Welfare state and competition Agenda 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

International competitiveness 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