I’d like to warmly welcome you all to Lindau on the banks of Lake Constance! First of all, I’d like to express my sincere thanks to you, Gräfin Bernadotte, Professor Schürer and the Foundation staff. Your great personal commitment has made the Lindau Meetings in Economic Sciences a forum of discussion renowned far beyond Germany.
Seventeen Nobel Laureates and several hundred talented young economists from around the world are gathered here under one roof – that adds up to decades of trailblazing academic endeavour and many more years of future research and policy consultancy. We will need them. For we find ourselves at a crucial moment. I, at least, am convinced that one day we will realize what a considerable impact our present actions or omissions will have on future decades.
This point in time will demonstrate to us the importance of transatlantic relations based on our shared values. We in Europe should remind ourselves of how turbulent and contradictory the last one hundred years have been – and what has happened on our continent: in the first half, there were two World Wars and the Shoa, global economic crisis, as well as Europe’s division during the Cold War. In contrast, we should also remember what has been achieved during the last 50 years: first in the West and subsequently throughout Europe peace, a common internal market, prosperity, an area of freedom, democracy and justice have been created. What achievements! Our task is to ensure that these achievements are safeguarded and to square up to the major tasks facing us at this present time. Our Europe has to be worth every effort to us. None of that can be taken for granted. Europe’s fate is the fate of all its peoples. German and European interests are indivisible. We Germans are aware of this responsibility. Anyway, there have always been problems, and resolving them gives us courage.
Over the last weeks, it has become abundantly clear in Europe as well as in the US that the bank and debt crisis has tested politicians, governments and central banks to the limit. The challenges facing governments around the world are immense. Many measures are controversial. I know that the Economics Nobel Laureates here today have different views. Governments have to decide on this uncertain basis, they have to lead courageously in order to swiftly restore confidence and credibility while, at the same time, keeping in mind which measures citizens will put up with. We have to remember all this when we criticize politicians for being too hesitant and sometimes contradicting themselves.
When the crisis broke out, consensus was quickly reached at global level. Stimulus packages on an unprecedented scale were adopted. There was a rush to aid the financial sector and banks – with taxpayers’ money, state guarantees and massive monetary transfusions by the central banks. The order of the day was to do everything possible to prevent a collapse and to stabilize the global economy. All of this was done with the aim of treating the patient, the world economy, as quickly as possible. Today, however, the banking sector is still fragile, public debts in the major economies are at record levels and in many cases the fundamental problems hindering growth and competitiveness are as present as ever. More time was gained than was actually used.
At the German Banking Congress I warned the financial sector that we’ve neither dealt with the causes of the crisis nor can we say today that we’ve recognized the risks and done everything to minimize them. We really are still faced with a development which resembles a game of dominoes. First the banks rescued other banks and then states rescued banks, and now a community of states is rescuing individual states. But who will ultimately rescue the rescuers? When will the accumulated deficits be distributed among whom and who will shoulder them?
For many years, many countries kept putting off dealing with problems by raising public expenditure, accumulating debts and issuing cheaper money. At the same time, countries were consuming and speculating on a grand scale instead of investing in good education and vocational training, in future-oriented research and innovations, that’s to say in those things which make an economy productive and competitive. Now there are gaping holes in public finances and valuable seed has been consumed rather than used to till fertile soil. The politics of brinkmanship has reached its limits. What seemed to always go well – running up new debts – will not go well for ever. This injustice towards young people must end. Instead we need an alliance with the young generation.
I can understand the indignation of many people. It’s their future opportunities which are at stake here. The International Monetary Fund is even warning against a “lost generation”.
I believe that all the necessary solutions to our problems will require everyone to make sacrifices. Democracy is as simple and as difficult at that. There can only be a bright future, however, if we return to sound economic policies on a long term basis. That will mean painful cuts in the short term. However, only these cuts can preserve our effectiveness and prosperity in the long term. It’s crucial that the burden is distributed fairly. I can understand why many don’t want to accept that some bank managers earn exorbitant sums while billions are being spent on propping up banks. And freeloaders in the financial world continue to believe that politicians and thus ultimately taxpayers will continue to provide a safety net because they are, for instance, too big and too important for the overall economy.
People are indignant when the principles of fairness are violated. Fairness is an intrinsic need of any individual and provides the foundation on which many groups function. The failure of the elites will jeopardize social cohesion in the long run. Those who count themselves among the elite and shoulder responsibility must not withdraw into their own parallel world. I stated that on 3 October, the Day of German Unity. Ever more citizens believe that what is happening is not fair and that the burdens are not being distributed equally.
In Europe, for many years individual member states submitted false statistics, allowed public spending to get out of hand, sought to nose ahead through low interest rates for consumption expenditure or create advantages through their tax rates. Nearly everyone stood by and watched. Too many of us simply turned a blind eye to increasingly wretched finances and economic principles.
Instead of setting a regulatory framework, governments are increasingly allowing themselves to be driven by global financial markets. Ever more often, they make hasty far-reaching decisions just before the stock markets open instead of trying to influence developments in the long term. This strikes at the very core of our democracies. I know from my own time as head of government in a federal state how much more difficult it is to act rather than simply talk. However, I also know from own experience that decisive action to consolidate the budget can be accepted politically. At European level, by the way, I would like to point to Latvia with its courageous policy of cuts and reforms as an example of how this can be done.
What has to be done now? How can states regain their leverage? How can we create the conditions for stable, viable long-term economic and social development? How can we secure the prospects of future generations?
First of all, politicians have to regain their ability to act. They have to stop reacting frantically to every fall on the stock markets. They mustn’t feel dependent on or allow themselves to be led around the ring by the nose by banks, rating agencies or the erratic media. Politicians have to formulate policies for the common good and they have to show courage and strength in the face of conflict with individual interest groups. They have to put structures into order and, if necessary, adapt the regulatory framework so that scarce resources can be used in the best possible way and business and society can thrive. Politicians have to take a long-term view and, if necessary, make unpopular decisions. Decisions have to be made in parliament in a liberal democracy. For that’s where legitimacy lies.
In Europe, the list of structural problems ailing individual member states are well known – and all states have their challenges: reforming the education system, improving vocational training, removing bureaucratic hurdles, modernizing public administration, simplifying the tax system and combating tax evasion. And no member state, and this should be patently obvious to everyone, should tolerate nepotism or clientelism.
The benchmarks are the principles of the European Union which we have anchored in our treaties and to which we have to return as quickly as possible: an open market economy with free competition and stable prices as well as healthy public finances. For years, member states – including Germany – have been violating the stability criteria adopted in Maastricht.
All member states have to adhere to their obligations under the Stability Pact – especially Germany, in which particularly high expectations have been placed. Under European law, all member states are obliged to bring their public debt under 60 per cent of GDP. In more than half of the member states, the debt-to-GDP ratio fell short of this target last year – especially in Greece, Italy, Belgium, Ireland and Portugal. And next in line is Germany with a ratio of more than 83 per cent. We Germans mustn’t allow an embellished impression of the strength of the rescuers to be created.
Unfairness, as well as incompetent budgeting and management of public finances must be penalized severely and swiftly. Furthermore, the common rules must be applied without ifs and buts, regardless of whether the member states in question are large or small. Those who need help have to fulfil the conditions which are essential if their economies are to recover. Europe’s diversity is a great advantage. For every nation is free within its own area of responsibility to decide how to reach the targets which have been set jointly.
Only in this way will we manage once again to make space for what people are calling for so often in Europe just now: public spirit and solidarity. Solidarity is a key part of the European idea. However, it is wrong to measure solidarity merely in terms of willingness to give others financial support, to act as guarantor for them or even to incur shared debts with them.
What is it that is actually being called for in this context? With whom would you personally take out a joint loan? To whom would you want your creditworthiness to be extended at your expense? For whom would you personally stand guarantor? And why? For your children? – I hope so! For more distant relations? – ah now it gets a bit more difficult. Perhaps we would stand guarantor if that was the only way to give the other person a chance to get back on his feet. Otherwise, only if we knew we weren’t overstretching ourselves and if it were in our common interest. Even a guarantor can behave immorally if he is just putting off inevitable insolvency.
In Europe, we are all friends, partners and relatives – the European family, a community built on solidarity. To me solidarity also means keeping an eye on the interests of young people. Anyone who tries today to mitigate solely with money and guarantees the consequences of burst speculation bubbles, indeed of decades of mismanagement, is shoving the burden onto the younger generation and making their future more difficult. Everyone acting in this way is basically letting themselves off lightly, thinking “who cares what happens after I’m gone?”
It gives me cause for thought when governments wait until the very last minute before showing any willingness to give up benefits and privileges and introduce reforms. Especially when the supreme guardians of the currency go way beyond the bounds of their mandate and buy up government bonds on a massive scale – currently more than 110 billion euro. In the long term this can’t be good, and therefore it can be tolerated at best for a short period. The guardians of the currency, too, must quickly find their way back to the agreed principles. I regard the huge buy-up of government bonds of individual states by the European Central Bank as legally questionable. Article 123 of the Treaty on the Functioning of the European Union prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence.
This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market. By the way, the indirect purchase of government bonds is even more expensive than direct purchase. Again, actors on the financial markets earn commission without incurring any risk at all.
This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market. By the way, the indirect purchase of government bonds is even more expensive than direct purchase. Again, actors on the financial markets earn commission without incurring any risk at all.
One of the fundamental principles of the market economy is this: risk and liability go hand in hand. Those who take risks might fail. This principle must also apply to the financial sector, to small investors as well as to big financial institutions. There is an urgent need here to make up for our failings, going beyond the measures already initiated in the G20.
The financial sector must once again take on a service role and contribute to sustainable global development. We need well-functioning, efficient global capital markets which help to manage risks rather than to create them. And which bring together capital and ideas – ideas on how to solve the huge tasks facing the world today. Resolute action will bring about recovery – partly thanks to strong economic development in emerging regions. I’m thinking here of Brazil, China, India and Indonesia. Let’s see the crisis as an opportunity and develop the necessary perspective for a global social market economy with a clear regulatory framework.
Ladies and gentlemen, to go back to what I said at the outset: we should ask ourselves where we want to be in 50 years’ time, as well as what is really important to us in the coming decades. In the final analysis, what is well-being? And what serves the common weal? And of this, what will turn out to be lasting and sustainable?
Science may not yet have reached any consensus on how best to measure personal well-being. But various indicators which try to measure people’s personal quality of life show that increasing GDP alone does not increase their happiness. As long as their basic material needs are met, it seems that people do not need to keep acquiring material things to ensure their happiness; rather, what they need is the chance to play an active part in the life of society, to develop their personalities freely in stable social conditions. In that case, well-being would mean above all having the opportunity to lead a successful, meaningful and creative life. That’s what many people aspire to. I welcome the fact that science intends to carry out more experiments in future into human conduct and its psychological and sociological foundation.
Here’s something else I find remarkable: attempts to measure well-being have found that in the European countries there is a close correlation between happiness and confidence in one’s fellow human beings. Trusting one another, being honest with one another – that’s the basis for human well-being, for cooperation and cohesion. And this is where I come back to the monetary economy. Granting one another credit is the basis for a functioning market economy and solid growth. It is a matter of confidence. We have to be honest with each other and with ourselves.
We should speak openly and honestly about scarcities, as things in this world are not in unending supply. The repeated attempt to ignore the impact of shortages and thus to close our eyes to the realities doesn’t bring any lasting improvement. At best, it gains us a bit of time. This is true also when it comes to our handling of natural resources and to a lifestyle to which more and more people around the world aspire. In this context, too, we simply ignore scarcities – because we are not honest and do not charge the true cost of energy and raw materials and the use of water, air and land.
Just as on the financial markets, risk and liability are often viewed as unconnected here too, thus violating a basic principle of sound management. Yet in many instances we are living not only at the expense of future generations, but also at the expense of the weakest in our societies. According to the United Nations, the people of the world’s poorest countries are the hardest hit by the repercussions of climate change, such as drought or flooding, even though they have done least to cause the problem. As early as 25 years ago, the Brundtland Commission called for “sustainable development, which implies meeting the needs of the present without compromising the ability of future generations to meet their own needs”.
We cannot pay for the comforts of the present with our future and that of our children. We need to change course, towards sustainable management and budgeting. Only in this way can a free and social market economy function.
We’re still a long way from that. We are not yet succeeding in meeting the basic needs of the present for all people. And we are succeeding even less in preserving scope for action for future generations. Changing this is the truly fundamental task facing us. In this connection, ladies and gentlemen, I am counting on your expertise, to show us powerful, correct action which is sustainable in the long term.
“We must make our election between economy and liberty, or profusion and servitude.” These are the famous words of the third President of the United States of America, Thomas Jefferson, urgently warning – in the summer of 1816 – against government overindebtedness. In this summer of our disillusionment, which must mark the start of a process of reorientation, need anything else be said? We just might have learned a lesson.
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