In addition to the need to boost skills, there were also warnings that the minimum wage and
increased labour legislation would make it more difficult to absorb many migrants at the low skill end of the labour market. The shortterm fiscal boost could well turn into a longer-term drag if migrants struggle to find work and fall back on benefits.
“EM export bubble is over”
German economists and policymakers still see the economy as being driven by a strong manufacturing sector which in turn drives the service sector. This traditional view has of course worked brilliantly in recent years as global trade has boomed. Now, the tide was turning as –although there was confidence that China would avoid a hard landing – it was admitted that the “EM bubble” was bursting as the period of extraordinary growth in China was over. Germany still has a strong niche in exports of luxury cars and capital goods, but the economy would have to find a new driver in coming years.
There was surprisingly little discussion on this subject. The Greek situation was seen to have been resolved and officials brushed off suggestions that by showing Greece the euro exit door Schäuble had crossed the Rubicon on the currency being irreversible: “he was only being tactical”, according to one person I met.
There was little appetite for allowing haircuts, although this was not universal, with one official saying “the money has gone and we should admit it”. This issue will come to a head when the IMF, which believes debt forgiveness is necessary, decides whether to renew its commitment to Greece in the New Year.
Schäuble’s balanced budget policy (rather oddly known as “the black zero”) was widely lauded and one got the sense that many would like it to be extended to the whole eurozone. There was significant frustration at the lack of fiscal discipline in the eurozone: there were too many get-outs and too much politics when it came to public deficits.
The solution was seen as taking the EU Commission out of the process and bringing in an independent fiscal watchdog. This body would then report to the Eurogroup where finance ministers would have a binding vote. One official described this as his “dream”, but admitted it was unlikely to happen.
This came up surprisingly frequently and as the only English person on the trip I was expected to give regular explanations as to why the UK might wish to leave the EU. Encouragingly, there was considerable support in Berlin for the UK remaining a member.
One official said it was “unthinkable” to have an EU without the UK. One who has been close to the process said that they were optimistic on the negotiations with the UK, but more pessimistic on the outcome of the referendum.
The optimism stems from common ground between Germany and the UK on how immigrants may use the benefit system. Freedom of movement remained a red line, but there was scope to do a deal. The pessimism came from the recent change of leader of the Labour party, although since the trip the Opposition has indicated support for remaining in the EU.
There should be a technical report out of Brussels on the UK’s demands in October, followed by a summit in December. That was likely to be followed by a political agreement in early 2016, but only after some “fireworks”. The referendum could then occur after the summer, towards the end of next year.
It was noted that should the UK choose to leave the EU there would be a prolonged negotiation period (up to two years) on unwinding treaties and making new arrangements (details of which have been notably absent from the anti-EU camp). The resulting uncertainty was seen as adversely affecting capital flows into the UK and the country’s international standing