able to make quite as much fuss. One might also wonder if the continuing revolution in manufacturing productivity isn’t a bigger cause of German unemployment than issues of competitiveness. Since unemployment – or at least underemployment – is a major problem in every industrialised nation in the world, I’m inclined to cut Germany a bit of slack. Or one might consider the effect of ECB interest rate policies. It seems to me that a large currency zone might well be better served by erring on the side of higher inflation rather than lower, since the costs created by moderate inflation are quite small, while the cost of a capital shortage can be enormous.

    But yes, while I can see an argument for claiming either that there is no problem, or that the problem should be addressed by more classical means – immigration, monetary policy, treating the east different for the simple reason that it is different – I agree with you entirely that carping on ARD about the effects of free trade with Poland are not a sign of creative, capable leadership on the left or the right. Before leaving the States, I got sick of people whose response to every problem was to lower taxes and deregulate even when those solutions were demonstrably non-helpful and in some cases had created the problem in the first place. I don’t respond any better to claims in German that international trade is the cause of every problem.

    Frankly, I’d back a significant liberalisation in the service industries – more flexible work hours and payroll taxes figured in proportion to wages instead of as fixed costs per worker. I would think this could be done without having to eliminate union involvement, so long as the state undertook to fund the gaps in social protections likely to come from it. It seems stupid to me that nothing in Belgium is ever open when I actually have time to shop, and it seems inane to me that this should happen at the same time as high unemployment. My only real difference with the liberal agenda is that I see no good reason to make people suffer in the name of competitiveness. If the changing the system can’t improve people’s lives, it shouldn’t be done.

  6. Yes. I’m always amused by the man in the BMW/on the Airbus 340-500 talking on his Siemens phone about the eurosclerotic inefficiency of German industry…there’s a real danger that fashionable solutions will lead to throwing out the baby with the bath water.

  7. I really love that term “wage dumping” and its sister “social dumping” (Sozialdumping) that I have been hearing over and over again in Austria for many years. It is such a stupid concept that one can only wonder why all of the local press keeps swallowing it as if it was honey.

    If Eastern European countries like Slovakia can balance their budgets with lower taxes on lower revenues, what on earth is morally reproachable about that? If the electorate in those countries doesn’t like the approach, they could after all change their system for a German or Austrian welfare state – ah no, that still wouldn’t remove the “wage dumping” bit. And now, the latest great idea of the Austrian xenophobic right, which includes the social-democratic unions: “they use the money from the EU to pay for this!”

    When will people finally accept that yes, there are poorer countries with hard-working populations, and it doesn’t mean the end of the world. After all, the capital is still mostly in the hands of the rich country companies. The Austrian national oil firm OMV has over the last decade bought up many oil networks in the east, is currently bidding for the national oil company of much larger Romania, and has seen soaring profits to the benefit of its Austrian shareholders and employees.

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