Sunday, July 30, 2017

Light touch regulation

An observation from Wolfgang Munchau in the Financial Times, nearly 2 years ago, that has stood the test of time --

More importantly, the Volks­wagen scandal has the potential to unhinge the German economic model. It has been over-reliant on the car industry, just as the car industry has been over-reliant on diesel technology. For its part, Berlin mollycoddles the industry and represents its interests abroad. The “VW law” in effect protects the company against a hostile takeover. And it was a former VW director, Peter Hartz, who wrote the labour reforms of the previous decade. In return, the industry contributes to the stability of regional employment. And the voting rules in the supervisory board ensure that production could be shifted out of Germany only with the explicit consent of the trade unions. In other words, it cannot. In terms of macroeconomic risk management, this is a silly strategy — similar to the UK’s over-reliance on the financial sector. Such strategies work well until they do not work at all.

He was talking about the diesel emissions scandal, which at the time afflicted only VW. But as it widens in scope and is now augmented by an anti-trust scandal, the distortions arising from the favoured status of the car industry look even clearer. 

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