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’.