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Welfare state and competitionAgenda 2010, Germany, Europe
Rome, March 13, 2008
Dr. Michael Dauderstädt
Structure of my presentation
• Welfare state and competition
• Agenda 2010 and the situation in Germany
• German reforms and their European repercussions
• Implications for a social Europe
Internationalcompetitiveness
• Competitiveness – a dangerous obsession?
• Trade specialization vs. locational competition
• Price competitiveness vs. efficient exchange rate regimes
• Sustainable growth with balanced external accounts
Welfare state and competitiveness
• Price competitiveness and the costs of the welfare state
• Collective consumption is no more a threat to competitiveness than housing costs
• Subsidizing export production through the welfare state
• Attracting FDI through an optimal supply of public goods and services
• Creating the conditions for long-term growth• Trade-off between public expenditure for
investment and redistribution
Germany’s international competitiveness
• No current account problems• The imagined loss of competitiveness
(globalization, overvalued exchange rate at the start of the Euro)
• Pressure on wages (threats of relocation)• Real problem: unemployment due to
underdeveloped service sector• Low or ineffective expenditure for public
investment, education and research
Agenda 2010
• Labour market policy: Conditionality and promotion (“Fördern und fordern”)
• Fusing unemployment insurance and welfare• Harsher means testing (private assets)• Results: Limited fiscal effects, ambiguous
employment effects (Bofinger), more inequality and poverty, pushing exports
• Higher private savings due to declining trust in the welfare state
The flip side of the export champion
• Lean business, lean state, mean society• Tough production, greedy consumers,
export championship• Leaving the high productivity, high wage
path• Stagnant domestic consumption• Replacing social security contributions by
VAT → subsidizing exports
Germany: beggaring its neighbours
• Declining unit labour costs (40% relative to Italy since 1998)
• Competitive disinflation • Low domestic demand + Export
surplus = less demand for the supply/output of neighbours
• Strengthening the Euro → More problems for EU and, in the end, Germany again
Germany: competitive disinflation
Biased EU policies
• Bias in favour of structural reforms (privatization, liberalization) at the expense of demand management
• Competition in the Single Market → pressure on unit labour costs → lacking demand
• Competition policy → no public compensation for internalized costs, no sanctions against externalizing costs
Towards a social Europe
• Balancing consumer and producer interests
• Internalizing social costs• Managing real exchange rates
through a coordinated monetary, fiscal and wage policy
• Embedding global and European markets
Thank you for your attention