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What really helps Europe’s economy

The economist Gabriel Felbermayr talks about European integration, the trade dispute with the USA and Chinese investments in Germany.

Gabriel Felbermayr, international economics expert at the ifo Institute
Gabriel Felbermayr, international economics expert at the ifo Institute © dpa

Gabriel Felbermayr is Director of the ifo Institute for International Economics in Munich. In 2019 he will become President of the Kiel Institute for the World Economy (IfW).

Professor Felbermayr, in the context of European integration, Angela Merkel and Emmanuel Macron are thinking about introducing a euro zone finance minister. They are taking a new angle by proposing joint investments in the infrastructure. What would this imply?
I’m not at all impressed with the idea of a euro zone finance minister, when we don’t even know what is supposed to be financed. We need to approach things step by step: first, by defining European projects that bring real added value. Only then does it make sense to talk about financing them. But I’m not excluding the possibility that eventually there will be a euro budget and a euro finance minister.

On the other hand, the main focus is on the transfer concept. I think this is very unwise. Transfers don’t appeal to citizens in the north who see themselves as paymasters for the extravagances of the Club Med, nor do they appeal to citizens in the south who detest being patronized.

We urgently need investments in European border regions.
Gabriel Felbermayr, international economics expert at the ifo Institute

Which investments do you suggest?
There are numerous European value added projects that are ready to be tackled. For instance, we urgently need investments that improve the accessibility of European border regions: roads, railways, power connections. Everyone would benefit. In the case of transfers, only the transfer recipients benefit. And if you do things sensibly, then investments in the border regions, which are often structurally weak, create new opportunities and employment.

The EU is arguing with the USA about trade tariffs. The American government is even considering leaving the World Trade Organization (WTO). Whose reasoning is right? Where’s the happy medium?
As far as free trade is concerned, neither the EU nor the USA have a clean record, so they should go ahead and admit it. The EU has higher average tariffs, but the USA is sealing off the public procurement markets. Negotiations for a free trade agreement, such as TTIP, are the only way forward here.

Trump is right to criticize the WTO. It was negotiated between 1986 and 1994. It has little or nothing to offer on digital services, data protection or global warming. It offers hardly any possibilities to counteract comprehensive state subsidies, such as in China. Again, negotiations are the only conceivable way to proceed. The EU needs to develop concrete proposals.

How would the USA benefit from leaving the WTO?
Leaving the WTO would be of no benefit at all to the USA. They might like to get away from the annoying WTO dispute settlement mechanisms, but they would lose the protection of intellectual property which the WTO guarantees, or the so-called most favoured nation in the trade in services. This would present a major problem for the USA.

Donald Trump believes that the American current account deficit of around 2.5 per cent of gross domestic product provides proof that the country’s trading partners are exploiting the USA. He’s wrong there. The USA enjoys the dollar privilege: they can consume more than they produce on a permanent basis. That’s a sign of strength, not weakness. 

The EU and the USA must defend their common values
Gabriel Felbermayr, international economics expert at the ifo Institute

China is investing in European, especially German, high tech companies and is promoting the New Silk Road project. Is the People’s Republic having the last laugh here?
In contrast to the EU or the USA, China has a long-term strategy that is set for decades. That’s a big advantage, although this doesn’t mean that the large-scale Chinese projects are automatically bound to succeed. Considerable write-downs can be expected on Chinese investments in infrastructure in Central Asian infrastructure and on Chinese investments at inflated prices in German companies.

But it’s true: if the EU and the USA don’t stand together to defend their common values, such as free competition or data protection, there will be an increased risk that China will impose its standards and rules on other countries.

Interview: Martin Orth

Overview: Economic research institutes in Germany