Merkel’s Reform Agenda

Angela Merkel has an interview in the Financial Times today. Unfortunately the transcript is subscription only. This is a pity, since to some extent she defines the kind of Europe she would like to see:

In an interview with the Financial Times, Angela Merkel, leader of the Christian Democrat Union, on Wednesday issued a clarion call for economic reform in Europe based on countries borrowing successful policies from one another. ?If I look at Scandinavia, for instance, I see we still have a long way to go in decoupling our social security system from labour; if I look at central and eastern European countries, I see I still have a long way to go in reforming my tax system; and when I look at the UK, I see I still have much to do to make my labour market more flexible.?

Ms Merkel’s references to central European countries and to the UK are striking, since the former are identified with low corporate taxes and in some cases, such as Slovakia with a ?flat tax? system. The deregulated UK labour market is often demonised by continental European politicians as alien to the European social model.

Her remarks provide clear backing for Tony Blair, prime minister and current holder of the EU’s rotating presidency, in his campaign to put economic reform at the centre of the EU’s effort to reconnect with European voters after their rejection of its planned constitution in France and the Netherlands in the past two months.

The big difficulty I see with her proposals is that they will put more of the burden of financing government on consumer taxes (VAT), and this will not help Germany lift domestic consumer demand which is one of the ‘big issues’.

Morgan Stanley economist Elga Bartsch, who I have in the past maligned somewhat here on this blog, has a pretty fair and balanced summary of the CDU reform programme here.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

3 thoughts on “Merkel’s Reform Agenda

  1. Well, as I understand it, the problem isn’t too little money in consumers’ hands but too much saving.So how much will raising VAT cut into that?

  2. “So how much will raising VAT cut into that?”

    Probably it won’t. What will happen is that if people only spend the same amount of money they will get less for it, so this might encourage them to save more, maybe they will value the saving more highly than the reduced quantity of goods :).

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