Professor Christoph Schmidt - Chair, German Council of Economic Experts HARDtalk

become too remote and incomprehensible. It's HARDtalk

next. Welcome to HARDtalk with me, Zeinab Badawi. From cars to

household appliances to complex medical equipment, Germany is known

the world over for its high`tech goods, a manufacturing base that has

earned its economic success and brought it in the from weaker

economies. In fact it is one of the world's top three exporters along

with China and the US budget faces criticism from Western nations that

accused it of promoting economic models that have hurt both the

eurozone and the global economy. My guess today is Professor Christoph

Schmidt, chair of the German Council of Economic Experts, an independent

body which advises German policymakers including the

government. Christoph Schmidt, welcome to

HARDtalk. Thank you for inviting me. Has Germany built its manufacturing

success on the back of the unfair vantage of low wages? I don't think

so. They have paid high wages throughout the last couple of years

and throughout recent history. The strength of the manufacturing sector

and the recovery of the German Labour market, which has reached

moderation lies on not too steep increases over time and a market

place that is not too skilled. Why did last year, the social economy

minister of France accused Germany of seeking an unfair advantage by

keeping pay artificially low? He said that he wanted Germany to play

fair with an economic model that is not based on a competition of who

can pay workers the least. I think he should look at the data and he

would realise immediately that the manufacturing workers are

well`paid, that they are not competing on the back of low wages

but on the back of very good products and high skills. But Labour

costs are lower in Germany than they are in France which means German

goods are cheaper than French ones and, as you know, France likes to

export goods to Germany but at the moment it is getting much more from

you. Wage growth has been lower in Germany throughout the first decade

of the century than in other countries in Europe but the level is

still very high. It is difficult to compare wage costs across a

economies because the quality of the products are different and that

makes it difficult to compare levels. What you can compare is the

starting point, let's say the turn`of`the`century, in Germany with

the sick man of Europe as the economist coined the phrase, and

engaged in many reforms making the German economy, not more

competitive, it was already competitive... You were applauded

for that. You were called the sick man of Europe but people like this

man referring to today, you have no said that before him when he says

that France cannot just become a service economy where factory

workers are replaced by hairdressers and fast food delivery staff, we

must protect manufacturing? He was then education minister but he was

social economy minister. Do you want France to become a nation of

hairdressers? Not at all. But job growth from 2005 to today, we have

increased by 3 million workers and decreased our unemployment levels.

These are mainly low skilled workers and it has nothing to do with

manufacturing. You're unemployed level is around .1% and in France it

is 11 so they are in a difficult place. This is the French sentiment,

so I put it to you, do you have any sympathy for them? I do for any

struggling economy. The question is not whether you have sympathy or not

but what would be the right measure to help alleviate the situation and

of course, the right measure is national reforms to national Labour

market and getting as much dualism as possible in the Labour market.

You have strong sectors in the Spanish manufacturing market but we

protected jobs which are taking the full burden of adjustment. This

situation is one that cries out for reform but the mystic reform,

Germany increasing its imports from other countries helps a little bit

but it cannot alleviate the situation. Reforms are a national

affair and national affairs have to be dealt with domestically. It is

not just France to set it. It is also the United States. In October

2013, a U.S. Treasury report reprimanded Germany saying that

you're exporting prowess is hampering economic stability in

Europe and hurting the global economy. I think that is a erroneous

analysis. To put it simply, if other people would stop buying German

cars, the economy would think significantly so it is the strength

of the German product that is at the heart of the situation and it can

only be overcome if other companies are pulling it close and having

their products perform. It is not just the strength of German

products. You have also benefited from the euro crisis with an

extremely weak euro. That is something that you have benefited

from. That is correct but that is also a good reason for Angela Merkel

and other European politicians to tell the German populace and voters

that it is only fair that Germany show solidarity in the crisis, and

it has. We have shown a lot of solidarity. Of course, the German

way of managing the rises in a quid pro quo manner offers solidarity but

at the same time, asking all other partners to reform the architecture

of the eurozone, batch was the right way to go because otherwise nothing

would have happened. But you know what the U.S. Treasury is referring

to is the deflation bias which has affected the world economy, to try

and oversimplify it perhaps, everyone wants Germany to spend more

just in the eurozone or the global economy that also for your own

good. There is a grain of truth in the whole argument, namely,

investment in Germany is quite low and incentive for private investors

is low. Much of German savings have gone abroad and invested in quite

unfortunate things like Spanish housing which, has much to do with

domestic policy. You cannot alleviate the situation by

introducing a federal minimum wage that is very high. That is not the

right way to do it. The right way would be to become even more

competitive to become attractive for investors with investment peaking.

One way of doing it is by increasing the minimum wage? They said that the

German capacity to grow, provide jobs and raise living standards will

depend on tapping more into domestic sources of growth. If people had

more money in their pockets, they might spend more. If you refer to

investment, you are right, if you refer to consumption, we must look

at the data once more because after the the reforms, we introduced many

people into the Labour market, reintegrated them into jobs that

were excluded from the market, thereby boosting their spending,

with a strong backbone of the German growth in the past years being

spending by German households. It is low but it has gone up in the last

quarter. Exports were the whole driving force behind growth but now

domestic forces are. It is only just beginning to pick up. You mentioned

the minimum wage. Germany is introducing one and it should start

at eight and a half euros per hour which will bring it more or less in

mind with the United Kingdom and France. But you are opposed to

that. Why? We have a minimum wage installed all the time... In

different sectors. It augments workers who have a low wage or a

large family to support on their income. Implicitly, that means that

we have a minimum wage of 6 euros per hour for a single worker rising

with the family status which puts us in line with other European

economies. This would propel us to the top of the ranking and will

probably destroy jobs and have the counterproductive effect that most

people expect. Why would you say it would destroy jobs? You know that

economists have many different views and that one of the leading economic

research institutions in Germany said last year that there was no

clear evidence that a minimum wage lead to job losses. I know the

study. It also said in the same study that 8 euros 50 an hour is

setting its much too high as you have many service sector jobs. It is

not all manufacturing. If it was, the topic of the initial

conversation would result in no harm. But isn't it good that those

in the service sector should get more? The consideration of German

trade unions said that she has met people who work for 3 euros an hour

in slaughterhouses or truck drivers who do not get paid expenses or even

their wages. Many work in construction and are employed as

independent contractors so that they don't receive other benefits. Is

that right? I think everyone should be on a high wage if they keep their

job. That is the basic prerequisite. You cannot as the

government set a wage floor but you can guarantee that it will function

properly which means that if you set a high wage, it might be the case

that some people, hairdressers, taxidrivers, florists, in the

Eastern bloc... But the blue clean your car and look after children,

all those essential services, don't they deserve a wage that is fair? A

do but they cannot pay their employers what they are worth and so

the job will be canceled. So when the head of a job agency said that

he had heard of people earning as little as 55 cents an hour, do you

just shrug your shoulders and think that that is the market? No, that is

something that should worry us. Why don't these people claim their 6

euros? I think this is really faulty data. The working poor level has

grown faster in Germany been in the eurozone as a whole. In absolute

terms, it is still lower but it is increasing. Wage inequality has been

increasing over time for the last when two years in Germany

moderately, but income inequality has been flat since the middle of

the first decade. Income inequality has not risen during the last ten

years. Budget poverty levels have, it is something different. Measured

on relative terms, what she means that `` which means that the general

level has remained the same, people are not becoming more poor. Is that

what you are telling the politicians? We have a coalition

government in at the moment with Angela Merkel and Sigmar Gabriel

insisting on this minimum wage as one of the conditions for joining

the coalition. He said it was about reestablishing social balance. When

you advise politicians, policymakers, Angela Merkel herself,

are these the kind of argument you put to them? That is not the way I

put it that I asked them to listen to different arguments and they

might listen to other people as well. There is no claim by

economists that they have exclusive rights to the truth. Of course not.

So you accept that? Every scientist is working on the basis of the

evidence available and no scientist worth his money can claim that he is

in possession of the ultimate truth but to the best of our knowledge, if

you put all evidence together, then it is highly risky what is happening

in Germany and might be very counterproductive. Instead of

alleviating poverty, we might see more job loss and poverty in the

future. Does it bother you when people like Sigmar Gabriel talk

about fairness and politicians do things out of political expediency

and you feel that your expert opinion is just ignored? Does it

upset you? opinion is ignored. It is, in a way.

People do take on board... But that is the problem, isn't it? There will

always be residual uncertainty about issues. The best of our knowledge so

far tells us that it's very risky to risk the German success in the

labour market by introducing regulations that nobody needs. One

professor from the University College London who is involved in a

very large debate in the UK about the role of economists and students

of economics feeling they are not well equipped to know what is going

on, she says that everyone knows the Economist Miss the boat in 2008, nor

did we later provide convincing explanations of what went wrong. Do

you think that public and political trust in economists is justifiably

go? `` low? We have a lot to take on in this instance. We did not explain

well enough. To the best of our knowledge we can give advice but

it's still not the ultimate truth. There might be things we cannot

foresee. We did not prepare the general public for this to happen

and that is again the fault of the economists who pretended they knew

more than they did. Obviously, Germany, a major powerhouse in

Europe. Briefly, we have heard so much about the euro. Greece is

heading out of the euro. Is that existential threat to the euro that

we all talked about from 2010 to 2012, is that over? By announcing

the transaction programme and seeing that the European Central Bank will

buy the bonds of ailing governments in the eurozone, helping them to

refinance themselves if they are cut off the market, that helped to

reinstall confidence in the integrity of the eurozone. Also, the

involvement of the European Central Bank in the fiscal realm will stay

and that also carries some grain of bad news with it. What is that? The

bad news is that the resilience of the eurozone depends on the economic

strength of the individual countries and individual countries need to

have well functioning labour markets to withstand the challenges of the

future. Countries like France, for example, will have to reform their

labour markets. And Mario Draghi has said that any recovery is weak and

faltering so far in the eurozone. How committed is Germany to the

eurozone? One banker from Goldman Sachs said that by 2020, Germany

will be exporting twice as much to China as to France. One ambassador

says that psychologically, German businesses or deliberately EU. I

disagree. Companies that have stayed in Germany have exported more to

other European countries. We as a European economy must see ourselves

as a large family made up of nationstates, which then trade with

other regions like China, North America and so forth. No, I think

the commitment of Germans and German companies and most German

policymakers to Europe is immediately obvious. Its 57% at the

moment of German goods exported to other EU countries. You believe that

will remain? It may shrink but that does not mean at all that the

commitment to Europe is vanishing. How likely is it that Germany will

remain one of the world 's top three exporter is when you see that many

countries in Asia such as South Korea, Singapore and China is self,

are no longer content to be the workhouses of the world? They are

really investing in hi`tech goods, the kind that you are famous for. I

think the EU as a whole has to be on the forefront of leading

technological change, leading in the provision of solutions for complex

problems that arise from day`to`day challenges. New challenges arising

in our complex world. From that, research and development in the EU

overall must increase and Germany being a strong part of this, of

course must take care that the population is well educated, that

our technological leadership and chemistry `` in chemistry and

manufacturing and so one is not vanishing. But that is the point. If

you look at technological development in the EU, Japan, the

US... The EU as a whole, but 2014, China will overtake the EU in

research and development. As a trend, are you worried that kind of

hi`tech stuff will move into the East? Again, at the moment, European

economies and populations talk too much about redistribution within the

member states and across member states and talk to little about how

to create value in the future and how to fortify our position in order

to be successful in the future world. Including you? One Wall

Street analyst said German industrial items are from the 1980s.

Germany does not have its own apple or... Our share index, our

equivalent of the Dow Jones, so to speak, it really points at a problem

how we need to invest more in research development and education.

Your own figures say that 82.5 million people in Germany... The

prediction is that it will be 69 million by 2050. Your population is

shrinking. You have lowered the pension age from 67 to 63. That's a

bigger welfare budget for you. That will put a lot of pressure on you.

Is the German economic miracle about to run out of steam? As much as we

were the sick man of Europe at the turn of the century and are now the

strong growth engine, it might become the case that we will fall

back to our old faults again and might lose this strength. Over many

years, but not immediately. Demographic change will hit us

severely and we need to take provisions of strengthening the

resilience of our pension system. At the moment, the German government is

not going in destruction. At the moment, we have a row between the US

and China, with the US accusing China of economic espionage. It has

indicted five Chinese military officials. Is Germany worried about

economic espionage? Germany has got to be worried, as are all other

countries, about property rights and security. But the best answer to

governments supporting their companies and trying to build up

national champions in their own country is not to engage and do the

same kind of behaviour but to fight for free, open markets, the rule of

law and to uphold competition and to level the playing field for all

companies. One question on another issue. Sanctions against Russia

because of what is happening in Ukraine. Germany has very deep

economic tide `` trade ties with Russia. What would be the cost to

the German economy of deeper sanctions against Russia? Both sides

are very vulnerable to sanctions and an escalation. That might help us

reigning the conflict. As Europeans, we receive a lot of oil

and gas from Russia. Some countries are completely dependent for their

gas supply on Russia. Germany is in the middle. Germany imports about 5%

of its imports from Russia, mainly oil and gas. 3% of our exports go to

Russia. We are quite vulnerable but it would hurt Russia more than the

EU. Thank you. The weather has been very changeable

this bank holiday weekend. It was a real washout in the south`east on