:00:00. > :00:11.disease. It is now time for HARDtalk.
:00:12. > :00:15.Welcome to HARDtalk. Is the Eurozone economy turning Japanese?
:00:16. > :00:18.Flat`lining growth, depressed prices and a general air of economic
:00:19. > :00:27.despondency are surely warning signs of a Japanese`style prolonged
:00:28. > :00:36.stagnation. Can Europe's economic policymakers turn things around? My
:00:37. > :00:38.guest today, Peter Bofinger, sits on Germany's Council of Economic
:00:39. > :01:10.Experts. Is the dominance of Germany's economic model now
:01:11. > :01:16.Europe's biggest problem? Peter Bofinger, welcome to HARDtalk.
:01:17. > :01:22.I think it is fair to say you are one of Europe's influential
:01:23. > :01:28.economist. How much trouble to you believe European economy is in right
:01:29. > :01:34.now? The European economy is not in a good shape right now. Certainly
:01:35. > :01:38.the crisis that we have been facing in the last few years is over. But
:01:39. > :01:44.we are not yet in a stable situation. There are still many
:01:45. > :01:48.risks. The main risk is we have a deflationary development in the
:01:49. > :01:56.Eurozone. Mentioning Japan is fair, is it? I think this is fair. The
:01:57. > :02:01.problem of the Rose and the adjustment is asymmetric. The
:02:02. > :02:07.country's problems as they have tried to become more competitive by
:02:08. > :02:12.not increasing or lowering wages. In Germany, the strongest economy, we
:02:13. > :02:19.made no efforts to make more growth, to do something in addition
:02:20. > :02:25.to allow semester `` symmetric adjustment. There will be talks on
:02:26. > :02:28.the budget next year and there is no intention of German policymakers to
:02:29. > :02:35.do something in addition to boost growth in the eurozone. I want to
:02:36. > :02:41.talk about Germany's response to what is happening, or lack of
:02:42. > :02:44.response as you might say. I just want to turn your attention west of
:02:45. > :02:48.Germany to France. Right now there is some of attention on what is
:02:49. > :02:54.happening in France. The Finance Minister, just the other day, said
:02:55. > :03:00.Gross has broken down in France and Europe. If that is true, if there is
:03:01. > :03:05.no prospect of growth in France, just how much of a drag is that on
:03:06. > :03:11.the Eurozone? It is a huge challenge. The situation in France.
:03:12. > :03:17.They are not doing the structural reforms that might be needed. On the
:03:18. > :03:21.other hand, they also backed a dynamic environment which is needed
:03:22. > :03:27.to make structural reforms to succeed. Germany in the last decade,
:03:28. > :03:32.we did these structural reforms, which mainly was a policy of
:03:33. > :03:35.renumeration, and it worked because there was a lot of momentum in the
:03:36. > :03:41.west of Europe and the rest of the world. This was a policy that was
:03:42. > :03:47.working in the economic environment. If you do the same thing in an
:03:48. > :03:52.environment with little growth, it is more difficult to succeed. Just
:03:53. > :04:01.to continue the broadbrush horizon for a minute, I wonder whether you
:04:02. > :04:04.really believe that given the fragility in France, given the
:04:05. > :04:10.overall lack of growth in the Eurozone, that it is possible to
:04:11. > :04:16.imagine the darkest days of Eurozone crisis could reappear. We wanted to
:04:17. > :04:23.think a year or so ago that we were over the worst. Do you think that is
:04:24. > :04:28.not true? The risks are still there. The main problem is a relatively
:04:29. > :04:36.unstable architecture of the Eurozone. This unstable architecture
:04:37. > :04:40.means we have a fully integrated monetary policy, and all the member
:04:41. > :04:46.states have responsibility for their own debt, they do not have a central
:04:47. > :04:51.bank which can help them like the case of the UK where you the Bank of
:04:52. > :04:59.England buying billions to make clear that there is no problem.
:05:00. > :05:07.Europe does have a central bank. The chief of the central bank it than a
:05:08. > :05:12.year ago, I will do what it takes to ensure that we emerge from this
:05:13. > :05:17.crisis, that it will not re` occur. I use and that those words are no
:05:18. > :05:26.longer comforting? It has never been tested. The main risk is a crisis of
:05:27. > :05:29.confidence in Italy. The Italian economy is getting into recession,
:05:30. > :05:36.you see unemployment going up. Maybe politicians are not able to produce
:05:37. > :05:45.the reforms that might be needed. A crisis of confidence could happen.
:05:46. > :05:47.We will not be able to buy Italian government bonds without limit. It
:05:48. > :05:52.seems to be the biggest problem right now is far from the crisis
:05:53. > :06:00.being on your's periphery, relatively small economies that
:06:01. > :06:03.Greece, Portugal, Ireland, now the most concern focuses on two of the
:06:04. > :06:12.biggest economies inside Europe, Italy and France. If one of those
:06:13. > :06:17.were to suffer such a crisis of confidence that there really was a
:06:18. > :06:21.sense of implosion, then the ECB and Eurozone generally would not have
:06:22. > :06:30.the tools to fix it, would they? Of course you can buy government ones
:06:31. > :06:32.without limit. If France is at a point where bond deals are going
:06:33. > :06:39.through the roof and confidence is lost in France, there much? `` then
:06:40. > :06:45.what? Investors have to go somewhere. If you go out to French
:06:46. > :06:53.or Italian bonds, which bonds would you buy? You can get German bonds,
:06:54. > :06:55.but the yield is close to zero. As an investor you would not go
:06:56. > :07:02.completely outside the currency area. There is some limit of
:07:03. > :07:10.confidence crisis. Investors have to put their money somewhere. If you
:07:11. > :07:16.have a future `` huge financial markets at the French are, you can
:07:17. > :07:20.get out of these bonds. These are relatively tiny slices of the whole
:07:21. > :07:26.market. Eating out of French bonds, where the ago. There are limitations
:07:27. > :07:32.for this kind of crisis of confidence. Look at the mismatch
:07:33. > :07:38.between what is happening in Germany and France and the twin motor of
:07:39. > :07:45.Europe. German public debt, 70% of GDP, France closer to 100%. There is
:07:46. > :07:51.not a deficit in Germany. In France, 4.5%, and that will persist through
:07:52. > :07:57.next year. The French are saying we will not meet the rules of the
:07:58. > :08:05.fiscal stability pact. Unemployment, 4.9% in Germany. Over 10% in France.
:08:06. > :08:12.How is that fundamental disconnect to in France and Germany going to be
:08:13. > :08:18.addressed? That is the 1 million euros question. It is difficult to
:08:19. > :08:24.change the French economy overnight. You also have to receive the effects
:08:25. > :08:32.of these reforms are somewhat limited. The success of the German
:08:33. > :08:39.economy is a success which is due to a very long tradition of German
:08:40. > :08:42.manufacturing. That is what makes German competitive. We have small
:08:43. > :08:48.and medium`sized companies, family owned enterprises, who are world
:08:49. > :08:56.champions on the printed segments of the global markets. They are a very
:08:57. > :09:02.special manufacturing base which other companies do not have. You
:09:03. > :09:12.cannot copy this, saying we want to have this same culture. The point
:09:13. > :09:16.is, if France and Germany cannot agree on a current strategy, then
:09:17. > :09:20.the Eurozone is utterly dysfunctional. You are at the centre
:09:21. > :09:24.of this problem. You sit in your Council of Economic Experts in
:09:25. > :09:31.Germany and that is your main focus. You are also hired by the now fired
:09:32. > :09:35.French trade and economy Minister to advise him advise the French. You
:09:36. > :09:41.have got a perspective on both economies. The art wall. The Germans
:09:42. > :09:45.are saying to the French, you have to make the reforms to abide by the
:09:46. > :09:50.rules of the fiscal stability pact and if not we will punish you and
:09:51. > :09:58.the French said, stop pushing us around. Stop pushing us around, you
:09:59. > :10:03.have trapped as in an austerity policy which you are imposing across
:10:04. > :10:08.Europe and which does not work for us. Which side of the argument are
:10:09. > :10:16.you on? Both sides have their own rates. That is a copout, if I may
:10:17. > :10:23.say so. They cannot both be right. Where are you siding? The German
:10:24. > :10:27.view is right, you need structural reforms and make the economy more
:10:28. > :10:32.flexible. That is something the French need. I think the French side
:10:33. > :10:38.is also right that you need a certain degree of the school deficit
:10:39. > :10:43.in order to keep the economy growing. The UK deficit is higher
:10:44. > :10:49.than that in France. The UK had the advantage of a strong commemoration
:10:50. > :11:00.of its currency. The central bank was much more aggressive. The ECB
:11:01. > :11:04.have some growth. We need a positive environment for the structural
:11:05. > :11:11.reforms to succeed. This kind of compromise is what is needed. There
:11:12. > :11:15.needs to be some pressure in the economic system to make these
:11:16. > :11:19.reforms work. It is all very well to talk about compromise and hoping
:11:20. > :11:24.everybody will find their way through this, but there are direct
:11:25. > :11:29.decisions that have to be taken. The Germans seem to want to punish
:11:30. > :11:33.France for breaking the rules. And Italy as well. Do you think that is
:11:34. > :11:39.the right thing to do, the right message to send? Definitely not.
:11:40. > :11:44.What you need is a more relaxed approach to austerity. Anything that
:11:45. > :11:52.is what we are observing. If you look at Spain, the commission has
:11:53. > :11:59.given them much more time to reduce their deficits. Spain will have a
:12:00. > :12:04.deficit of 5% this year. Ireland maybe also 5%. The commission, I
:12:05. > :12:12.would also think the politicians in the Eurozone have realised you have
:12:13. > :12:14.to give time for consolidations. Otherwise it becomes
:12:15. > :12:18.counter`productive. I would assume that this is something which is
:12:19. > :12:24.shared by the German government. They do not say it aloud. But there
:12:25. > :12:31.is a more relaxed view on posterity. You think even Angela Merkel is
:12:32. > :12:38.softening? Prepared to loosen the rules of that? I would think so.
:12:39. > :12:44.Have they set it to you? No. Last year or this year, there is not this
:12:45. > :12:49.same push for austerity that you could observe some years ago. Is
:12:50. > :12:54.that not because you look at what is happening in Ireland and Portugal
:12:55. > :12:58.and Spain and they seem with their own eyes a real commitment to
:12:59. > :13:03.structural reform and they do not see that in Italy and France? You
:13:04. > :13:13.have to see the deficits are much higher. That is a major difference
:13:14. > :13:17.between these countries. Italy has a massive debt problem. Italy's
:13:18. > :13:26.overall debt is 135% of national output. Italy has a huge debt
:13:27. > :13:30.problem as well. My question is whether the pursestrings should be
:13:31. > :13:32.loosened. But if the person string is loosened and are not tied to
:13:33. > :13:47.structural reform, what good is it? completely right, we need both. ``
:13:48. > :13:53.comeback in Italy, they are trying to do things. They changed the
:13:54. > :13:56.political institutional framework to become more effective in the
:13:57. > :14:03.political decision`making, changing the role of courts in Italy. I would
:14:04. > :14:06.not say they don't do anything. There are efforts but there could be
:14:07. > :14:11.more effort. They are there trying to do... What about Francois
:14:12. > :14:16.Hollande and his efforts. How would you characterise them as Chamakh
:14:17. > :14:24.there is not so much. He has tried to reduce social security. They are
:14:25. > :14:31.not... Not too many efforts one can identify. You are a German
:14:32. > :14:36.economist. You would agree with me that in many parts of Europe right
:14:37. > :14:42.now, Germany is becoming deeply unpopular. You say, Angela Merkel
:14:43. > :14:45.might be softening but to most Europeans, certainly in countries
:14:46. > :14:53.with huge deficit problems, Germany is seen as unrelenting in its
:14:54. > :14:58.obsession with austerity. Do you feel that when you travel around
:14:59. > :15:03.Europe talking economics? Yes. That is the case. The problem is not so
:15:04. > :15:08.much the German approach these are these the deficit in other
:15:09. > :15:16.countries. `` visa be. The problem is German's approach to its own
:15:17. > :15:23.fiscal policy. `` they expect more stimulus from Germany. More could be
:15:24. > :15:30.needed to make the adjustment process more symmetric. Nothing is
:15:31. > :15:37.happening as one can see from this budget proposal for next year. There
:15:38. > :15:44.is no awareness in Germany that we are part of a larger system which
:15:45. > :15:49.needs us to become a kind of locomotive for the whole system.
:15:50. > :15:56.This awareness is absent with what we do in fiscal policy as if we were
:15:57. > :16:01.an island. This seems to me where you are a fascinating figure in your
:16:02. > :16:07.country, a maverick. You say the Germans, a wonderful phrase, Germany
:16:08. > :16:11.is acting like a vampire in terms of global purchasing power, sucking out
:16:12. > :16:14.money from companies, countries like the US, which are prepared to pump
:16:15. > :16:18.their economies with stimulus packages. You benefit from that
:16:19. > :16:23.because you can sell them all goods because they spend their money.
:16:24. > :16:27.Germany, in its own zone, doesn't appear prepared to spend money at
:16:28. > :16:32.all. In fact, Germans save money but don't spend it. That's a collective
:16:33. > :16:39.problem. There is an obsession with debt. You can find that in our
:16:40. > :16:44.fiscal policy. You can find it in our companies who are deleveraging
:16:45. > :16:49.for many years, making huge profits but instead of investing the money,
:16:50. > :16:53.they feel it reduces their debt, the same thing with the household
:16:54. > :16:56.sector. This purchasing power that we don't spend is something that the
:16:57. > :17:05.global economy might definitely need. When people say in France or
:17:06. > :17:09.in the US, sent this message to Germany that you need to loosen your
:17:10. > :17:13.own purse strings and Lauren how to spend a bit of money and stimulate
:17:14. > :17:16.your economy and help others by consuming more, this is what Germany
:17:17. > :17:22.says, you can't make Europe stronger by making Germany weaker. That was a
:17:23. > :17:30.recent comment from the general secretary of the CSU. That seems the
:17:31. > :17:36.reaction you get. I get many of these reactions every day. The
:17:37. > :17:43.problem is the German philosophy of economic policy is shaped by the
:17:44. > :17:49.so`called housewife. How do you as a German who believes that housewife
:17:50. > :17:53.mentality has gone too far, how do you persuade your compatriots to
:17:54. > :17:56.change their mindset? I tell them that even the housewife would take
:17:57. > :18:03.an mortgage if she has found a good house to live in. And would say,
:18:04. > :18:11.this debt isn't a bad thing. On a political basis, the problem with
:18:12. > :18:15.Germany now, there is a lottery can invest in infrastructure to make it
:18:16. > :18:20.more competitive `` and lot. It would make it good for the whole
:18:21. > :18:24.economy `` there is a lot of Wii. The interest rate for Germany are
:18:25. > :18:31.close to zero. If you take the real interest rate. There is a lot of
:18:32. > :18:41.opportunity for our government to invest in the future and we would
:18:42. > :18:46.that be better off and even our savers would be better off. You said
:18:47. > :18:49.more should be spent on infrastructure projects. What many
:18:50. > :18:52.Europeans want you to do is put money into infrastructure projects
:18:53. > :18:57.in other parts of Europe as part of a collective effort to have a
:18:58. > :19:01.Eurozone wide stimulus. The Polish for example are talking about a 700
:19:02. > :19:05.million euro strong infrastructure package over years. They would
:19:06. > :19:10.obviously want Germany to come up with a lot of the funding for that.
:19:11. > :19:15.You have to differentiate between financing other governments and
:19:16. > :19:18.financing by private ` public partnerships. These are two
:19:19. > :19:26.different things. One thing is that the governments themselves could do
:19:27. > :19:30.more. I would say a comprehensive infrastructure programme in the
:19:31. > :19:37.Eurozone financed by government is something which would be warranted.
:19:38. > :19:40.Again, it says, kept away from this obsession with cutting deficits. If
:19:41. > :19:44.you look at the UK or the US, deficit is much higher than the
:19:45. > :19:50.Eurozone. You would have the same deficit like the UK or the US, we
:19:51. > :19:54.could have 2.5% more deficit, use it for investment and it wouldn't be
:19:55. > :20:00.worth than these two importing countries. Interestingly, one way in
:20:01. > :20:02.which the government appears to be willing to change its philosophy
:20:03. > :20:09.isn't necessarily by big spending projects, but by for example,
:20:10. > :20:15.increasing, establishing at quite a high rate for the minimum rate of 8
:20:16. > :20:20.euros 50 per hour in Germany, which some industrialists say encourages
:20:21. > :20:25.inefficiency, but also by lowering the end `` retirement age, agency
:20:26. > :20:29.trend in Europe. Those are measures which to some would appear to be
:20:30. > :20:35.encouraging economic inefficiency, even though they might stimulate
:20:36. > :20:43.some spending. If you take the 8.5 euros 50 to the median wage, in
:20:44. > :20:50.comparison, it is not very high. That is something that is adequate
:20:51. > :20:52.for the German economy. As far as our manufacturing industry is
:20:53. > :20:59.concerned, they paid much higher than that. The trade unions and the
:21:00. > :21:05.minimum wages in this collective agreement are much higher than that.
:21:06. > :21:10.This isn't a problem for our competitiveness and the reduction of
:21:11. > :21:15.the retirement age to 63 is only for people with work experience or 45
:21:16. > :21:21.years. They have to work 45 years and then qualify for this early
:21:22. > :21:29.retirement at 63. It costs about 1.5 billion euros per annum, this is
:21:30. > :21:35.0.1% of GDP, so it is something we shouldn't exaggerate. One final
:21:36. > :21:40.thought about Germany and Europe. I taught at the beginning of this
:21:41. > :21:46.about French resentment. It was put that, it was said, stop pushing us
:21:47. > :21:50.around. There is resentment the other way. German resentment of
:21:51. > :21:56.being seen as those who are ultimately expected to bail out the
:21:57. > :22:04.profligate members of the Eurozone. Some Germans are sick of it. You see
:22:05. > :22:11.the rise of the AFD party, which seems to think a breakup of
:22:12. > :22:19.Germany. Do you worry about that sentiment rising in your country?
:22:20. > :22:23.Yes. It is a serious challenge. On the other hand, it is unfounded. So
:22:24. > :22:29.far, we have not had to pay for other countries. Secondly, we are
:22:30. > :22:33.profiting from extremely low interest rates. Germany has become a
:22:34. > :22:40.safe haven for all of the funds coming from other countries. Our
:22:41. > :22:45.long`term... (CROSSTALK). That is Germany becoming the vampire again.
:22:46. > :22:49.It isn't sustainable. Nevertheless, so far, our finance minister has
:22:50. > :22:52.been profiting form `` from these long`term rates. They are saving
:22:53. > :22:59.about 20 billion euros per annum because of the low interest rates.
:23:00. > :23:02.Third, of course, we are the country profiting most from
:23:03. > :23:06.without the euro, we would have experienced huge appreciation and
:23:07. > :23:11.might have ended up with a Japanese`style situation `` the
:23:12. > :23:16.euro. That is the challenge in Japan. They had waves of
:23:17. > :23:19.appreciation which really made the country non`competitive
:23:20. > :23:24.internationally. That would have been the risk with its
:23:25. > :23:28.in the financial market. Throughout the discussion, the undercurrent has
:23:29. > :23:33.been that the Eurozone is no more in sync today than it was at the height
:23:34. > :23:37.of the crisis in 2010 `2011. That is the fundamental problem, that
:23:38. > :23:41.different countries and economies in the Eurozone are still fundamentally
:23:42. > :23:49.out of sync. You are right. Two years have been wasted. The Eurozone
:23:50. > :23:55.has been saved. That was in July 2012. Two years after, no
:23:56. > :23:58.significant changes have been made to make the whole architecture more
:23:59. > :24:04.stable. There haven't been efforts made to stimulate the Eurozone
:24:05. > :24:13.economy to create this pressure it needed for structural reforms to
:24:14. > :24:20.unfold their effects. I would say two years have been wasted. That is
:24:21. > :24:21.a problem. Peter Bofinger, thank you for being on HARDtalk. Thank you.
:24:22. > :24:49.Thank you very much indeed. Hello. Once again, I am going to
:24:50. > :24:53.show you pressure chart has a familiar look to it. A big area of
:24:54. > :24:54.high pressure dominating across Scandinavia. Also across Northern
:24:55. > :24:56.Europe. But, in