Hans-Werner Sinn

Nationalökonomie & Finanzwissenschaft

Ifo Viewpoint

Ifo Viewpoint No. 63: The Arguments of the Reform Opponents

Munich
4 March 2005

The opponents of the German reforms are on the defensive, but they are putting up a strong fight, calling the protagonists of reform prophets of doom. Here a glossary of their arguments along with refutations.

We are fine. The contention that Germany's economy is in trouble is a pure invention.

Germany has mass unemployment and is the country with the slowest growth in Central and Western Europe since 1995. We are laggards.

Slow growth is the hardly avoidable result of German unification.

If the new states in eastern Germany were converging with the west, German growth would be faster not slower. Even western Germany alone has grown more slowly than any other country in Central and Western Europe, and eastern Germany has grown even more slowly.

Whoever travels to other European countries, to the fastest growing economies like Ireland or Finland, sees with his or her bare eyes that these economies are not as well developed as the German economy.

What the traveller sees is the capital stock in the form of real estate that was built out of the GDP of previous decades. Today's statistics shows what the Germany of tomorrow will be like.

Don't the record profits of firms such as Siemens, E.ON or BASF prove that the German economy is competitive?

The problem is: Companies are competitive, but not workers. Businesses manage to survive by shifting production to low wage countries (bazaar effect). There the profits are made that cover the domestic losses. Companies that do not go abroad have problems. With 30,000 businesses going bankrupt every year in western Germany, a new record has been set.

Don't the data of the Federal Statistical Office show that Germany is not a bazaar economy and that there is still sufficient value added in Germany?

According to these data additional exports worth one euro immediately induces 55 cents worth of imports. Still, value added in export rises as in any country that specialises. But it falls too fast in other sectors. The net effect is measured by the growth rate of GDP, and that is, as mentioned above, the lowest anywhere.

Is Germany not the export champion of the world?

No, in 2004 we were the vice-champion, 9% behind the United States. We are only world champions if service exports are left out. Nevertheless Germany's export is strong. The strength was greatly boosted by the strong euro by which even German exports to the euro zone are enlarged when converted into dollars. In addition exports are inflated by the bazaar effect. A one percent increase in value added of exports increases the export volume by 1.36%.

But we have a record trade surplus. Is that not proof of our competitiveness?

This surplus, by definition, is a measure of Germany's capital exports. The savings that are not converted into investments in Germany flow abroad as loans, and foreigners then buy German products. It would be better if the savings flowed to domestic investors that would buy buildings or machines in Germany, because this would create new jobs here.

Working longer has no benefits. Including overtime we already work 42.5 hours a week.

The average collectively bargained working week is 38 hours. What is needed is longer working hours for the same monthly wage. Paid overtime does not help businesses save costs.

If longer hours are worked, more people will be dismissed. We must distribute the few jobs we have more justly and work shorter hours.

The shortening of working times in Germany has demonstrably contributed to an increase in mass unemployment (J. Hunt, Quarterly Journal of Economics). There is no lump of labour. If people work longer per day, the capital stock also works longer (buildings and machines). There is an immediate boost to growth, and as a second step businesses will employ more people because there are people outside the factory gates that will only produce as much as they earn after working hours are lengthened.

Instead of working longer we need technological progress to improve our competitiveness and to safeguard German jobs. Therefore the state must support innovations.

For the economy the extension of working hours is the same as technological progress that enlarges the productivity of labour and capital. All effects on the operation of the economy are the same. No one is arguing against promoting basic research. But extending working hours has a faster effect.

Who will buy the additional products if people who work longer do not earn any extra money?

The businesses will then indeed earn more money. The increase in enterprise profits and the boost in corporate spending power is identical, to the last cent, with the value of increased production. The entrepreneurs will not hoard the money, but they will spend it to purchase capital goods or they will loan the money to others who will spend it on buying such goods.

In the new states there are many unemployed people although the wages are still much lower than in the west. Doesn't that prove that the lack of demand is the key factor?

Unemployment depends on wages and productivity. In eastern Germany wages increased much faster than productivity. Demand exceeds regional production by nearly one half because of the gigantic public transfers and thanks to an inflow of capital. Never there has been such a large area with such a large excess demand.

Is not productivity in the east already as high as in the west?

No, GDP per employee stood at 72% in 2004. This does not even include the zero productivity of the unemployed. Productivity in terms of GDP per person of working age is below 60% of the level in western Germany. Monthly wages are already nearly 80%.

The economic pessimists are themselves responsible for the loss of jobs because of the bad mood that they create.

If the patient is to agree to an operation, he must be told the truth even if it deteriorates his mood. Opium is only called for if the illness is hopeless.

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute

Published under the heading "Die Irrtümer der Reformgegner", Süddeutsche Zeitung, No. 62, March 4, 2005, p. 24.