Josef Ackermann: Do not rely on past achievements

In recent years, both the Nordic countries and Germany have emerged as role models in the economic debate. Much has been achieved, but Josef Ackermann, former CEO of Deutsche Bank, issues a word of caution: “Whenever the world starts to regard one’s economy as a role model, one is probably resting on one’s laurels and has started already to fall behind”, he says in an interview with the NIB Newsletter.

Dr Ackermann welcomes that IFIs do their job as countercyclical lenders and step in when private credit markets do not work properly. However, if this continues for too long, it could be seen as being normal one day and it would also crowd out the private sector.

How would you assess the competitiveness of the Nordic countries at the moment? What are their biggest strengths and weaknesses? Are there significant differences between the countries? Where do you see the biggest challenges for the Nordic countries in the coming years? What could the Nordic countries do to further increase their competitiveness?

“With the exception of crisis-stricken Iceland, the Nordic countries continue to occupy top spots in world competitiveness rankings. They are generally classified as business-friendly and innovative, and their economies are widely regarded as role models for the rest of the world. And yet, there is a vibrant debate in the region and beyond regarding whether they can maintain their present positions.

This debate partly reflects the widespread economic slowdown, which even the Nordic countries have not been able to escape, but also more fundamental concerns about their dependence on an open global economy, their ability to maintain an edge in the skill levels of their workforce, in innovation and design, and to further sustain their welfare states in light of the ageing population and increased international tax competition.

It is important not to generalise, though. For Denmark, a lack of growth in productivity and a strong dependence on slowly growing if not stagnating Europe is the greatest concern. For Iceland, overcoming the legacy of the financial crisis and building a sustainable economic model is an ongoing challenge. For Finland, the size and the efficiency of the public sector is the key issue. For Sweden, mobilising an ageing workforce is arguably the most pressing challenge, while Norway has to prepare its economy for the post-hydrocarbon era. And for the Baltic states, the key issue is to develop the skill levels of their workforce.”

During the pre-crisis years, Estonia, Latvia and Lithuania were seen as “Baltic tigers”. The recession revealed that much of the boom had been artificial, a bubble financed by foreign debt. Now these countries have adopted tough austerity measures in order to regain credibility. What is your message to these countries?

“Like many others, the Baltic countries succumbed to the temptations of easy money and built up unsustainably large current account deficits in the pre-crisis years. But they deserve a lot of praise for their willingness and ability to respond forcefully to the crisis, when capital inflows stopped suddenly after 2009. Unit labour costs have dropped markedly in all three countries, helping to bring current accounts back into balance and unemployment down—though the latter is still too high in Latvia and Lithuania in spite of massive emigration. All three Baltic countries have also proved to be fiscally prudent, as low public sector debt levels prior to the crisis allowed them some leeway to respond fiscally. But most importantly, their political systems have responded well, as the populations have been willing to endure economic hardship and their governments had the courage to take tough decisions.

Many European politicians have therefore rightly praised the Baltic countries as role models for other EU countries in need of adjustment.

The job is not done, though: In the medium term, the Baltic countries must improve the competitiveness of their economies if they want to be able to further catch up to more advanced countries. In order to achieve that productivity, growth must continue to exceed the EU average, as it has since 2000. Education and innovation are key here. As members of the euro area, the Baltic countries also need to develop their ability to manage their economies without autonomy over monetary policy and the exchange rate. For this, flexible labour markets, including wage flexibility, and intelligent use of macro-prudential policy tools is of utmost importance to avoid a renewed build-up of unsustainable imbalances.”

Finland has been very high in the competiveness rankings of various institutions. Still, economic developments there have been rather disappointing during recent years. Do you see any reasons for that?

“It is indeed remarkable to find an economy that is so competitive prima facie in recession for three out of the last five years. My explanation for this is a combination of domestic structural weaknesses and a very challenging external environment. Finland has been particularly hit by the growing tensions between Russia and the West. While, at below 2% of total exports, Russia’s role as an export market is negligible for Denmark, Norway and even Sweden, Russia is the second largest trading partner for Finland, accounting for about 10% of total exports and more than one sixth of imports. What’s more, as part of the euro area Finland has also been hit by the weak economic development of its number one trading partner, while at the same time, membership of EMU has reduced the number of policy tools available to fight slow growth.

Third, Finland is teaching us all a lesson on the risks of economic specialisation, as industry-specific – even firm-specific! – shocks in the ICT and paper industries have contributed significantly to the economy’s slowdown. And finally, there has been a slow policy response to structural weaknesses such as low productivity growth, rising household debt and the ageing of society.”

Being some years ago the “sick man of Europe”, Germany has regained its post-war image as a very strong and competitive economy. What have been the key drivers for this comeback? Is there something that the Nordic–Baltic region could learn?

At present, Germany is reaping the rewards of a combination of courageous political action and fortunate timing. And by this I mean the reform of the labour market and the social security system by the Schröder government in 2002–3. As a consequence, the German manufacturing sector got back into shape just in time to benefit from the pre-crisis boom in emerging markets, as well as from the recovery after the crisis. Germany is currently alone among the G7 economies in maintaining its share of global exports. The country had the good fortune to enter the crisis with restored competitiveness and fiscal strength. Similarly, due to the recession in the early years of the millennium, German households and firms had not joined the debt party in the pre-crisis years and, hence, it did not have to deleverage to the same degree as other countries after 2009.

But restoring German competitiveness was not only a remarkable political achievement. It is as much an expression of the willingness of trade unions and employer associations to cooperate and for workers to forego rises in real wages for almost a decade. One can judge the importance of such a sacrifice and social consensus by looking at France, where it is blatantly absent—with the concomitant consequences.

Nevertheless, a warning is warranted here: in recent years Germany has done very little in terms of economic reforms. If anything, past reforms have been diluted. Hence, Germany, as with the Nordic countries, should be on guard: Whenever the world starts to regard one’s economy as a role model, one is probably resting on one’s laurels and has started already to fall behind.”

International financial institutions such as the EIB and state-owned development agencies such as KfW have increased their lending during the last few years due to the financial crisis. How do you see this development? How do you see the prospects for long-term lending in Europe in the forthcoming years?

“I have mixed feelings about this development. On the one hand, it is welcome that IFIs and development agencies are doing their job as countercyclical lenders, stepping in when private credit markets do not work properly. IFIs and development agencies also accumulate precious technical expertise that improves the allocation of capital for profitable investments.

On the other hand, strong lending by EIB, KfW and the like only shows that lending activity by private banks is still dysfunctional, notwithstanding the best efforts of central banks and governments to help them along.

By the way, Sweden, with its strong private institutions for gathering capital, seems to be an exception here.

But, in general, this state of affairs has lasted for some years already now, and if it continues much longer there is a risk that government involvement in lending markets will come to be seen as normal one day. That would not only entail significant risks for taxpayers; over time, it would also crowd out private-sector lending, even if private markets become functional again and impede the development of capital markets (bonds and equity), which should be the main source of long-term lending, in my view.

In fact, the currently debated EUR 315 billion investment package by the EU, spearheaded by the EIB, will massively increase the role of development agencies and could well become a catalyst for such nefarious developments.

Hence, it is important that the EU makes quick progress on building a Capital Market Union aimed at activating sources of long-term finance such as securitisation markets, bonds, long-term loans, and leasing arrangements.

At the same time, private long-term lending will not revive unless governments reignite long-term growth prospects through structural reforms and by providing a reliable regulatory environment, e.g. in energy policy, that provides long-term certainty for investors. Why should they put their money into the euro area after all, with a potential growth of merely 0.8–1% according to OECD estimates, when potential growth is estimated at 2% for the US and 1.5–2% for the OECD area as a whole?”