My good fortune continued on Monday as I was able to visit Germany’s Ministry of Finance. Wolfgang Schäuble, Germany’s Finance Minister, has taken the public lead in negotiations with Greece. It was very fortunate to visit the ministry on the day following the Greek referendum.
I had a meeting with Torsten Arnswald, Economic Advisor and Head of the Fiscal Policy Division. We have included a presentation that Mr. Arnswald gave in Vienna in March of this year. Our conversation was fascinating, and I was truly sorry when our time together was finished. Here are some of my notes and observations from our discussion:
These are good economic times for Germany. Growth is projected at just below 2% (this could be better). Europe is facing a significant aging process, and this could be why growth is declining. A weaker Euro and low interest rates have helped.
Germany implemented the necessary reforms and it has digested the East-West unification that was so difficult economically. Because Germany had implemented reforms in prior years, the 2009-2010 recession was simply a demand shock and not a structural crisis. Germany was able to recover from the recession quickly. While Germany is viewed a large exporter (the world’s third largest), it is also a large importer (also the world’s third largest). While Germany has a high current account balance, the low Euro and low oil have supported a widening of the current account.
Germany has expertise in high value services like engineering, which becomes a structural benefit to the economy. As emerging markets like China and Brazil grow, this supports the traditional Germany strengths in engineering.
When discussing the policy issues surrounding Greece, it is valuable to look at the examples of Spain and Portugal. They regained competitiveness as they underwent reforms. These are models of success on how to create a true link with the global economy.
Given the events of recent months, and of the previous day’s referendum, it was valuable to put the Greek question in context. It is important to understand whether a country is a “creditor nation” or a “debtor nation.” Germany is clearly a creditor nation, and this may create contradictory interests from debtor nations like Greece. Ultimately, creditors and debtors need to come together with solutions that allow growth and repayment. Germany is finding allies for its views among the nations of the Baltics and Eastern Europe. They have undertaken some of the necessary reforms in the past 25 years.
Greece’s economy is very small. Greece’s public debt is in public hands. So what is the problem? Greece is a governance problem, it is not a financial problem. Does it really make sense to get a quick solution at the expense of a loss of rules for the whole of Europe? Greece highlights the contradiction of perceived flexible membership in a permanent currency union. (My view and the view of many I spoke with: it was a mistake to let Greece in the Euro). Successful monetary union will require proper institutions and structural reforms.
There are divergent examples of success in implementing reforms, such as Ireland, Spain, and Portugal. France and Italy need to undertake more reforms. It was clear from our conversation that the Ministry of Finance in Germany is not taking Germany’s economic success for granted. It wants to fight the tendency among politicians to embrace interventionist policies. There is also a belief that markets need to get back to normal interest rates at some point. The joke going around the Ministry of Finance and the Bundesbank is that they have successfully abolished interest rates! This is clearly not sustainable. 2015 will be the second straight year of a German federal balanced budget. There was clear enthusiasm for private solutions to grow the economy rather than expecting growth from public intervention.
Challenges clearly exist in the economy. There is a need for a more vibrant entrepreneurial culture. The conservative attitudes and bank-based economy acts as a drag on growth. Germany’s future is bright in part because so many people vividly remember the pain and challenges associated with government control and intervention. The Berlin Wall traveled directly through the current Ministry of Finance. The building that we met in was originally built and used by the Nazis. Germany prizes its economic freedom and strength. Germany is clearly pro-Europe, but it seems unlikely that it will let Greece destroy the structure and foundations of the Eurozone.
Special thanks to Brennan Staheli, Joseph Hirschi, and the Lunt Capital team for their contributions to this report.