Economic policy challenges in the wind of change Speech at the Süddeutsche Zeitung’s 2018 economic summit

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1 Welcome

Mr Beise,

Ladies and gentlemen,

Good morning. I am very pleased to be able to open the third day of this congress and I would like to thank you for the invitation.

Before we get down to discussions, let me begin with a few words tying together trade policy, global economic activity, challenges facing economic policy-makers and forthcoming tasks for monetary policy and fiscal policy-makers in the euro area.

Halloween was just two weeks ago, so I also promise to talk about ghosts and zombies, and I'll throw in lots of wind for good measure. 

2 Benefits of open markets

The rock band Scorpions sang “Listening to the wind of change” at the end of 1990; the song became a “hymn of change” in the Soviet Union and, thanks to its music video, was forever linked to the fall of the Berlin Wall, the 30th anniversary of which will be held next year.

“Wind of change” was inspired by the change that transpired as a result of glasnost and perestroika, which brought down the Iron Curtain. This political revolution also gave rise to major economic upheavals. Most notably, the countries of the former Eastern Bloc gained access to an invention that appears to perform miracles.

You may be familiar with the “replicator” from the sci-fi TV series “Star Trek” – it’s a machine that conjures up a nice dinner or a smart uniform from molecules and energy. Back then, a similar technology had already been long developed in the West. Cereals could be turned into tropical fruit, a couple of bottles of beer could become a juicy steak and a few tonnes of crude oil could even be turned into a car.[1] I’m speaking of international trade.

Trade allows us to specialise – we have known this since Adam Smith. We provide goods and services, and we have a cost advantage in their production. This raises our productivity, meaning it increases our output or saves us time.

For consumers, trade means more variety and lower prices. In real terms, the latter boils down to a higher income, a greater level of wealth.

The wind of change in the 1990s opened the doors of the Central and Eastern European economies to international trade. The Single Market also came into effect at this time, the North American Free Trade Agreement was concluded, and the World Trade Organization (WTO) began its work.

Most of all, an ever greater number of emerging markets were becoming more and more integrated into the global economy. In the decade from 1990 to 2000, the volume of international trade and services transactions doubled, and global economic output rose by one-third.

Today it's normal for us to use smartphones, software and clothing made abroad. We think nothing of travelling to other countries and of young people studying abroad.

3 Macroeconomic effects of tariffs

That said, another wind has been blowing – a headwind, so to speak –, especially over the past two years. Tariffs are once again seen as a tool that supposedly helps protect or even increase wealth.

I think this belief is mistaken. Just last year, the Bundesbank published macroeconomic model calculations showing that there are only losers in trade wars.[2]

Introducing a tariff would have a similar effect as a supply or cost shock. Ultimately, it's the consumers who pay the bill – in the form of higher prices. Please note that this applies above all to the country that introduces the tariffs. Our model simulations also show, however, how heavily a full-scale trade war would impact on the global economy as a whole.

For those directly involved, a trade conflict is often compared to the prisoner's dilemma situation known in game theory: if the other raises tariffs, one believes one has to strike back in order to limit one’s own losses. But this just means that everyone is worse off in the end. And this is also the case when capital flows are restricted.

And although this game theory analogy is a bit of an oversimplification of the real world, Rick Grimes, one of the main characters in the TV series “The Walking Dead”, is not far off the mark when he says: “We survive this by pulling together, not apart.”

4 Global growth outlook

Various institutions are currently adjusting their growth forecasts downwards for a number of countries, often pointing to the ghost of uncertainty caused by trade conflicts as the reason.

Luckily, not every instance of uncertainty will immediately throw global activity off course. In its recent Monthly Report, the Bundesbank examined the macroeconomic effects of uncertainty.[3]

It showed that uncertainty did indeed have a noticeable impact on economic activity during the global financial crisis ten years ago. However, it was not possible to identify any negative impact in the more recent past. The relationship between uncertainty and the real economy is not as close as is often supposed.

In numerous discussions with entrepreneurs, they cite the high level of uncertainty as a reason for showing restraint when making investment decisions. At the macroeconomic level, our study suggests that it depends on how suitable the indicator is: political uncertainty, in particular, appears to not go very far in explaining economic activity.

This is consistent with the fact that global economic activity has already withstood a number of things – such as the Brexit referendum and a range of political upheavals in the United States, Europe and elsewhere. The IMF estimates that the global economy will probably expand this year and next year at the same rate as in 2017. That said, concerns have increasingly been raised that risks to global growth have increased in the past few weeks. I refuse to join this chorus of pessimism, because there have been positive developments, too.

The fact that problems in Argentina and Turkey have not actually spread is a point worth noting, and the risk of a broad escalation of the trade dispute has, if anything, diminished of late.

The United States has agreed on a revised free trade agreement with its neighbours Mexico and Canada, and discussions with the EU over dismantling trade barriers are also in the pipeline. The recent efforts to reform the WTO are also a good sign.[4]

The confrontation between the United States and China continues, however. An agreement that also addresses the issues of opening up markets and protecting intellectual property might not only mitigate a lot of concerns, but could also signify genuine progress.

5 Economic policy challenges

Ladies and gentlemen,

There’s a Chinese proverb which reads: “When the wind of change blows, some build walls, others build windmills.”

This is why it’s important to not only forge bilateral agreements but also, looking ahead, to further develop the rules-based multilateral trading system.

But it’s also true that international trade is shifting employment prospects and relative wages, and it is bringing with it winners and losers. Studies have shown that opening the markets up to China has resulted in heavy downsizing in the US manufacturing sector. Local labour markets have been slow to adapt, and the lifetime income of affected workers has been markedly reduced.[5]

Populist movements have played on the fact that these effects have been insufficiently heeded by economic policymakers. And the effects of technological progress are unfolding in a similar manner. While the economy as a whole is benefiting, individuals, entire sections of society and even regions run the risk of falling by the wayside.

This is a challenge faced by many policy areas. Distribution policy can reduce income losses, but that alone is not enough. First and foremost, people need to be put in a position to personally reap the benefits of change.

In this context, it’s important to create the right conditions, especially through education, and to make spirited competition for new ideas possible. With respect to digitalisation, in particular, we must not only modernise infrastructure but also safeguard competitive structures.

6 Monetary policy normalisation

Ladies and gentlemen,

It’s up to politicians, not the central banks, to “build windmills”. The Eurosystem’s sole mandate is to preserve price stability. And according to ECB staff projections published in September, euro area inflation is set to hit 1.7% this year and in the next two years.

That more or less corresponds to my understanding of price stability over the medium term. And the ECB Governing Council has, quite logically, signalled that net asset purchases will come to an end in December. But this is just the first step towards gradual monetary policy normalisation. The next steps will be dictated by dataset developments.

Economic data from the euro area and Germany have been less positive of late than previously. This morning, a slight decline in German GDP was reported for the third quarter.

This is primarily due to a drop in output in the automotive sector. Manufacturers are experiencing difficulties in certifying vehicles according to the new emission test procedure, the WLTP.

But fluctuations in the figures should not obscure the fact that the economic upturn in Germany and the euro area is still intact. The pace of expansion may have slowed, but that also reflects increased capacity utilisation and growing bottlenecks in the labour market. In Germany, in particular, this has more to do with a lack of specialised labour than a lack of demand.

With that in mind, it’s also clear to me that we should not waste time as we walk the long road back to normal monetary policy. We should not take the risks and side effects of ultra-loose monetary policy lightly.

Problems include financial stability risks but also, for instance, the “zombies” in enterprises' midst. For instance, a recent BIS study found that the number of financially fragile firms has soared since the end of the 1980s. That’s because the financial pressure on firms that ought to exit the market has dwindled – partly on account of lower interest rates.[6]

Luckily, we're not living in the apocalyptic world of “The Walking Dead”. But the spread of zombie firms is detrimental to productivity growth. And that is putting the brakes on potential growth, which is making for headwinds.

7 Pressure for fiscal policymakers to act

It also becomes more convenient for governments to borrow in a setting of low interest rates. If risk premia are compressed, the main beneficiaries are those countries that would otherwise, quite rightly, be more cautious due to the criticism levelled at the sustainability of their finances.

Furthermore, it is now becoming clear that monetary policymakers’ scope to act will probably be limited when a future economic downturn occurs. Fiscal policymakers will thus have greater responsibility for the task of macroeconomic stabilisation than in the past.

Now, during a robust economic upswing, is not the right time to loosen the fiscal reins in the euro area. On the contrary, euro area countries should be reducing their still high levels of debt. This applies, in particular, to those countries that find themselves especially indebted – Italy is one such example.

It’s entirely valid for a new government to want to put its own stamp on policy. However, to the extent that this goes hand in hand with additional spending, it would be advisable to cut other spending or increase revenue. Reducing debt is a necessary course of action that must not be neglected.

In this context, it is not just about prolonged non-compliance with the European fiscal rules undermining their binding force.

Nor do I share the view that growth problems can be solved by means of spiralling debt or that high debt is unproblematic. I am not passing moral judgement, even if the German word for “debt”, Schuld, has a second meaning, namely “fault” or “blame”. For me, debt falls into a purely economic category: it describes financial liabilities that must be repaid at a later date with interest.

For a monetary union with a single monetary policy and 19 national fiscal policies, the additional, key notion at play here is that it can only function as a union of stability if its members maintain sound budgets.

8 Conclusion

Ladies and gentlemen,

Much like economic policymakers, individuals, too, must be open to change. Mark Twain is quoted as saying, “I’m in favour of progress; it’s change I don’t like.”

Where would inventions, discoveries and successes be if nothing ever ventured from its safe, predetermined path? In this respect, uncertainty is perhaps the elixir of life rather than the stuff of the devil.

The trailblazers who will take to the stage here later are positive, tangible examples of how individuals with entrepreneurial spirit and inventive talent can drive growth.

Thank you for listening. I will now take your questions.


  1. See C. Wheelan (2010), Naked Economics – Undressing the Dismal Science, W. W. Norton & Company, New York.
  2. See Deutsche Bundesbank, The danger posed to the global economy by protectionist tendencies, Monthly Report, July 2017, pp. 77-91.
  3. See Deutsche Bundesbank, The macroeconomic impact of uncertainty , Monthly Report, October 2018, pp. 49-64.
  4. See European Commission, WTO modernisation, Concept paper, September 2018; and WTO, IMF and World Bank, Reinvigorating Trade and Inclusive Growth, Report, September 2018.
  5. See D. H. Autor, D. Dorn and G. H. Hanson (2016), The China Shock: Learning from Labour-Market Adjustment to Large Changes in Trade, Annual Review of Economics, Vol. 8, pp. 205-240.
  6. See R. Banerjee and B. Hoffmann, The rise of zombie firms: causes and consequences, BIS Quarterly Review, September 2018, pp. 67-77.