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