Marcel Fratzscher is the president of the DIW-Berlin economic think tank, and a professor of macroeconomics and finance at Humboldt-University Berlin.
He has been one of the leaders of the school of German economists defending the idea that Germany should play a more proactive role in reforming the eurozone and engage French President Emmanuel Macron on the matter. But German populists have “built walls of fear,” he says, by presenting Europe as “a transfer union with Germany as its paymaster.” Fratzscher also explains why he thinks that in spite of appearances, eurozone reform is making progress.
The French government seems to have been disappointed by the signals sent by Berlin on the eurozone reform, and the German coalition governments budget plans seem conservative. Do you think there is cause for concern for France and other European countries?
I consider Chancellor Angela Merkels interview on Europe a few days ago a promising first step. Lets not forget that this is her initial position, and I am convinced that the negotiations with France, Italy and others will make the German government move further. But the other Europeans will also have to accept some compromises, in particular on strengthening market mechanisms for future crisis prevention and on governance.
On the budget, Germany is currently in the luxurious position of having a huge surplus, with revenues rising further in the next few years. But we have to realize that this comfortable position is mainly due to luck, and not good policies. The main reason is the [European Central Banks] low interest rates, which generate savings of about €40 billion or more a year for the state budget. Without that, the federal government would be far from having a “Schwarze Null” (black zero) surplus. Then theres the booming labor market, and the record profits of German companies.
Yet many Germans resent the ECBs policies?
The criticism against the ECB in Germany has been excessive and often unfair, while these critics have been blind to the massive benefits which Germany has also reaped from the euro and from ECB policy. Without the ECBs decisive actions, the European crisis would have been much deeper and, ultimately, Germanys economy would not be experiencing its current boom.
How do you explain that in spite of this fiscal surplus, the government has produced a budget plan that critics say falls short on public investment?
This budget is a mixed bag. Even though the federal state looks like it will cut public investment in the medium term, it is also transferring money to municipalities that is earmarked for that purpose, so the overall picture is better than it looks.
My biggest worry about this budget is that it contains too much “pork,” too many presents to voters, which do not make much economic sense. For example, it creates home ownership incentives for families with children, which will do nothing to address, or could even worsen, the price explosion in housing rents. And it cuts taxes to the upper-middle class. At the same time, there arent enough commitments to strengthen Europe, and I fear a reluctance to increase the German contribution to the EUs multiannual financial framework or to commit funds for much-needed investment or macroeconomic stabilization in the euro area.
Considering the good state of its finances, why does Germany seem so hesitant to engage with Macron on eurozone reform?
Populists here have been successful in falsely conveying that Europe is all about the creation of a transfer union, with Germany as its paymaster. And some German economists contribute to building these walls of fear. So people are misinformed. Many, for example, think that the [eurozone bailout fund] European Stability Mechanism is a fiscal transfer machine — whereas it in fact loans money.
So with this wrong perception — “Germany has given away a lot of money!” — people wonder: Whats the purpose of all this? Why is it in Germanys interest?
But wouldnt something like a banking union be in Germanys interest? Why does Berlin seem so reluctant?
Part of this is the ignorance I was talking about. It is incredibly hard to make people understand that a successful banking union, including deposit insurance, makes all of Europe safer, including Germany and its banks.
Then of course, there is a serious divergence on what the right reduction of risk should be in the banking sector, the prevailing German view being that putting the right amount of capital in a bank takes care of the problem.
That said, my feeling is that the situation is changing. The German side is opening up. There has been a personnel change, new people are taking over, and there is an emerging consensus that the European deposit insurance scheme is not only inevitable, but even desirable, if done right. Of course, there are many technical questions to solve but on this issue, there is movement.
Do you have the feeling that the uncertainty in Italy is a new obstacle to reform on this matter?
Italy has been the elephant in the room in Europe for at least 10 years, even though the German side has recognized the efforts made by the Monti, Renzi and Gentiloni governments. The current situation in Italy shows why all should push for sensible reforms of the euro area architecture now. In case of an Italian crisis, Germany would have very little negotiating power, if any. Europes leaders should not repeat the mistakes of the past, such as in 2012 when they acted too late and then very quickly agreed on banking union in order to fight rising market speculation. If the new Italian government were to seriously question the euro, it would cause huge damage first and foremost to Italy, but it would hurt all of Europe, including Germany. We should not be fooled by the false safety of the current economic recovery, but be aware of these risks.
This interview was edited for length and clarity.