G20 Talks

Schäuble's Battle to Save His Legacy

  • Why it matters

    Why it matters

    Germany’s G20 presidency will be dominated by President Donald Trump’s “America First” policy, with talks likely to focus on averting protectionism.

  • Facts

    Facts

    • German Finance Minister Wolfgang Schäuble is hosting a meeting of G20 finance ministers and central bank governors in Baden-Baden Friday and Saturday as part of Germany’s presidency of the G20.
    • Mr. Schäuble’s achievements as finance minister are under threat: the fight against aggressive national tax policies and corporate tax avoidance as well as achieving a balanced German budget for three years in a row.
    • Mr. Trump and leading Republicans in Congress want to radically alter the U.S. tax system. Plans revealed up to now call for a lowering of the corporate tax rate from 35 to 20 or even 15 percent as well as a reform of the tax base that could hurt German exports and tax revenues.
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    Audio

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German Finance Minister Wolfgang Schaeuble talks to reporters during the G20 Finance Ministers and Central Bank Governors Meeting in Baden-Baden
Wolfgang Schäuble will be a man in demand at the G20 meeting. Source: Reuters

Wolfgang Schäuble sees himself as a servant of his country. Pomp and pageantry are anathema to him. But he decided to splash out a bit in this year of Germany’s presidency of the Group of 20 leading economies, and had a postage stamp designed to mark the events which include a meeting of finance ministers and central bank governors beginning Friday in the southwestern city of Baden-Baden – not far from Mr. Schäuble’s own constituency.

The stamp features a square knot that symbolizes the networked world and conveniently tightens further the more one tries to pull at it.

The G20 could well use that sort of cohesion. Mr. Schäuble and Chancellor Angela Merkel had actually wanted the presidency to offer pretty backdrops ahead of the September general election. But President Donald Trump is shaking everything up with his America First doctrine.

Instead of the planned discussions about digitization, financial market regulation or developmental aid for Africa, the global summits this year will be preoccupied with German trade surpluses, American import taxes and the looming deregulation of U.S. financial institutions. The days before the meeting in Baden-Baden, which was running Friday and Saturday, have been filled with wrangling over how America can be persuaded to declare its commitment to free trade – whether that be in a final joint communiqué or a separate statement.

Mr. Schäuble’s style is to seek out his counterparts for face-to-face talks, and her will be doing so with Steven Mnuchin, formerly a Goldman Sachs banker and now the freshly minted Secretary of the Treasury. One principle of Mr. Schäuble is that “economics is ultimately more a social than a natural science.” Another principle he adheres to is self-reliance. Shortly before the G20 meeting, Mr. Schäuble emphasized that Europe must take on a stronger role and China can’t avoid assuming more responsibility for the global economy in the long run.

But much is at stake for him personally as well. “Are we going to fall back into stronger national boundaries?” he asked recently in a speech in Berlin.

The planned U.S. tax reform would hurt German exports and reduce German tax revenues, putting Mr. Schäuble's balanced budget at risk.

Mr. Schäuble, who has held a seat in the Bundestag for almost 45 years, detected such tendencies before Mr. Trump became president. Take the strong public resistance to the Transatlantic Trade and Investment Partnership, even in Germany. Or right-wing populism in France, Hungary and the Netherlands, or the apparent yearning for authoritarian figures. These trends are evidently troubling Mr. Schäuble, a convinced republican, European and atlanticist.

What is more, Mr. Schäuble’s achievements as finance minister are under threat: the fight against aggressive national tax policies and corporate tax avoidance as well as achieving a balanced German budget for three years in a row. Mr. Trump and leading Republicans in Congress want to radically alter the U.S. tax system. Plans revealed up to now call for a lowering of the corporate tax rate from 35 to 20 or even 15 percent as well as a reform of the tax base.

That would be a revolution with global consequences. Taxation would no longer be based on value creation but on the destination principle. U.S. companies would no longer pay any American corporate tax at all on production destined for export. In reverse, importers would be required to pay taxes no longer solely on their profits, but on their entire revenues in the USA. “The result would be a 20-percent import duty and a corresponding export subsidy,” said Holger Schmieding, chief economist at Berenberg Bank.

This wouldn’t just affect German exports. If the German government acceded to the U.S. tax revolution and allowed German exporters to deduct the taxes they paid at the U.S. border, German industry would remain competitive – but a big hole would be ripped in government finances. Mr. Schäuble’s balanced budget would be in danger. The same effect threatens if, in response to Brexit, the U.S. and Britain set a global tax-reduction spiral in motion. A transatlantic trade war would also be expensive if Europeans chose to use higher tariffs on U.S. imports in order to respond in kind to a protectionist President Trump.

Business groups are clearly worried about the tone of the G20 meeting. In a joint statement, German and French business associations  urged the G20 to resist protectionism in all its forms: “We are concerned about the current proposals to disrupt trade and global supply chains through new border tariffs and taxes,” said the association of German industries (BDI), employers (BDA) and French business association MEDEF. “The living standards in Germany and France, as well as in Europe overall, are being threatened through the nationalist extremist and populist powers, as well as through external economic challenges.”

But Mr. Schäuble is familiar with setbacks. One of his favorite literary figures is Sisyphus, who he believes to have been contented with his fate. Perhaps the minister, almost 75 years old, will simply have to add one more term in office as Finance Minister in order to outlive Donald Trump politically – and to secure his life’s work.

 

This article first appeared on the website of the business weekly WirtschaftsWoche. To contact the author: Christian.Ramthun@wiwo.de

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