As Professor Donges would have wished, in addition to remembering our dear collaborator and friend, we talked about economics, with the background of his thinking, with which he gave us so many times, in a dialogue featuring Cristóbal Montoro, Amadeo Petitbò and Ana Samboal.
Cristóbal Montoro, Professor of Public Finance at the University of Cantabria and Minister of Finance and Public Administrations of the Spanish Government in the legislatures of 2000-2004 and 2011-2018.
Amadeo Petitbò, Professor of Economics at the Universities of Barcelona and Complutense de Madrid, President of the Tribunal de Defensa de la Competencia from 1995-2000 and Trustee of the Rafael del Pino Foundation.
Ana Samboal holds a degree in Information Sciences from the Complutense University of Madrid, a master's degree in Economic Journalism and Business Communication from Nebrija University and the Public Management Leadership Programme at IESE Business School. She currently collaborates with EsRadio, 13 Televisión, The Economist y Today's DebateShe is a lecturer at ESIC and teaches management training courses for several communication agencies.
On 13 December 2021, the Rafael del Pino Foundation and the Institute of Economic Studies organised a tribute in memoriam to Professor Juegen B. Donges. Donges, with the participation of Cristóbal Montoro, Professor of Public Finance at the University of Cantabria and Minister of Finance and Public Administrations in the legislatures of 2000-2004 and 2011-2018, and Amadeo Petitbò, Professor of Economics at the University of Barcelona and Complutense University of Madrid and President of the Court for the Defence of Competition between 1995 and 2000.
Cristobal Montoro recalled that he met Donges when he joined the Institute of Economic Studies on 1 January 1982. Donges was already there, representing the European and international link of the IEE. In the 1980s, the Institute was a forge of ideas, because Spain was going through a time of profound changes. At that time we had the first left-wing government of our democracy, which was a real litmus test. It was the same government that brought about Spain's entry into the then European Economic Community in 1986, and the same government that brought about Spain's entry into NATO. 1986 was a decisive year in the European Union because it was when the single market treaty was launched.
During all this forging of ideas, of economic policies, in the 1980s, globalisation began with a bang, the globalisation of the capital market and the drawing up of the financial markets, with their problems. The conservative revolutions also began in the United States and in the United Kingdom, with Margaret Thatcher, which meant that the Institute of Economic Studies had to digest a lot at the same time. In those years, supply-side economics was making a very strong start in Spain. Donges always used the term supply-side reforms, which is the great economic conceptual change that took place in the 1980s. Donges was passionate about economics.
Entering the European Union was going to be hard, but staying outside was going to be a horror. But then it turned out that joining, liberalising the economy, opening it up, lowering tariffs on the Spanish economy, was very positive. We were also lucky because oil prices fell and the real terms of trade between the peseta and the dollar improved. Later, in the Maastricht debate, which was a very important debate that can be found in Donges' writings and lectures, he talked about the fact that this was not an optimal monetary zone of the Mundell type. But what was clear was that Spain, when it did its homework to comply with budgetary stability and economic stability, the two great duties that go hand in hand, the founding of the euro was also enormously positive in terms of the financing of our economy, the internationalisation of our companies and the boost to very important multinationals that Spain has in the world. This great leap forward that our country takes every time we open up, every time we commit to economic stability, one part of which is budgetary stability. In this sense, Donges was the master in this forging of ideas.
Montoro recalled a lunch at the Institute for Economic Studies, which he attended in 2017 when he was still minister, Donges' analysis was that Spain was beginning to imitate the German model of the current account surplus. That is the great discovery of the Spanish economy of which Donges was enormously proud, because it is the first time in our economic history that, since 2012, we have had year after year a current account surplus, the capacity to finance the rest of the world, including last year, a year as strange and anomalous as 2020. However, Donges insisted that we must not confuse the extraordinary nature of the times with the need to continue improving competitiveness and productivity. These are elements that should underpin economic policy at a time when such policy is actually retracting the impulses that have been exerted in such extraordinary circumstances as those of the pandemic.
In this area, Donges also referred to education, emphasising vocational training and explaining the German system of apprenticeships for young people in companies, something we have not been able to develop in Spain. There are also other differences. In the German system, education is highly selective from school and students do not go to university if they do not pass certain parameters.
Amadeo Petitbó: I became acquainted with the work of Professor Donges through a book published in 1976, at the behest of Professor Ernest Lluch, vilely murdered by ETA, who together with his brother Enric Lluch had a magnificent publishing house, called Oikos Tau, where they published books that were sometimes orthodox and sometimes not so orthodox. Among these not so orthodox books, they published one on industrialisation in Spain. I was devoted to industrial economics because I have always found it very difficult to understand the mysteries of monetary economics, the juggling that bankers, especially central bankers, do. It seemed like magic to me and it seemed much more sensible to devote myself to the real economy, which can be counted in physical units and not in monetary units.
Donges' book was groundbreaking in several ways. One, it broke with the Keynesian tradition. I am one of those economists who, because of my age, spent my younger years studying Keynes's economics and I wasted a lot of time. And then I had to waste a lot more to forget Keynes, to understand supply-side economics and to understand how it worked in an economy. The second interesting thing about the book is that it used something that, for us, was miraculous. He used computers, year 76, and, therefore, he could do regression analysis, something that we could not do because there were no computers in Spanish universities and those of us who used them had to use a bank's computers, which were left with us for a few hours at night so that we could do some regression and understand causal relationships so that we could understand some relevant phenomenon in the Spanish economy.
I knew nothing more about Professor Donges until, when I had something to say in the field of competition, the Institute of Economic Studies invited me to its business meetings, where I realised that it was not incompatible to be a good economist and a liberal thinker, nor was it incompatible to be a good economist and a liberal thinker and to use liberal thinking in government action. The discussions at the IEE were brilliant, with a common thread that Professor Donges had perfectly elaborated and verified over time and which he used to give his opinion on governments, whether of one party or another, with absolute independence.
What common elements were there in his thinking? The common thread was very strong and he knew how to articulate it perfectly. He did not only think in macroeconomic terms but also in microeconomic terms, and he did not limit himself to microeconomic theory, but constantly quoted the Schumpeterian entrepreneur, the innovative entrepreneur and not the rent-seeking or welfare-seeking entrepreneur. But he always talked about structural reforms. When he talked about structural reforms, he talked about education; when he talked about liberalisation, he introduced structural reforms; when he talked about balanced budgets and rational monetary policy, he related it to structural reforms. All this allowed him to provide a powerful and coherent explanation of the phenomena he analysed, be they in the Spanish economy, the European economy or the international economy. He always embellished this with a singular irony and a singular ability to qualify certain behaviours.
When he spoke of structural reforms, he included vocational training. I came from a sui generis vocational training, because I had to start working very early on and one way to study was commercial expertise, which was a kind of useless vocational training but which would lead to another education called commercial teaching. It was a kind of vocational training that helped us to do something useful and earn a living. While I was studying economics, I earned my living by working as an accountant for various companies because there was a demand for this type of training and it was offered. The most progressive part of the economists in Franco's governments had the brilliant idea of reforming the business schools, which allowed you to train in a profession that allowed you to have a job. All this was eliminated because someone said that they had to be university studies, so they made Business Studies. This is now coming back and we are hearing that there is more and more demand for vocational training, in some places to the detriment of university training. That's where the activity reserves come in, which is another thing we must never forget. This is a country riddled with activity reserves, where you can do one thing, but you can't do a similar thing. That is to say, a mining engineer, or a civil engineer, cannot carry out a study that the legislation reserves for a geologist, for example, the foundations of a house. If we analyse how our inefficient regulation works, another issue that concerned Professor Donges, we will see a country riddled with reserves of activity whose ultimate effect is to drive up costs, reduce competition and eliminate efficiency.
Cristóbal Montoro: You cannot forge new ideas in a complacent way, or commitments for the future, if everything seems wonderful to you and you agree with everyone. That is what makes you great. When he was appointed president of the German Council of Wise Men, we at the IEE told him that he had already been made an official Wise Man. It's another thing if the government then pays attention to the wise men.
Donges has a magnificent preamble to the book "Welfare for All", which is really the great change in Germany after the Second World War, which is how that change really happens. His country makes a formidable economic transformation that we sometimes single out too much because it had the Marshall Plan. It is not that. Economic development depends on many other things and, of course, on these conditions of competition, how the German economy opens up, how it does so during this period. He is a great admirer of the European construction since the first German and French politicians and then he is more critical of the others because they understand that the others have had to manage more crises. It has not been so much a contribution to European construction as a management of a succession of crises.
If Spain has companies like the ones it has, it is because the entrepreneurs and managers are qualified and knowledgeable. If not, it is impossible. This Spain, with its level of development, is a Spain that has qualified people without whom it would not be able to face the difficulties it is experiencing. That is the great virtue of knowledge. That is what we have to value in figures like Donges, who have worked so hard, not for being right about everything, but for working to generate and disseminate knowledge.
Amadeo Petitbó: The labour market was one of the few things he valued positively in the government's action, the labour reform. Vocational training was something he constantly mentioned. Donges drove a BMW, but always used Mercedes as an example. He wondered why Mercedes were so good, and the answer was that it was because the workers had received good vocational training. That's why he attached so much importance to it.
He also mentioned slowness. I remember lobbying the government to liberalise rail transport, more than twenty years ago. We have only started now. With the professions, there have always been some professional groups that have been able to overcome government pressure and have been protected by inefficient regulations. Solicitors are one of them. Or pharmacists. In the programmes of the political parties there is always a desire to liberalise these things, but then, for one reason or another, there is a brake that prevents it. I gave an example: Why is it that in the United States, when a book appears and it is a novelty, it is offered with a 25% discount? So that people will buy it, so that the businessman can recover the investment as quickly as possible. In Spain we are still stuck with a regulation that prohibits discounts of 5%. But the worst thing is the argument that limits discounts to favour culture, which is a reversal of the terms, probably because someone thinks that, in this way, it encourages demand.
Donges' great virtue is that he was able to tease out these small contradictions in the political argument, behind which there were always incentives to obtain rents, some kind of favour under the cover of inefficient regulations. We have great entrepreneurs whose successes are often limited by inefficient regulations. Regulations that mean higher investments, in cases that are perfectly avoidable; they mean time and they mean doing tasks that are absolutely unnecessary. If we were to make a catalogue of inefficient regulations in Spain we would be frightened. Here we need a job like the one Donges had in Germany, which was a study of regulation, with proposals to the government aimed at eliminating everything that involves inefficient regulation.
Donges had an idea of a rational public administration. He had the businessman behind his argumentation and he thought that public administration should be a companion that contributes to reducing the average costs of companies because, in this way, companies become more competitive. For that we need two things: to eliminate all traces of inefficient regulation and to promote competition. Entrepreneurs do the rest, because they know how to do it. Spanish entrepreneurs, when they have gone out to compete outside Spain, have succeeded. If we look at the number of entrepreneurs and, above all, business managers outside Spain, we would be astonished. There are more and more of them.
Cristóbal Montoro: Let's get positive. Data from the World Bank. In 1975, there were 36 million people in Spain. Per capita income was between 15,000 and 16,000 dollars. Last year, there were 47 million of us, which is not because Spaniards have gone crazy about having children, and the per capita income was 33,000 dollars. We have come a long way in Spain. Can you tell me that in 1996 Spain was going to have world leading textile companies? We had closed many, Sabadell, Tarrasa, and now we are world leaders in textiles. Can you tell me in 1996 that we were going to be world leaders in the construction and management of infrastructures? Were we in 1996? How much business investment outside Spain was there in 1996? 6% of GDP. Who was doing it? The public Telefónica. Its board was made up of three representatives of La Caixa and BBVA and the rest were all of us who went to the general commission of secretaries and under-secretaries. Also Repsol, Endesa and someone else. Today, Spanish businessmen outside Spain have 56%. Today we are not only the most open country in terms of trade, in terms of the importance of exports and imports, but there is no other country in the world that has done this in terms of direct investment.
What we are talking about is that what Donges was advocating is that the unification of the German exchange rate should be one-for-one. None of us saw it, but what he was saying is that we didn't know what political sense unification might make and he is advocating that position. We will see the cost. When the Berlin Wall falls, when the unification of Germany is taking place, when all these phenomena are taking place, the disappearance of the USSR, which means that new markets are appearing but we have much more competition, would anyone say that Spain was going to become the second largest car producer after Germany? These are all multinational companies based in Spain that are making decisions in terms of headquarters and have to consult their parent companies outside Spain. This is what we are experiencing in that sense, and for what have been such useful ideas as the liberalisation of supply, how to face competition in globalisation, to be able to develop and have efficient public services. Or does anyone think that in 2019 83 million people could come to Spain, many of them residents, if we did not have good public services for public safety, if we did not have a country with quality health services, if we did not have infrastructures that give tourism the ability to compete internationally? We are the world leader in tourism in terms of infrastructures.
We need to invest in ideas. This country has been transformed in this way, and investment in ideas has not been seen. This is enormously profitable for countries. That is why Donges was working at the Kiel Institute and the Cologne Institute, because there are very strong economic institutes there. Here we have it in the format of 31 years ago. We have to invest in this, which is not just about being publishers of other people's work, it is about forging ideas, directing them, guiding them, winning the future. That is the message that Donges is leaving us. We need much more civil society. This is essential to be able to transform and lay the foundations for the transformation and modernisation of society. It is not all in direct politics; it is in the forging of those ideas. That is Donges' great legacy.
Amadeo Petitbó: You have to invest in ideas. Here I would like to mention something that Professor Donges did not understand. When he said investing in ideas, Professor Donges said that we have to encourage venture capital, we have to encourage start-ups and he added that, for all of this, training is necessary. This is where inefficient regulation comes in. Professor Donges never understood why a scholarship holder had to pay income tax on the scholarship obtained, which is something I don't understand either. If what we want is to train, and train our compatriots in the best universities and research centres in the world, they need help because enrolling at MIT or Harvard is not the same as enrolling at the Autónoma or the Complutense. You have to think about 70,000 or 80,000 euros. If the foundations grant these scholarship holders a scholarship for the amount of the tuition plus a small amount each month, with what they receive each month they do not pay the corresponding IRPF. This is contradictory. If we want more training, we have to increase spending on training, which is then recouped because, if the scholarship holder who comes to run a multinational after five years pays a lot of taxes, he ends up compensating for the possible non-personal income tax that he has had to pay during the years of his scholarship. We have to reverse this. The best training policy we can implement in Spain is to send five or ten thousand Spaniards abroad every year to study at the university that suits them best. Of the ten thousand, perhaps five thousand will return, but we will have them, it is a good investment. These are the investments that Professor Donges said have multiplier effects. They are not these so-called one-off investments, that is to say, they have a short life. They have a return even for the Treasury. The Treasury would make a good investment by giving grants. What happens is that they don't trust them.
Cristóbal Montoro: I was a scholarship holder in 1973. One of the scholarships I had was at an institute that existed at the time, which was called the Institute of Economic Studies, which was public, but it fell into disuse. I was also an associate professor at the Autonomous University of Madrid, in the chair of Public Finance. My last concern at that time was the tax I paid because that was not the issue. What also happens a lot in Spain is that there is a lot of insistence on research, on its public nature, and then there is an attempt to make that research more private, but that is very difficult. If you are pursuing a career as a researcher and, at the same time, a career as a civil servant, you choose one path or the other in that sense. In Spain, there is an important private research industry in the pharmaceutical industry, which is one of our leading research and export industries. But in the other, there is a strong insistence on public research in a career very similar to that of teaching. Often, the contradiction that arises is that you want to do things with all the public security and then want the characteristics of the private sector, including the risk that comes with much higher salaries than those of civil servants.
Amadeo Petitibó: I was referring only to the scholarships for postgraduate studies that many foundations grant so that, for two, three or four years, a student can be trained in a research centre or a first-class university. As a rule, this student is paid tuition fees, plus some travel expenses, plus an amount that is not enough to go to the opera every week. The fact that these scholarships are subject to income tax discourages them from going to first-rate institutions. An alternative is to go to public schools. Instead of doing a Master's at Harvard, one has the possibility of going to Stockholm, but it's not exactly the same. From the Foundation's experience, the students we have had in these schools for two or three years have been completely transformed and some of them have become vice presidents of companies like Facebook. They have been well-trained students who have been able to compete in the global arena, not just in Europe. Many of them have had to go into debt, others have not been able to. In the end, the Treasury has recovered what it has lost during these years of study. It is a good investment for the Treasury.
Donges also said that we have to link wages to productivity, not to the CPI which, from a rational point of view, is hardly sustainable. Linking them to productivity makes all the sense in the world. But linking them to the CPI, one year you have a sharp rise in the CPI and a fall or maintenance of productivity and this is a disaster for the company.
Cristóbal Montoro: In this crisis, Donges argues that we must not deviate from the path of structural reforms, which he called supply-side reforms, linked to competitiveness and productivity. He was critical of the flexibility that has been granted to the Stability and Growth Pact in the European Union. He pointed out that the first breaches came precisely from Germany and France in the 2002 crisis. After the attacks on the Twin Towers, the world economy collapsed and Germany and France failed to comply with the Stability Pact. This led to a revision of the Stability Pact, which was a step backwards. We are now at a critical juncture. The European Commission has just announced that next year, in the first quarter, it will propose a revision of the fiscal rules. Donges insisted in his recent work that we cannot go backwards in terms of the European Union if what we do is to give up the rules because Europe is an integration with rules and with the demands that this entails. The big open question now is what this revision of the rules will consist of. From the left-wing ideological point of view, it is already being celebrated as a triumph because a relaxation of the rules is anticipated with the formation of the new German government, but I have to see this for myself. Either we understand and accept that the European Union is about rules, that we can change concepts in these rules, that we can change the growth potential as a benchmark for this fiscal rule, but we cannot do without a rule that aims at medium and long-term budgetary stability.
Amadeo Petitbó: More than one is in for a surprise with the German government. There is a stereotype and the unenlightened left, which is the majority of the left, believes that the future is a simple projection of the past in the case of Germany. I have my doubts and I think they are going to discipline us from the point of view of spending. And they are going to be demanding in the way they spend these billions that the president of the government announces saying that he is going to solve all our problems.
In addition to what he said about the Stability and Growth Pact, Professor Donges had been very critical of the abandonment of the Lisbon Pact, when Durao Barroso had power in this area. Many of us thought that Europe could become modernised through all that was promised in the Lisbon Pact, but it demanded such an effort, especially from the authorities, that many preferred to abandon the Pact and continue along the traditional path of intervening in the economy. Thinking about this intervention, two news items came to mind and I imagined what Professor Donges' reaction would have been. One of them says that Spain has been the industrialised country where the weight of tax revenue as a percentage of GDP has grown the most, because an extraordinary phenomenon has occurred, the result of the reality that prevails at the moment, which is that GDP is falling more than tax revenue. This automatically translates, by pure arithmetic, into an increase in the tax burden on GDP, which, from Professor Donges' point of view of rationality, is not sustainable. The second is this kind of euphoria and faith, without very solid foundations, that inflation will be a transitory phenomenon and that we can therefore do without it. There are many studies that say that prices go up like rockets and down like feathers, which has almost always happened and is likely to happen again. I can imagine Professor Donges saying that we make budget forecasts and a macro picture on the basis of an oil price, on the basis of inflation, on the basis of a, b, c, d, e, on bases that are unlikely to be met. Consequently, a political strategy is being developed on a false basis, or on a fragile basis. In the event that fragility turns into a rupture, what will happen? Because to entrust everything to outside help. Today I was listening to an important government spokesman who said that we are going to give priority to investments. He then gave two examples of investment: helping some to buy housing and helping others to rent. Renting housing has nothing to do with investment spending. If we start confusing spending with investment, and transfer this to all government action, the disaster could be monumental. Following the teachings of Donges, the first and foremost thing is to maintain coherence. Economics does do this, but when you ignore the coherence of these schemes, disaster is assured. If we argue on the basis of unverified hypotheses, the risk of making mistakes is very high.
Cristóbal Montoro: In our field, when we bring politics into public life, it is quantified. In economics, facts are measured and results are measured, and that is a big difference and a very positive difference. It is measured because it is the welfare of the people. When we talk about GDP, we are talking about the income generated in a country. Spain has a tax structure that can be improved, but it is comparable to Europe. The behaviour of tax collection in this crisis corresponds to an economic situation in which income has been sustained. It is the success of the ERTEs that has meant that Social Security contributions have not fallen. This means that the collection will certainly exceed the 19, which, in turn, were historical, in this year. One year before the record of exceeding GDP is made. We did not reach the GDP and we are going to collect. There is no way around that. No one is paying into that box out of solidarity; it is because they are selling, because they are exporting, because they are paying their payrolls, etc. The economy can be read in the tax collection. If, with the tax structure, tax collection is what it is and is going to exceed historic highs, why is there a need to increase tax collection instead of the other way round? If we are already at record levels of revenue, we are going to recover the economy. It is also the first time in the history of Spain that, without devaluing, we have had a current account surplus every year since 2012, we have financing capacity vis-à-vis the rest of the world, and we have had it again in year 20. When GDP is falling by 10%, when the deficit is 10%, that means that savings are higher, 12% of GDP. There is a capacity for action and what we have to do is to channel savings towards investments and even consumption, through the generation of confidence. We are emerging from the crisis with our own resources, because we are a very competitive country, as we have never been before.
Amadeo Petitbó: This is little talked about because it is the great merit of the employers and also of the workers. Entrepreneurs have done a great job in recent years. They have realised that their future depended on their ability to compete internationally and, faced with this possibility, they had two alternatives: to take refuge in protectionism and public aid or to accept the challenge and go out into the international market to compete. They opted for the latter and they have done very well, we have very competitive companies everywhere and increasingly better entrepreneurs. And future entrepreneurs are getting better and better too, because a mentality has been generated in many young people that their future does not necessarily lie in an office in a certain ministry, but in the management of a company, and if the company is multinational, so much the better.
The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.
The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.