A Talk With Germany's Economic Guru

Heiner Flassbeck on growth, trade, and Europe's central bank

Few postwar German officials have caused more controversy than Oskar Lafontaine, the left-leaning Finance Minister in the nation's new Social Democratic government. Heading Lafontaine's brain trust is Heiner Flassbeck, a 47-year-old economist previously known for his outspoken criticism of the Bundesbank's monetarist policies. Flassbeck is one of the theorists behind Lafontaine's demands that the European Central Bank cut interest rates to spur growth. On Nov. 30, Frankfurt Bureau Chief Thane Peterson visited Flassbeck at his Bonn office to discuss his views on the economy.

Q: What is your assessment of the German economy?

A: We have revised [our growth] forecast downward to 2%. The economy is weakening. We expect a slowdown of export growth rates.

Q: Is Europe overall recovering better than Germany'?

A: The preconditions for higher growth rates are there. But we're getting a little offtrack as the world financial crisis hits us. We face enormous pressure to absorb more goods in Europe. It's not unjustified for [U.S. Treasury Secretary Robert E.] Rubin to be talking about this. If Europe is not successful through higher growth rates and higher domestic demand [in taking in more imports] then we're facing something we won't like at all: an appreciation of the euro. That would be disastrous.

Q: Do you see real protectionist pressure in Europe?

A: It would be a problem if we have a slowdown. In areas exposed to the world economy, the pressure already is enormous. Suppliers from the rest of the world come in with very low prices, and our producers say: "This is dumping." This is not my position. I'd say it's a result of the huge depreciation of Asian currencies. We have to live with that. We have to increase our imports. Europe must recognize the degree of global interdependence now--not just to look inward.

Q: You sound like Robert Rubin.

A: Yes, well, I understand the U.S.'s problems. What we have had in recent years is a desynchronization of the economic cycles in the U.S. and Europe. A depreciation of the dollar is not a solution. The solution is a reduction of the growth gap between Europe and the U.S. As [French Finance Minister Dominique] Strauss-Kahn has said, we prefer to achieve this with a Clinton-Greenspan approach, not a Volcker- Reagan approach. The stimulus should come from the monetary side rather than the fiscal side.

Q: What would you like the European Central Bank to do?

A: We need a symmetric monetary policy that reacts to an undershooting of inflation in the same way it reacts to an overshooting of inflation.

Q: So, the ECB should cut rates?

A: I do not have to give recommendations of this kind to an independent central bank.

Q: What is your position on the European Central Bank's independence?

A: No one questions the independence of the central banks. And it is clear that price stability has the priority. Without it, you will not get unemployment down. But if all this is clear and we are in danger of getting a sharp appreciation of the euro, then what do we do when exports come down? Who's going to act?

Q: Some businesspeople see a conspiracy among left-leaning governments in Europe.

A: It's definitely a false worry to talk about a conspiracy. Everywhere [in Europe] we find a lot of understanding and common positions. But when you look at commentary in the U.S., you get the impression that there are these terrible socialists doing things. Mr. Lafontaine and Mr. Strauss-Kahn are pressing for [monetary and fiscal policies] that you have had in the U.S. for seven or eight years. We take the U.S. as a role model, and [critics] say: "No, you are socialists. You cannot be as market-oriented as we have been."

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