Peter Bofinger - Member of the German Council of Economic Experts HARDtalk

disease. It is now time for HARDtalk.

Welcome to HARDtalk. Is the Eurozone economy turning Japanese?

Flat`lining growth, depressed prices and a general air of economic

despondency are surely warning signs of a Japanese`style prolonged

stagnation. Can Europe's economic policymakers turn things around? My

guest today, Peter Bofinger, sits on Germany's Council of Economic

Experts. Is the dominance of Germany's economic model now

Europe's biggest problem? Peter Bofinger, welcome to HARDtalk.

I think it is fair to say you are one of Europe's influential

economist. How much trouble to you believe European economy is in right

now? The European economy is not in a good shape right now. Certainly

the crisis that we have been facing in the last few years is over. But

we are not yet in a stable situation. There are still many

risks. The main risk is we have a deflationary development in the

Eurozone. Mentioning Japan is fair, is it? I think this is fair. The

problem of the Rose and the adjustment is asymmetric. The

country's problems as they have tried to become more competitive by

not increasing or lowering wages. In Germany, the strongest economy, we

made no efforts to make more growth, to do something in addition

to allow semester `` symmetric adjustment. There will be talks on

the budget next year and there is no intention of German policymakers to

do something in addition to boost growth in the eurozone. I want to

talk about Germany's response to what is happening, or lack of

response as you might say. I just want to turn your attention west of

Germany to France. Right now there is some of attention on what is

happening in France. The Finance Minister, just the other day, said

Gross has broken down in France and Europe. If that is true, if there is

no prospect of growth in France, just how much of a drag is that on

the Eurozone? It is a huge challenge. The situation in France.

They are not doing the structural reforms that might be needed. On the

other hand, they also backed a dynamic environment which is needed

to make structural reforms to succeed. Germany in the last decade,

we did these structural reforms, which mainly was a policy of

renumeration, and it worked because there was a lot of momentum in the

west of Europe and the rest of the world. This was a policy that was

working in the economic environment. If you do the same thing in an

environment with little growth, it is more difficult to succeed. Just

to continue the broadbrush horizon for a minute, I wonder whether you

really believe that given the fragility in France, given the

overall lack of growth in the Eurozone, that it is possible to

imagine the darkest days of Eurozone crisis could reappear. We wanted to

think a year or so ago that we were over the worst. Do you think that is

not true? The risks are still there. The main problem is a relatively

unstable architecture of the Eurozone. This unstable architecture

means we have a fully integrated monetary policy, and all the member

states have responsibility for their own debt, they do not have a central

bank which can help them like the case of the UK where you the Bank of

England buying billions to make clear that there is no problem.

Europe does have a central bank. The chief of the central bank it than a

year ago, I will do what it takes to ensure that we emerge from this

crisis, that it will not re` occur. I use and that those words are no

longer comforting? It has never been tested. The main risk is a crisis of

confidence in Italy. The Italian economy is getting into recession,

you see unemployment going up. Maybe politicians are not able to produce

the reforms that might be needed. A crisis of confidence could happen.

We will not be able to buy Italian government bonds without limit. It

seems to be the biggest problem right now is far from the crisis

being on your's periphery, relatively small economies that

Greece, Portugal, Ireland, now the most concern focuses on two of the

biggest economies inside Europe, Italy and France. If one of those

were to suffer such a crisis of confidence that there really was a

sense of implosion, then the ECB and Eurozone generally would not have

the tools to fix it, would they? Of course you can buy government ones

without limit. If France is at a point where bond deals are going

through the roof and confidence is lost in France, there much? `` then

what? Investors have to go somewhere. If you go out to French

or Italian bonds, which bonds would you buy? You can get German bonds,

but the yield is close to zero. As an investor you would not go

completely outside the currency area. There is some limit of

confidence crisis. Investors have to put their money somewhere. If you

have a future `` huge financial markets at the French are, you can

get out of these bonds. These are relatively tiny slices of the whole

market. Eating out of French bonds, where the ago. There are limitations

for this kind of crisis of confidence. Look at the mismatch

between what is happening in Germany and France and the twin motor of

Europe. German public debt, 70% of GDP, France closer to 100%. There is

not a deficit in Germany. In France, 4.5%, and that will persist through

next year. The French are saying we will not meet the rules of the

fiscal stability pact. Unemployment, 4.9% in Germany. Over 10% in France.

How is that fundamental disconnect to in France and Germany going to be

addressed? That is the 1 million euros question. It is difficult to

change the French economy overnight. You also have to receive the effects

of these reforms are somewhat limited. The success of the German

economy is a success which is due to a very long tradition of German

manufacturing. That is what makes German competitive. We have small

and medium`sized companies, family owned enterprises, who are world

champions on the printed segments of the global markets. They are a very

special manufacturing base which other companies do not have. You

cannot copy this, saying we want to have this same culture. The point

is, if France and Germany cannot agree on a current strategy, then

the Eurozone is utterly dysfunctional. You are at the centre

of this problem. You sit in your Council of Economic Experts in

Germany and that is your main focus. You are also hired by the now fired

French trade and economy Minister to advise him advise the French. You

have got a perspective on both economies. The art wall. The Germans

are saying to the French, you have to make the reforms to abide by the

rules of the fiscal stability pact and if not we will punish you and

the French said, stop pushing us around. Stop pushing us around, you

have trapped as in an austerity policy which you are imposing across

Europe and which does not work for us. Which side of the argument are

you on? Both sides have their own rates. That is a copout, if I may

say so. They cannot both be right. Where are you siding? The German

view is right, you need structural reforms and make the economy more

flexible. That is something the French need. I think the French side

is also right that you need a certain degree of the school deficit

in order to keep the economy growing. The UK deficit is higher

than that in France. The UK had the advantage of a strong commemoration

of its currency. The central bank was much more aggressive. The ECB

have some growth. We need a positive environment for the structural

reforms to succeed. This kind of compromise is what is needed. There

needs to be some pressure in the economic system to make these

reforms work. It is all very well to talk about compromise and hoping

everybody will find their way through this, but there are direct

decisions that have to be taken. The Germans seem to want to punish

France for breaking the rules. And Italy as well. Do you think that is

the right thing to do, the right message to send? Definitely not.

What you need is a more relaxed approach to austerity. Anything that

is what we are observing. If you look at Spain, the commission has

given them much more time to reduce their deficits. Spain will have a

deficit of 5% this year. Ireland maybe also 5%. The commission, I

would also think the politicians in the Eurozone have realised you have

to give time for consolidations. Otherwise it becomes

counter`productive. I would assume that this is something which is

shared by the German government. They do not say it aloud. But there

is a more relaxed view on posterity. You think even Angela Merkel is

softening? Prepared to loosen the rules of that? I would think so.

Have they set it to you? No. Last year or this year, there is not this

same push for austerity that you could observe some years ago. Is

that not because you look at what is happening in Ireland and Portugal

and Spain and they seem with their own eyes a real commitment to

structural reform and they do not see that in Italy and France? You

have to see the deficits are much higher. That is a major difference

between these countries. Italy has a massive debt problem. Italy's

overall debt is 135% of national output. Italy has a huge debt

problem as well. My question is whether the pursestrings should be

loosened. But if the person string is loosened and are not tied to

structural reform, what good is it? completely right, we need both. ``

comeback in Italy, they are trying to do things. They changed the

political institutional framework to become more effective in the

political decision`making, changing the role of courts in Italy. I would

not say they don't do anything. There are efforts but there could be

more effort. They are there trying to do... What about Francois

Hollande and his efforts. How would you characterise them as Chamakh

there is not so much. He has tried to reduce social security. They are

not... Not too many efforts one can identify. You are a German

economist. You would agree with me that in many parts of Europe right

now, Germany is becoming deeply unpopular. You say, Angela Merkel

might be softening but to most Europeans, certainly in countries

with huge deficit problems, Germany is seen as unrelenting in its

obsession with austerity. Do you feel that when you travel around

Europe talking economics? Yes. That is the case. The problem is not so

much the German approach these are these the deficit in other

countries. `` visa be. The problem is German's approach to its own

fiscal policy. `` they expect more stimulus from Germany. More could be

needed to make the adjustment process more symmetric. Nothing is

happening as one can see from this budget proposal for next year. There

is no awareness in Germany that we are part of a larger system which

needs us to become a kind of locomotive for the whole system.

This awareness is absent with what we do in fiscal policy as if we were

an island. This seems to me where you are a fascinating figure in your

country, a maverick. You say the Germans, a wonderful phrase, Germany

is acting like a vampire in terms of global purchasing power, sucking out

money from companies, countries like the US, which are prepared to pump

their economies with stimulus packages. You benefit from that

because you can sell them all goods because they spend their money.

Germany, in its own zone, doesn't appear prepared to spend money at

all. In fact, Germans save money but don't spend it. That's a collective

problem. There is an obsession with debt. You can find that in our

fiscal policy. You can find it in our companies who are deleveraging

for many years, making huge profits but instead of investing the money,

they feel it reduces their debt, the same thing with the household

sector. This purchasing power that we don't spend is something that the

global economy might definitely need. When people say in France or

in the US, sent this message to Germany that you need to loosen your

own purse strings and Lauren how to spend a bit of money and stimulate

your economy and help others by consuming more, this is what Germany

says, you can't make Europe stronger by making Germany weaker. That was a

recent comment from the general secretary of the CSU. That seems the

reaction you get. I get many of these reactions every day. The

problem is the German philosophy of economic policy is shaped by the

so`called housewife. How do you as a German who believes that housewife

mentality has gone too far, how do you persuade your compatriots to

change their mindset? I tell them that even the housewife would take

an mortgage if she has found a good house to live in. And would say,

this debt isn't a bad thing. On a political basis, the problem with

Germany now, there is a lottery can invest in infrastructure to make it

more competitive `` and lot. It would make it good for the whole

economy `` there is a lot of Wii. The interest rate for Germany are

close to zero. If you take the real interest rate. There is a lot of

opportunity for our government to invest in the future and we would

that be better off and even our savers would be better off. You said

more should be spent on infrastructure projects. What many

Europeans want you to do is put money into infrastructure projects

in other parts of Europe as part of a collective effort to have a

Eurozone wide stimulus. The Polish for example are talking about a 700

million euro strong infrastructure package over years. They would

obviously want Germany to come up with a lot of the funding for that.

You have to differentiate between financing other governments and

financing by private ` public partnerships. These are two

different things. One thing is that the governments themselves could do

more. I would say a comprehensive infrastructure programme in the

Eurozone financed by government is something which would be warranted.

Again, it says, kept away from this obsession with cutting deficits. If

you look at the UK or the US, deficit is much higher than the

Eurozone. You would have the same deficit like the UK or the US, we

could have 2.5% more deficit, use it for investment and it wouldn't be

worth than these two importing countries. Interestingly, one way in

which the government appears to be willing to change its philosophy

isn't necessarily by big spending projects, but by for example,

increasing, establishing at quite a high rate for the minimum rate of 8

euros 50 per hour in Germany, which some industrialists say encourages

inefficiency, but also by lowering the end `` retirement age, agency

trend in Europe. Those are measures which to some would appear to be

encouraging economic inefficiency, even though they might stimulate

some spending. If you take the 8.5 euros 50 to the median wage, in

comparison, it is not very high. That is something that is adequate

for the German economy. As far as our manufacturing industry is

concerned, they paid much higher than that. The trade unions and the

minimum wages in this collective agreement are much higher than that.

This isn't a problem for our competitiveness and the reduction of

the retirement age to 63 is only for people with work experience or 45

years. They have to work 45 years and then qualify for this early

retirement at 63. It costs about 1.5 billion euros per annum, this is

0.1% of GDP, so it is something we shouldn't exaggerate. One final

thought about Germany and Europe. I taught at the beginning of this

about French resentment. It was put that, it was said, stop pushing us

around. There is resentment the other way. German resentment of

being seen as those who are ultimately expected to bail out the

profligate members of the Eurozone. Some Germans are sick of it. You see

the rise of the AFD party, which seems to think a breakup of

Germany. Do you worry about that sentiment rising in your country?

Yes. It is a serious challenge. On the other hand, it is unfounded. So

far, we have not had to pay for other countries. Secondly, we are

profiting from extremely low interest rates. Germany has become a

safe haven for all of the funds coming from other countries. Our

long`term... (CROSSTALK). That is Germany becoming the vampire again.

It isn't sustainable. Nevertheless, so far, our finance minister has

been profiting form `` from these long`term rates. They are saving

about 20 billion euros per annum because of the low interest rates.

Third, of course, we are the country profiting most from

without the euro, we would have experienced huge appreciation and

might have ended up with a Japanese`style situation `` the

euro. That is the challenge in Japan. They had waves of

appreciation which really made the country non`competitive

internationally. That would have been the risk with its

in the financial market. Throughout the discussion, the undercurrent has

been that the Eurozone is no more in sync today than it was at the height

of the crisis in 2010 `2011. That is the fundamental problem, that

different countries and economies in the Eurozone are still fundamentally

out of sync. You are right. Two years have been wasted. The Eurozone

has been saved. That was in July 2012. Two years after, no

significant changes have been made to make the whole architecture more

stable. There haven't been efforts made to stimulate the Eurozone

economy to create this pressure it needed for structural reforms to

unfold their effects. I would say two years have been wasted. That is

a problem. Peter Bofinger, thank you for being on HARDtalk. Thank you.

Thank you very much indeed. Hello. Once again, I am going to

show you pressure chart has a familiar look to it. A big area of

high pressure dominating across Scandinavia. Also across Northern

Europe. But, in