OPINION

The Euro crisis, the German labour market and SA

Loammi Wolf comments on Leon Schreiber's analysis

Leon Schreiber's excellent analysis "Learning from the Germans" is both thought-provoking and inspiring. I would like to make a few comments on the euro crisis, economic systems and ways to boost youth employment.

To start with, I think one should be careful to interpret the real cause for the euro crisis as a choice between austerity and economic growth. Even though Wall Street, the Obama government, investment bankers and rating agencies would like to create that impression that it is primarily an economic or currency crisis, it is doubtful whether this suffices as explanation.

South Africans could therefore relax a bit about the euro crisis. The difficulties faced by the euro are more of a structural nature and will probably be sorted out. Obviously one cannot control how the markets react in the process because indirectly it also impacts on trade and commerce, and the stock exchanges are jittery. But there are ways and means do deal with that.

In fact, the euro crisis was predestined to surface. This was already predicted by some Swiss economists at the inception of the euro as common currency. They correctly forecast that the countries which will get into trouble would be Greece, Ireland and Portugal, likely to be followed by Spain and Italy.

The main reason is that a common currency was created, which dropped the flexible adjustment of individual currencies in the European Union, and replaced that with a system that would depend on a congruence of fiscal and socio-economic policies although the latter remained the domain of national sovereignty.

In these days one may wonder why Germany, where 80% of its citizens were perfectly happy with the hard currency of their old Deutsche Mark, agreed to create the common currency in the first place. A bit of history that became public in the aftermath might shed light on that.

When the Berlin Wall fell, the four occupying forces of Germany first had to agree to a German reunification. The Americans did so unconditionally. Thatcher refused. Gorbachov agreed on condition that Russian expropriations in East Germany between 1945 and 1949 would not be reversed. So it all depended on France whether the Germany could reunify.

Apparently Mitterand's condition was that Germany should support the common currency, much to the dismay of Kohl, but he agreed to it. It was more important to get reunified and to transform East Germany into a social democracy after forty years' of harsh communist rule. This secret agreement only became public much later.

One may nevertheless question why other European nations then joined this "risky project". Well, it has obvious advantages to have a common currency as an economic block, but the structural difficulties to create a common currency without a political union that would function like a federal state were probably under estimated.

These structural difficulties now surfaced massively. Thus the choice is not really between austerity and economic growth but how to harmonise core areas of fiscal and socio-economic policy in the individual states of the euro-zone to create more stability for the currency.

Germany has no control over the fiscal and economic policy of France, Spain or Italy or any other European nation and that is right to. Each nation should be able to decide flexibly how it wants to run its economy. Yet, the strength of the common currency undeniably depends on solid fiscal and economic politics.

Loans and salaries are much higher, for example, in France and Spain than in Germany although Germans work longer hours on average. Not so long ago Chritine Lagarde, then still the minister of finance of France, admonished Germans to increase loans so that the French could keep up with the German economy. Germans, however, are by nature rather conservative and prefer modesty over risk. Trade unions would much rather negotiate a cut in loans before risking a plant from being closed. One of the peculiarities of the German system is further that trade unions have a say in the management of firms and thus tend to cooperate with employers rather than being out on confrontation all the time.

There are other areas where there are stark disparities in the socio-economic systems of the euro-zone too. On average the German pension age is 65 with a tendency to increase to 67. By contrast, Francois Hollande wants to reduce the French pension age again to age 60 which Nickolas Sarkozy just increased to 62 under much protest.

In the light of these difficulties, one can understand that Germans do not want to be manoeuvred into being a donor in a "transfer union" and why they insist on sticking to the "no bailout clause" of the monetary union.

The common currency is an experiment which no other continent and economic block tried before. The United States of America consists of 52 federal states run by a single government. That's easy. Within a federal state where a single nation's government can make fiscal and economic policy, it is no problem to make financial transfers among rich states to poorer states. This is what Germany does internally all the time but the parliaments at a Länder and federal level can control such fiscal transfers.

This, however, is not possible at the "confederal" level of the euro-zone's monetary union. The European Central Bank cannot make fiscal policy like the American Federal Reserve Bank. Its main function is to stabilise the common currency.

What Paul Krugman therefore overlooks is that one cannot compare the euro-zone with the United States of America. In Europe you first have to get all 17 member states of the euro-zone to agree to take the next small step in terms of international treaties. All of them are a bit apprehensive about what they are willing to agree to and what not because it affects their national sovereignty.

Another aspect that was not properly considered is the weighting of representation by member states in the European Central Bank. Ottmar Issing, former president of the German Federal Reserve Bank, pointed out over the weekend that it does not make sense that economically weak and small countries such as Malta, Greece, Portugal and Ireland have as much representation in the ECB as the economic strong countries like Germany, France, Italy, Spain and the Netherlands, which represent the biggest chunk of the common market's economy.

Yet, if this experiment works and the euro-zone countries can succeed to create a model in terms of international treaties on how to run a common currency without individual nations giving up their national sovereignty completely, Asia, Africa and South America are likely to follow suit.

There are two reasons for optimism that the common currency will probably work: First, the European Union is the strongest economic bloc in the world with a very vibrant productive commerce. Thus, there is no currency crisis. Secondly, you have a lot of very talented specialists in macro economics, fiscal law and international economic and banking law who are working very hard to find solutions how to improve deficits in the current treaties. Europe will probably do it in the same way that it first created the common market, then the European union and after that the common currency - slowly, and one step at a time.

The three most pressing issues that need to be addressed are the following: first, to find a solution how to deal with the Target2 trade surpluses that has run up at the European Central Bank for countries with strong economies like Germany and how to balance that out between the national central banks; second, how to accommodate capital flight from southern euro countries such as Greece, Italy and Spain to the safe havens of Germany and Switzerland because that directly affects the liquidity of their banks and forced them to take up more sovereign debt; and finally, how to achieve greater harmony between the fiscal and economic policies of the member states so that Germany is not destabilised with a transfer union it cannot control.

But to return to the comments of Leon Schreiber: He has set out some things South Africans could learn from the Agenda 2010 very well. Thus I am not going into that again. I would just like to mention a few things which could be helpful to South Africa.

First, it may be a good start not to see economic policy options as a stark choice between socialism and capitalism. There are regular calls for the nationalisation of banks, the mines and land as a messianic solution to the huge problems facing South Africa.

Yet, one can hardly envisage more counter-productive solutions than these. The problem with the socialist economic perception - oversimplified - is that is sees the economy statically as a cake with a constant size, which needs to be cut up justly, even if that means that everybody will just get a few crumbs in the end.

There is little reverence for individual entrepreneurship and the willingness to take well calculated risks, to invest in innovative ideas and working hard for one's reward. Yet, there is a very strong emphasis on entitlement to share in the profits that reward such incentives. This invariable leads to economic stagnation as the down-ridden economies of the former East Block documented so well.

The other extreme is an over-emphasis of capitalism as a driving force of socio-economic systems. The United States of America long cherished the notion of the American dream of the self-made man. Yet, in many respects this is a very egotistical if not ruthless system because it neglects social responsibility for the less fortunate and the weakest of society.

Most European countries have followed the so-called "third way". One can also call it a social-democratic market economy. The idea originated from Ludwig Erhardt, who was the post-war father of the German Wirtschaftswunder. He conceived of the idea to marry the advantages of capitalist initiative and risk with labour security and social stability. It is still paying out and has given Germany a slight edge over others.

Other European countries have also tried to find a balance between the extremes of socialism and capitalism. For a long time their social security systems were too bloated and trade unions too egoistic to claim pay rises even if this was not wise. What one has come to see is that the better one can balance the two systems, the more prosperous their populations became.

South Africans could therefore definitely benefit from daring to implement a little more social democracy and to use incentives more creatively to counter downward economic trends to avoid a recession.

Let me start with the latter. Germany depends as heavily on its car industry as South Africa on mining. That makes them vulnerable in difficult economic times. So what did Germany do to be able to sail through the last economic recession that hit the Western world?

It had to expect a slump in car exports, but instead of waiting on the downward turn in the economy, it quickly created an incentive to boost the domestic market. The government subsidised the car industry with a Abwrackpremie. All people with older cars which did not meet modern environmental friendly emissions standards could trade in their cars on new ones and got a state subsidy for having their old cars deposed of.

This benefitted a cleaner environment and simultaneously prevented a slump in the car industry, which would have entailed less revenue and an increase in unemployment when the car industry had to lay off workers. Thus, clever short term incentives could have a very beneficial stabilising effect for the economy.

One of the major problems facing South Africa is a too high youth unemployment rate. There is a big discussion in South Africa whether the government should subsidise youth employment or not. The trade unions, especially Cosatu, seem to be very wary of it as the recent clash with DA supporters who marched on Cosatu House indicated.

Yet, South Africa is not alone in having to deal with high youth unemployment. Italy and Spain has similar problems, and they did not come about as a result of the euro crisis, but is due to structural deficits in the labour market.

By contrast, the latest figures that were published last week show that Germany now almost has full employment of its youth. So what do they do that is different?

It has to do with the way in which its school system is structured and how vocational training takes place in a society that has an equally high regard of good craftsmanship than of academic training. Let me sketch how its works briefly.

After primary school, the high schools split in those who prepare pupils for academic training at universities and those who prepare pupils for vocational training. This avoids an oversupply of university trainees in fields for which there isn't enough demand on the labour market. Pupils on the vocational-training track complete high school at grade ten and then move on to specialised commercial schools or other training centres after that.

This system of apprenticeships and vocational training, divided into some 350 trades, is based on a combination of academic and practical training. It covers an extremely wide span of occupations. Young people can train to become bakers, butchers, hairdressers, assistants to medical doctors and dentists, cheese makers, beer brewers, cashiers, diverse jobs in the chemical and manufacturing industry and in construction, the hotel and catering industry, whatever.

The practical training component takes place with firms specialising in a particular field. The trainee therefore gets first hand on-the-job training. Obviously no business would do that for free. This dual-training system is therefore supported by incentives and tax breaks. The state often subsidises youth training and support them with a modest salary. Thus they already earn as they train. Once their training is completed, most firms offer their apprentices permanent employment because they know the ropes. The flexible vocational training system therefore has advantages for both sides and explains why youth unemployment is so low.

South Africa has a very high youth unemployment rate. One commentator described them as "jobless, restless, ready for revolution". Yet, such a dual system of vocational training could change their desolate position in a blink.

The Economist's praise of this system as the "Modell Deutschland über alles" is probably a bit over the top. Yet, the dual training system is worth to have a look at as a possible solution for South Africa's high youth unemployment. It could create a secure foot in the door for young people, whose biggest hurdle it is to be absorbed into the labour market.

A social democracy is kind to its people, yet every thing is not offered on a silver plate. It is a system of give and take where all benefit. It is much better for young people to have hope and to earn a modest salary whilst they train than not earning anything and having no hope for a better life.

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