Wednesday, September 01, 2004

Britain vs. Germany - A Study in Economic Contrasts

An interesting comparison of the very different fortunes of the British and German economies, and what it means in political terms for the leaders of both countries. Blair should be eternally grateful that his rise came in the wake of Margaret Thatcher's revolution.

The British press has been making much of the notion that Britain might overtake Germany as Europe's largest economy by 2025. Economic predictions, particularly those that peer so far into the future, are questionable things, but this one at least has the merit of framing a central fact of European life: a galloping Britain and a gloomy Germany.

A Mori opinion poll this month for the Financial Times revealed that only 7 percent of the British population is concerned about unemployment. The reason is that if you lose your job, you find another one: the jobless rate, at 4.8 percent, is the lowest since the 1970s.

In Germany, by contrast, the unemployment rate is more than double the British, and over 4 million people are looking for jobs six years after Chancellor Gerhard Schröder declared, on taking office, that slashing unemployment was his top priority. Katinka Barysch, a German economist based in Britain, noted that surveys suggest that two-thirds of Germans worry about losing their jobs.

"When you're worried," she added, "you don't spend. When you feel good, you do." That is a fair summary of the state of the national psyches in Germany and Britain these days. Domestic consumption in Germany remains anemic because confidence is low; companies are not hiring, because they do not see the demand to justify it. The country, still struggling with a unification hangover, seems locked in a negative spiral.

The British, however, buoyed by property prices that have risen close to 20 percent in the past year, are on a spending spree. The prosperity of central London has become almost obscene; even once depressed northern towns like Newcastle have come alive.

All the consumption is helping to fuel growth expected to reach close to 4 percent this year, about double the predicted German level.

The political impact of these differences is broad. Prime Minister Tony Blair seems well placed to win the next election, despite his difficulties over supporting the United States in Iraq, precisely because the economy is so strong. Schröder, who avoided an unpopular war, looks increasingly embattled because his talk of reform to make the German economy nimbler has not been matched by action.
So much for the superiority of the continental "social market" economy, then. One hopes America's left-leaning voters would look over the water and draw the appropriate lessons; an unemployment rate Americans consider abysmally high would be thought a godsend in France, Germany or Italy.

And what does our correspondent have to say about that supposed "historical inevitability" called the Euro? Look at this snippet:
Germany accounts for about a third of the euro economy; its fortunes, along with those of France, dictate the image of the euro zone, even if other smaller countries like the Netherlands and Finland are doing well. As long as Germany's funk continues, and France does little better, any chance of Britain joining the euro will remain remote. Why join a club that is struggling?

"Britain should certainly not join the euro zone because it is not structurally aligned," said David Hillier, chief economist for Barclays Capital. "In fact, with its flexible labor markets, lack of red tape, low savings ratio, strong housing market and current account deficit, Britain is far more similar to the United States than the euro zone. If Britain is going to join a monetary area, it should join the dollar."
Now look at the followup:
It is true the two economies seem to have a lot in common, not least the strong fiscal stimulus provided in recent years by both the British and American governments. But Hillier's is a provocative suggestion. The Finnish and Italian economies do not have a lot in common, but manage to coexist within the euro zone. Britain might also find an accommodation if it had the will. (emphasis added)
"Provocative to who?" one might ask. Amazing how our correspondent manages to ignore the arguments against Eurozone membership made both by David Hillier and the facts he himself provides, only to make the facile claim that the British could find a way somehow, if only they had the will; what is more amazing still is that he chooses Italy of all economies as one of the successful counterexamples to Hillier's argument, and then he opts for tiny Finland, whose economy is massively dominated by the fortunes of a single company, as the other data point in favor of the Euro. Is this man really that stupid, or is his ardor for the sort of "multilateralism" represented by the EU, the UN and other such international boondoggles so strong that it seems inconcievable to him that full participation in any such organization wouldn't be a good thing? My suspicion is that the latter option is the correct one.