:00:00. > :00:13.become too remote and incomprehensible. It's HARDtalk
:00:14. > :00:16.next. Welcome to HARDtalk with me, Zeinab Badawi. From cars to
:00:17. > :00:21.household appliances to complex medical equipment, Germany is known
:00:22. > :00:26.the world over for its high`tech goods, a manufacturing base that has
:00:27. > :00:31.earned its economic success and brought it in the from weaker
:00:32. > :00:36.economies. In fact it is one of the world's top three exporters along
:00:37. > :00:41.with China and the US budget faces criticism from Western nations that
:00:42. > :00:47.accused it of promoting economic models that have hurt both the
:00:48. > :00:50.eurozone and the global economy. My guess today is Professor Christoph
:00:51. > :00:55.Schmidt, chair of the German Council of Economic Experts, an independent
:00:56. > :00:57.body which advises German policymakers including the
:00:58. > :01:30.government. Christoph Schmidt, welcome to
:01:31. > :01:34.HARDtalk. Thank you for inviting me. Has Germany built its manufacturing
:01:35. > :01:40.success on the back of the unfair vantage of low wages? I don't think
:01:41. > :01:46.so. They have paid high wages throughout the last couple of years
:01:47. > :01:50.and throughout recent history. The strength of the manufacturing sector
:01:51. > :01:59.and the recovery of the German Labour market, which has reached
:02:00. > :02:06.moderation lies on not too steep increases over time and a market
:02:07. > :02:14.place that is not too skilled. Why did last year, the social economy
:02:15. > :02:18.minister of France accused Germany of seeking an unfair advantage by
:02:19. > :02:22.keeping pay artificially low? He said that he wanted Germany to play
:02:23. > :02:27.fair with an economic model that is not based on a competition of who
:02:28. > :02:32.can pay workers the least. I think he should look at the data and he
:02:33. > :02:35.would realise immediately that the manufacturing workers are
:02:36. > :02:38.well`paid, that they are not competing on the back of low wages
:02:39. > :02:44.but on the back of very good products and high skills. But Labour
:02:45. > :02:49.costs are lower in Germany than they are in France which means German
:02:50. > :02:53.goods are cheaper than French ones and, as you know, France likes to
:02:54. > :02:58.export goods to Germany but at the moment it is getting much more from
:02:59. > :03:03.you. Wage growth has been lower in Germany throughout the first decade
:03:04. > :03:08.of the century than in other countries in Europe but the level is
:03:09. > :03:16.still very high. It is difficult to compare wage costs across a
:03:17. > :03:20.economies because the quality of the products are different and that
:03:21. > :03:24.makes it difficult to compare levels. What you can compare is the
:03:25. > :03:29.starting point, let's say the turn`of`the`century, in Germany with
:03:30. > :03:33.the sick man of Europe as the economist coined the phrase, and
:03:34. > :03:39.engaged in many reforms making the German economy, not more
:03:40. > :03:44.competitive, it was already competitive... You were applauded
:03:45. > :03:49.for that. You were called the sick man of Europe but people like this
:03:50. > :03:56.man referring to today, you have no said that before him when he says
:03:57. > :03:58.that France cannot just become a service economy where factory
:03:59. > :04:06.workers are replaced by hairdressers and fast food delivery staff, we
:04:07. > :04:10.must protect manufacturing? He was then education minister but he was
:04:11. > :04:17.social economy minister. Do you want France to become a nation of
:04:18. > :04:23.hairdressers? Not at all. But job growth from 2005 to today, we have
:04:24. > :04:30.increased by 3 million workers and decreased our unemployment levels.
:04:31. > :04:35.These are mainly low skilled workers and it has nothing to do with
:04:36. > :04:40.manufacturing. You're unemployed level is around .1% and in France it
:04:41. > :04:47.is 11 so they are in a difficult place. This is the French sentiment,
:04:48. > :04:54.so I put it to you, do you have any sympathy for them? I do for any
:04:55. > :04:58.struggling economy. The question is not whether you have sympathy or not
:04:59. > :05:03.but what would be the right measure to help alleviate the situation and
:05:04. > :05:07.of course, the right measure is national reforms to national Labour
:05:08. > :05:14.market and getting as much dualism as possible in the Labour market.
:05:15. > :05:18.You have strong sectors in the Spanish manufacturing market but we
:05:19. > :05:25.protected jobs which are taking the full burden of adjustment. This
:05:26. > :05:31.situation is one that cries out for reform but the mystic reform,
:05:32. > :05:36.Germany increasing its imports from other countries helps a little bit
:05:37. > :05:39.but it cannot alleviate the situation. Reforms are a national
:05:40. > :05:45.affair and national affairs have to be dealt with domestically. It is
:05:46. > :05:52.not just France to set it. It is also the United States. In October
:05:53. > :05:55.2013, a U.S. Treasury report reprimanded Germany saying that
:05:56. > :05:58.you're exporting prowess is hampering economic stability in
:05:59. > :06:08.Europe and hurting the global economy. I think that is a erroneous
:06:09. > :06:13.analysis. To put it simply, if other people would stop buying German
:06:14. > :06:17.cars, the economy would think significantly so it is the strength
:06:18. > :06:21.of the German product that is at the heart of the situation and it can
:06:22. > :06:27.only be overcome if other companies are pulling it close and having
:06:28. > :06:31.their products perform. It is not just the strength of German
:06:32. > :06:37.products. You have also benefited from the euro crisis with an
:06:38. > :06:42.extremely weak euro. That is something that you have benefited
:06:43. > :06:48.from. That is correct but that is also a good reason for Angela Merkel
:06:49. > :06:52.and other European politicians to tell the German populace and voters
:06:53. > :06:57.that it is only fair that Germany show solidarity in the crisis, and
:06:58. > :07:02.it has. We have shown a lot of solidarity. Of course, the German
:07:03. > :07:08.way of managing the rises in a quid pro quo manner offers solidarity but
:07:09. > :07:12.at the same time, asking all other partners to reform the architecture
:07:13. > :07:16.of the eurozone, batch was the right way to go because otherwise nothing
:07:17. > :07:21.would have happened. But you know what the U.S. Treasury is referring
:07:22. > :07:26.to is the deflation bias which has affected the world economy, to try
:07:27. > :07:31.and oversimplify it perhaps, everyone wants Germany to spend more
:07:32. > :07:35.just in the eurozone or the global economy that also for your own
:07:36. > :07:41.good. There is a grain of truth in the whole argument, namely,
:07:42. > :07:45.investment in Germany is quite low and incentive for private investors
:07:46. > :07:50.is low. Much of German savings have gone abroad and invested in quite
:07:51. > :07:58.unfortunate things like Spanish housing which, has much to do with
:07:59. > :08:00.domestic policy. You cannot alleviate the situation by
:08:01. > :08:05.introducing a federal minimum wage that is very high. That is not the
:08:06. > :08:09.right way to do it. The right way would be to become even more
:08:10. > :08:15.competitive to become attractive for investors with investment peaking.
:08:16. > :08:24.One way of doing it is by increasing the minimum wage? They said that the
:08:25. > :08:27.German capacity to grow, provide jobs and raise living standards will
:08:28. > :08:32.depend on tapping more into domestic sources of growth. If people had
:08:33. > :08:37.more money in their pockets, they might spend more. If you refer to
:08:38. > :08:42.investment, you are right, if you refer to consumption, we must look
:08:43. > :08:46.at the data once more because after the the reforms, we introduced many
:08:47. > :08:49.people into the Labour market, reintegrated them into jobs that
:08:50. > :08:54.were excluded from the market, thereby boosting their spending,
:08:55. > :09:03.with a strong backbone of the German growth in the past years being
:09:04. > :09:07.spending by German households. It is low but it has gone up in the last
:09:08. > :09:13.quarter. Exports were the whole driving force behind growth but now
:09:14. > :09:18.domestic forces are. It is only just beginning to pick up. You mentioned
:09:19. > :09:23.the minimum wage. Germany is introducing one and it should start
:09:24. > :09:25.at eight and a half euros per hour which will bring it more or less in
:09:26. > :09:33.mind with the United Kingdom and France. But you are opposed to
:09:34. > :09:42.that. Why? We have a minimum wage installed all the time... In
:09:43. > :09:48.different sectors. It augments workers who have a low wage or a
:09:49. > :09:52.large family to support on their income. Implicitly, that means that
:09:53. > :09:57.we have a minimum wage of 6 euros per hour for a single worker rising
:09:58. > :10:02.with the family status which puts us in line with other European
:10:03. > :10:07.economies. This would propel us to the top of the ranking and will
:10:08. > :10:12.probably destroy jobs and have the counterproductive effect that most
:10:13. > :10:20.people expect. Why would you say it would destroy jobs? You know that
:10:21. > :10:25.economists have many different views and that one of the leading economic
:10:26. > :10:28.research institutions in Germany said last year that there was no
:10:29. > :10:38.clear evidence that a minimum wage lead to job losses. I know the
:10:39. > :10:42.study. It also said in the same study that 8 euros 50 an hour is
:10:43. > :10:48.setting its much too high as you have many service sector jobs. It is
:10:49. > :10:55.not all manufacturing. If it was, the topic of the initial
:10:56. > :11:01.conversation would result in no harm. But isn't it good that those
:11:02. > :11:06.in the service sector should get more? The consideration of German
:11:07. > :11:10.trade unions said that she has met people who work for 3 euros an hour
:11:11. > :11:14.in slaughterhouses or truck drivers who do not get paid expenses or even
:11:15. > :11:19.their wages. Many work in construction and are employed as
:11:20. > :11:24.independent contractors so that they don't receive other benefits. Is
:11:25. > :11:30.that right? I think everyone should be on a high wage if they keep their
:11:31. > :11:33.job. That is the basic prerequisite. You cannot as the
:11:34. > :11:38.government set a wage floor but you can guarantee that it will function
:11:39. > :11:43.properly which means that if you set a high wage, it might be the case
:11:44. > :11:51.that some people, hairdressers, taxidrivers, florists, in the
:11:52. > :11:55.Eastern bloc... But the blue clean your car and look after children,
:11:56. > :12:03.all those essential services, don't they deserve a wage that is fair? A
:12:04. > :12:08.do but they cannot pay their employers what they are worth and so
:12:09. > :12:12.the job will be canceled. So when the head of a job agency said that
:12:13. > :12:16.he had heard of people earning as little as 55 cents an hour, do you
:12:17. > :12:22.just shrug your shoulders and think that that is the market? No, that is
:12:23. > :12:29.something that should worry us. Why don't these people claim their 6
:12:30. > :12:35.euros? I think this is really faulty data. The working poor level has
:12:36. > :12:41.grown faster in Germany been in the eurozone as a whole. In absolute
:12:42. > :12:44.terms, it is still lower but it is increasing. Wage inequality has been
:12:45. > :12:50.increasing over time for the last when two years in Germany
:12:51. > :12:54.moderately, but income inequality has been flat since the middle of
:12:55. > :13:00.the first decade. Income inequality has not risen during the last ten
:13:01. > :13:07.years. Budget poverty levels have, it is something different. Measured
:13:08. > :13:15.on relative terms, what she means that `` which means that the general
:13:16. > :13:19.level has remained the same, people are not becoming more poor. Is that
:13:20. > :13:23.what you are telling the politicians? We have a coalition
:13:24. > :13:28.government in at the moment with Angela Merkel and Sigmar Gabriel
:13:29. > :13:33.insisting on this minimum wage as one of the conditions for joining
:13:34. > :13:39.the coalition. He said it was about reestablishing social balance. When
:13:40. > :13:42.you advise politicians, policymakers, Angela Merkel herself,
:13:43. > :13:50.are these the kind of argument you put to them? That is not the way I
:13:51. > :13:52.put it that I asked them to listen to different arguments and they
:13:53. > :14:00.might listen to other people as well. There is no claim by
:14:01. > :14:09.economists that they have exclusive rights to the truth. Of course not.
:14:10. > :14:12.So you accept that? Every scientist is working on the basis of the
:14:13. > :14:17.evidence available and no scientist worth his money can claim that he is
:14:18. > :14:22.in possession of the ultimate truth but to the best of our knowledge, if
:14:23. > :14:27.you put all evidence together, then it is highly risky what is happening
:14:28. > :14:31.in Germany and might be very counterproductive. Instead of
:14:32. > :14:35.alleviating poverty, we might see more job loss and poverty in the
:14:36. > :14:43.future. Does it bother you when people like Sigmar Gabriel talk
:14:44. > :14:45.about fairness and politicians do things out of political expediency
:14:46. > :14:47.and you feel that your expert opinion is just ignored? Does it
:14:48. > :15:07.upset you? opinion is ignored. It is, in a way.
:15:08. > :15:12.People do take on board... But that is the problem, isn't it? There will
:15:13. > :15:18.always be residual uncertainty about issues. The best of our knowledge so
:15:19. > :15:22.far tells us that it's very risky to risk the German success in the
:15:23. > :15:28.labour market by introducing regulations that nobody needs. One
:15:29. > :15:31.professor from the University College London who is involved in a
:15:32. > :15:35.very large debate in the UK about the role of economists and students
:15:36. > :15:40.of economics feeling they are not well equipped to know what is going
:15:41. > :15:45.on, she says that everyone knows the Economist Miss the boat in 2008, nor
:15:46. > :15:51.did we later provide convincing explanations of what went wrong. Do
:15:52. > :16:03.you think that public and political trust in economists is justifiably
:16:04. > :16:10.go? `` low? We have a lot to take on in this instance. We did not explain
:16:11. > :16:13.well enough. To the best of our knowledge we can give advice but
:16:14. > :16:19.it's still not the ultimate truth. There might be things we cannot
:16:20. > :16:24.foresee. We did not prepare the general public for this to happen
:16:25. > :16:29.and that is again the fault of the economists who pretended they knew
:16:30. > :16:33.more than they did. Obviously, Germany, a major powerhouse in
:16:34. > :16:40.Europe. Briefly, we have heard so much about the euro. Greece is
:16:41. > :16:44.heading out of the euro. Is that existential threat to the euro that
:16:45. > :16:55.we all talked about from 2010 to 2012, is that over? By announcing
:16:56. > :17:01.the transaction programme and seeing that the European Central Bank will
:17:02. > :17:05.buy the bonds of ailing governments in the eurozone, helping them to
:17:06. > :17:09.refinance themselves if they are cut off the market, that helped to
:17:10. > :17:16.reinstall confidence in the integrity of the eurozone. Also, the
:17:17. > :17:21.involvement of the European Central Bank in the fiscal realm will stay
:17:22. > :17:28.and that also carries some grain of bad news with it. What is that? The
:17:29. > :17:32.bad news is that the resilience of the eurozone depends on the economic
:17:33. > :17:36.strength of the individual countries and individual countries need to
:17:37. > :17:40.have well functioning labour markets to withstand the challenges of the
:17:41. > :17:46.future. Countries like France, for example, will have to reform their
:17:47. > :17:49.labour markets. And Mario Draghi has said that any recovery is weak and
:17:50. > :17:58.faltering so far in the eurozone. How committed is Germany to the
:17:59. > :18:03.eurozone? One banker from Goldman Sachs said that by 2020, Germany
:18:04. > :18:13.will be exporting twice as much to China as to France. One ambassador
:18:14. > :18:19.says that psychologically, German businesses or deliberately EU. I
:18:20. > :18:30.disagree. Companies that have stayed in Germany have exported more to
:18:31. > :18:33.other European countries. We as a European economy must see ourselves
:18:34. > :18:41.as a large family made up of nationstates, which then trade with
:18:42. > :18:48.other regions like China, North America and so forth. No, I think
:18:49. > :18:51.the commitment of Germans and German companies and most German
:18:52. > :18:58.policymakers to Europe is immediately obvious. Its 57% at the
:18:59. > :19:04.moment of German goods exported to other EU countries. You believe that
:19:05. > :19:08.will remain? It may shrink but that does not mean at all that the
:19:09. > :19:14.commitment to Europe is vanishing. How likely is it that Germany will
:19:15. > :19:18.remain one of the world 's top three exporter is when you see that many
:19:19. > :19:23.countries in Asia such as South Korea, Singapore and China is self,
:19:24. > :19:28.are no longer content to be the workhouses of the world? They are
:19:29. > :19:34.really investing in hi`tech goods, the kind that you are famous for. I
:19:35. > :19:39.think the EU as a whole has to be on the forefront of leading
:19:40. > :19:43.technological change, leading in the provision of solutions for complex
:19:44. > :19:53.problems that arise from day`to`day challenges. New challenges arising
:19:54. > :19:56.in our complex world. From that, research and development in the EU
:19:57. > :20:00.overall must increase and Germany being a strong part of this, of
:20:01. > :20:06.course must take care that the population is well educated, that
:20:07. > :20:09.our technological leadership and chemistry `` in chemistry and
:20:10. > :20:16.manufacturing and so one is not vanishing. But that is the point. If
:20:17. > :20:27.you look at technological development in the EU, Japan, the
:20:28. > :20:29.US... The EU as a whole, but 2014, China will overtake the EU in
:20:30. > :20:34.research and development. As a trend, are you worried that kind of
:20:35. > :20:42.hi`tech stuff will move into the East? Again, at the moment, European
:20:43. > :20:45.economies and populations talk too much about redistribution within the
:20:46. > :20:50.member states and across member states and talk to little about how
:20:51. > :20:55.to create value in the future and how to fortify our position in order
:20:56. > :21:03.to be successful in the future world. Including you? One Wall
:21:04. > :21:08.Street analyst said German industrial items are from the 1980s.
:21:09. > :21:16.Germany does not have its own apple or... Our share index, our
:21:17. > :21:27.equivalent of the Dow Jones, so to speak, it really points at a problem
:21:28. > :21:32.how we need to invest more in research development and education.
:21:33. > :21:37.Your own figures say that 82.5 million people in Germany... The
:21:38. > :21:42.prediction is that it will be 69 million by 2050. Your population is
:21:43. > :21:48.shrinking. You have lowered the pension age from 67 to 63. That's a
:21:49. > :21:52.bigger welfare budget for you. That will put a lot of pressure on you.
:21:53. > :21:58.Is the German economic miracle about to run out of steam? As much as we
:21:59. > :22:02.were the sick man of Europe at the turn of the century and are now the
:22:03. > :22:05.strong growth engine, it might become the case that we will fall
:22:06. > :22:13.back to our old faults again and might lose this strength. Over many
:22:14. > :22:18.years, but not immediately. Demographic change will hit us
:22:19. > :22:21.severely and we need to take provisions of strengthening the
:22:22. > :22:27.resilience of our pension system. At the moment, the German government is
:22:28. > :22:31.not going in destruction. At the moment, we have a row between the US
:22:32. > :22:35.and China, with the US accusing China of economic espionage. It has
:22:36. > :22:48.indicted five Chinese military officials. Is Germany worried about
:22:49. > :22:53.economic espionage? Germany has got to be worried, as are all other
:22:54. > :22:56.countries, about property rights and security. But the best answer to
:22:57. > :23:00.governments supporting their companies and trying to build up
:23:01. > :23:06.national champions in their own country is not to engage and do the
:23:07. > :23:11.same kind of behaviour but to fight for free, open markets, the rule of
:23:12. > :23:17.law and to uphold competition and to level the playing field for all
:23:18. > :23:21.companies. One question on another issue. Sanctions against Russia
:23:22. > :23:26.because of what is happening in Ukraine. Germany has very deep
:23:27. > :23:31.economic tide `` trade ties with Russia. What would be the cost to
:23:32. > :23:40.the German economy of deeper sanctions against Russia? Both sides
:23:41. > :23:44.are very vulnerable to sanctions and an escalation. That might help us
:23:45. > :23:48.reigning the conflict. As Europeans, we receive a lot of oil
:23:49. > :23:53.and gas from Russia. Some countries are completely dependent for their
:23:54. > :23:59.gas supply on Russia. Germany is in the middle. Germany imports about 5%
:24:00. > :24:06.of its imports from Russia, mainly oil and gas. 3% of our exports go to
:24:07. > :24:07.Russia. We are quite vulnerable but it would hurt Russia more than the
:24:08. > :24:44.EU. Thank you. The weather has been very changeable
:24:45. > :24:45.this bank holiday weekend. It was a real washout in the south`east on