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Hamburg | 31.01.2018

Weidmann: Protectionism and isolationism are not the answer

Bundesbank President Jens Weidmann has warned of the flipside of protectionism. "Trade-restrictive measures often provoke backlashes, and these harbour the risk of erupting into trade wars in which there can only be losers," he said at an award ceremony in Hamburg. The prize, the Karl Klasen Journalism Prize, which was awarded to US journalist Steven Erlanger from the New York Times, is given to journalists deemed worthy of recognition for their writings on US-German relations. The foundation that awards the prize was set up in 1992 in memory of the former president of the Deutsche Bundesbank, Karl Klasen.

As an example of protectionist measures, President Weidmann pointed to the punitive tariffs recently imposed by the United States on producers of solar panels and washing machines.  One outcome of the punitive tariff imposed on solar panels and components is that it will drive up domestic production costs and depress demand for solar panels, he observed. This in turn means that fewer solar panel fitters will be required, which is why the American Solar Energy Industries Association expects job losses, Mr Weidmann explained.

Losers of globalisation

Though open markets are on the whole beneficial, Mr Weidmann believes they do not necessarily increase the wealth of every single person. The losers of globalisation include in particular lower-skilled workers in industrial countries, hence the real danger that people might begin to turn against globalisation. "Someone who's just lost their job probably won't take comfort from being able to buy a cheap smartphone," said Mr Weidmann.

Nevertheless, he believes that protectionism and isolationism are not the right responses. For him, the right course of action is to enable people to reap the rewards of globalisation and technological progress themselves. Better schools and universities as well as flexible labour and product markets are some of the options which could help. "I, for one, firmly believe that open markets and economic structures that are more conducive to growth boost productivity, employment and incomes," he remarked.

Current account surplus appropriate

Mr Weidmann used his speech in Hamburg once again to defend Germany's current account surplus, which has come in for criticism from a number of sides, saying that this is the outcome not of mercantilist policy, but of the wide variety of decisions made by domestic and foreign enterprises. He noted that the surplus, totalling 8% of GDP, can partly be explained by demographic changes, low oil prices and expansionary monetary policy and that German enterprises' high levels of savings are striking. The latter, Mr Weidmann said, partly reflect the investment restraint of German enterprises, which only picked up again last year.

"One way to reduce the current account surplus, then, would be to create attractive investment conditions within Germany, for instance by implementing the energy U-turn quickly and predictably, or by extending the country's digital infrastructure," he suggested. Higher public infrastructure spending is also conceivable, though investment needs would have to be calculated precisely and covered cost-effectively.

The Bundesbank President rejected calls for debt-financed public spending programmes, as these would temporarily continue to fuel demand in periods that already have high levels of production capacity utilisation.

Monetary union must remain a stability union

Turning his attention to the debate on the future of the European Union, Mr Weidmann described the longing for profound national sovereignty as "somewhat reactionary". At the same time, however, he stated that the principle of subsidiarity enshrined in the EU Treaty needs to be applied more effectively.

Drawing on a recent survey, Mr Weidmann stressed that the single currency enjoys high approval ratings, though the architecture of monetary union continues to be fragile. This fragility, however, is not due to any fundamental flaw in the single currency itself. "Rather, it is more the interplay between the single monetary policy on the one side and national sovereignty in matters of economic and fiscal policy on the other that makes the monetary union susceptible to crisis."

The Bundesbank President warned that the deepening of European integration should not be reduced to simply increasing risk sharing, as this would do nothing to make Europe and monetary union more stable. Instead, he insisted that monetary union must remain a stability union. "Failure to achieve this will cause the single currency to fall out of favour," Mr Weidmann concluded.

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