Poor Oskar Lafontaine, who fell on his sword last week, is already on the way to Keynesian martyrdom. Brave Oskar asked for interest rate cuts to spur the European economy! Plucky Oskar told big business to pay higher taxes to fund social programmes for the poor! Doughty Oskar proposed a wholesale reform of the international monetary system! But he lasted only four months as a minister. The proposal for accelerated canonisation holds that he was brought down by a coalition of big German business, Anglo-Saxon free marketeers and the hard money men – and woman – of the European Central Bank.
The truth is more mundane. The main perpetrator was Oskar Lafontaine himself, and his awesome lack of political sensitivity. He would perform a considerable public service to finance ministers, present and future, if he were to write a short manual on how not to do it. After all, failures are more instructive than successes. And we have not had such a conspicuous failure since the first Mitterrand administration tried reflation in France back in 1982.
Like other ministers, finance ministers need an ear for their political constituencies. On this score, Lafontaine could not be faulted. He is capable of partisan oratory that few others can rival. But a racy turn of phrase with your supporters is not enough. Finance ministers also need an ear for the financial markets. In anything other than a command economy, they have to nurture what Keynes called the “animal spirits” of business people. They have to understand the greed and the fear that motivates money, and respect its power. Failure to do so ultimately spells political disaster – and few left-wing governments get a second chance. This is not new, and it is nothing to do with globalisation. It is as old as Leon Blum’s “Popular Front” and the early British Labour governments.
Lafontaine’s second ear had tinnitus. For German businesses, he became a bogey figure. His reform of corporation tax blocked the loopholes that had made the high tax rates tolerable, but did nothing to promise a corresponding reduction in rates. If you increase taxes on investment returns, you must not expect investment to rise. Business investment is now expected to grow at just half the rate projected at the beginning of Lafontaine’s tenure. Even his tax proposals on the utilities – scarcely more radical than Labour’s windfall tax to pay for the jobs programme – were demonised as an unacceptable impost on companies. In both cases, Lafontaine preferred high-profile confrontation to low-profile effectiveness.
His impact on the financial markets was even more spectacular. Almost single-handedly, his criticism of the European Central Bank served to drive down the value of the new euro by nearly 8 per cent against the dollar in three months. If Lafontaine wanted the new bank to cut interest rates this was the most counter-productive course he could have adopted.
The sensible course would have been to apply gentle, private pressure. The bank is far from a lost cause. Despite its antecedents in the monetarist Bundesbank, it has been more pragmatic than its critics feared. Its policy framework avoided money supply targets, and set a 0-2 per cent target range for inflation. Its council voted to cut French and German interest rates from 3.3 per cent to 3 per cent before the euro launched. The really hard men – Hans Tietmeyer and Jean-Claude Trichet – have already been outvoted on key monetary policy issues. But the new bank needs to establish its credibility with the markets and it can’t be seen to be caving in to vocal external pressure.
Lafontaine’s French counterpart, the far more subtle Dominique Strauss-Kahn, also wants lower interest rates. But he has desisted from making a song and dance about it. He points out that the bank’s mandate is to promote price stability, but it is also to support “the general economic policies in the Community”, including “sustainable and non-inflationary growth respecting the environment . . . a high level of employment and social protection”.
Lafontaine seems to have been less interested in results than in making a noise. Not only did he go public with appeals for lower interest rates, but he also called for target zones for the euro-dollar exchange rate. To a central bank, this is the equivalent of pulling out a revolver, because the bank is then forced to manipulate interest rates to meet the exchange rate target.
The bank therefore knew exactly what Lafontaine’s game was. Indeed, its president, Wim Duisenberg, is a Social Democrat and former finance minister himself. He has one Dutch characteristic in abundance: the harder you push him, the more he digs his heels in. Nor did Lafontaine even genuflect to the central bankers’ family gods, the notion that most problems are caused by rigidities in the labour market.
This is certainly an overblown point, but it is nevertheless part of the European truth. Some of Europe’s unemployment is due to the business cycle and lack of demand, but some is clearly due to such causes as skills mismatches, easy benefit systems and high protection against being fired (which acts as a disincentive to hiring). It is hard otherwise to explain why the unemployment rate is just 2 per cent in Luxembourg or 3.6 per cent in the Netherlands or 4. 4 per cent in Austria, when the comparable rate in Belgium is 8.4 per cent, in Germany 9.5 per cent and in France 11.7 per cent. All of them have shared the same monetary policy for more than a decade; it is the national wage-setting institutions that differ. A serious attempt to deal with European unemployment needs to tackle both deficiency of demand and problems of supply: you need both blades of the scissors to cut through the problem.
Measured by the grey standards of policy-making rather than the black and white of the conference pulpit, Lafontaine was struggling. He was a considerable opposition figure who was certainly interested in new ideas. In the Saarland, he was one of the early bridge-builders between the SPD and the Greens.
But he failed as a man of government. He preferred well-publicised sound-bites to well-executed legislation. Ultimately he was one of those politicians who wanted to be someone rather than do something. What a shame.
The writer, a former business editor of the “Independent”, is group managing director and chief economist at Fitch IBCA, the international credit rating agency
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