Coffee House

If you want a lesson in how not to run an economy, take the Eurostar

14 August 2014

3:18 PM

14 August 2014

3:18 PM

For the last five years, politicians of all shades have been banging on about how we should adopt this or that aspect of German economic policy. George Osborne argued in 2011: ‘We want to learn the lessons of the successful Mittelstand model, which has operated in Germany for many decades.’ Only a few weeks ago, Vince Cable argued: ‘Britain has not been as good as competitors like Germany in turning ideas into wealth creation.

The German economy seems to be widely admired, despite lagging behind Britain’s for nearly a generation. It is true that Germany had a better post-crash period than the UK, but its financial sector was smaller and many of its problems were hidden from view. Germany was also benefiting from the Schroder reforms during the 2000s while Britain was suffering from the effects of Gordon Brown increasing government spending and regulation. If anything, Germany did a bit better in the 2000s because Germany copied Anglo-Saxon policies, and we did a bit worse because we were copying the failed continental policies. However, the overall picture is one of British growth substantially outpacing German growth since 1980.

Today’s economic growth figures should stop the debate about Britain emulating Germany in its tracks. The German economy is shrinking and the French economy is performing very poorly. If you want a lesson in how not to run an economy, take the Eurostar. The key to the dismal French economic performance lies in government spending of around 55 per cent of national income and increases in personal and corporate taxes that seem as if they are specifically designed to reduce growth.

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But Germany has taken a turn for the worse too. The Schroder reforms led to significantly improved outcomes in the 2000s; but Angela Merkel halted policy reform. She has now moved into reverse gear. Her coalition agreement with the Social Democrats includes a national minimum wage, a reduction in the state pension age to 63 for some workers, better pensions for mothers and a 30 per cent quota for women on listed companies’ supervisory boards. It is as if Germany has looked around and decided upon a policy of ‘what counts is what doesn’t work’.

Germany has other serious long-term problems. For example, its population is ageing rapidly. The working population is going into steep decline, while the proportion of people over 65 will rise from 20 per cent to 30 per cent by 2030. This problem, combined with increased regulation, which could lower productivity and reduce participation in the labour force, does not bode well for Germany.

Politicians such as Vince Cable often take a dim view of financial speculation. However, it appears that Cable, Osborne and others have made the classic financial analysts’ mistake of backing Germany when its fortunes were at its highest.

Of course, things are not perfect in Britain. And there is much we could learn from Germany – or even France: liberalising land-use planning would make a huge difference to the UK economy, for example. However, let’s not take the wrong lessons from Germany. It has not been outperforming Britain in the last thirty years, and it is not likely to do so in the near future.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School, City University, London

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Show comments
  • uberwest

    I know you want to make a point, but I think it’s dishonest to overlook the fact that the Germans are still dealing with the consequences of taking the former East Germany on board, as well as bailing out the bankrupt EU nations.

  • Terry Field

    “Of course, things are not perfect in Britain.”

    An article that is beyond reason and belief.
    Germany runs a massive trade surplus; its technological domination of a dozen major industries is global in scale.
    Britain runs a massive trade deficit toGermany’s massive trade surplus.
    This article is monumental CR*P.

    • AtMyDeskToday

      Speaking as a regular visitor to Germany (the old East region, I have relatives there). I think your words don’t quite adequately describe just what a complete and utter travesty of the truth this article is.

  • IsambardBrunel

    I can only assume this was written by someone who has never spent much time in Germany, they have better education & healthcare, stronger manufacturing industry, better transport infrastructure, better construction quality, you name it they invest in the future rather than just trying to make a quick buck, just that crude indicators like GDP don’t reflect this.

  • rolandfleming

    In Germany:
    – a normal person can actually buy a house worth living in
    – public transport is affordable and works well
    – they have large numbers of SMEs which generate/add value through goods and services sold worldwide
    – businesses and polytechnics train highly skilled workers with good long term prospects
    – they invest long term in infrastructure and training
    – they are less dependent on the whims of the financial market
    – they have low crime
    – they don’t run massive deficits year after year

    There are bad things too (e.g., expensive energy), but the overall picture is pretty strong. Don’t forget that during the last 25 years, Germany absorbed a former soviet basket case without going croak.

    The UK is stronger than Germany in some domains, but now is hardly the time for hubris or Schadenfreude. The current growth in the UK doesn’t look very sustainable to me.

    • Terry Field

      British growth is a pump-up before the election, based on retail consumption, massive imports (look at the dreadful trade deficit 5% of GDP) – a real old Reggie Maudling fraud.
      The government of Britain under both parties has been a degenerate nightmare since 1945. With the notable exception of the fine and sainted Margaret.

  • Clive Mather

    There is a big hole in this article – it’s called eastern Germany. Germany, unlike the UK, has for the last 24 years had to invest substantial amounts of money in a clapped-out former Communist country. The GDR turned out to be in a worse state than expected (not that expectations were very high anyway!), with antiquated and worn-out manufacturing capacity geared to producing forth-rate products; crumbling infrastructure, poor housing and high levels of pollution.
    The former GDR territory has about a fifth of reunited Germany’s population. The closure or radical restructuring of industry necessarily threw a lot of people out of work leading to high benefit costs. Things are starting to pick up now, notably for example in Dresden, but it will be a while yet before the East catches up with the rest of Germany.

    • Terry Field

      This whole article is a giant whole filled with poisonous and dangerous half-truths and straight lies.

  • John Smith

    France is an economic basket case & they have to wait two years to change it.
    When Hollande was elected Miliband was a big supporter of his chosen path.
    Gives us an insight of how the Labour party could have further damaged our economy

    • post_x_it

      “they have to wait two years to change it”
      But they won’t! The French electorate’s answer to failed left-wing policies is to vote for even more left-wing policies, because the reason the last lot failed was because they were too “Anglo-Saxon neoliberal”. Obviously.

      • John Smith

        Last time they voted against ‘bling bling’ Sarkozy. Now they repent at their leisure
        I have never met a guy so hated as Hollande is currently. His polls are rock bottom.
        Try reading the comments columns in the French press.
        They are likely to vote FN big style, as they are also wondering about the eurozone & its benefits. Also mass immigration from its former colonies
        They wish to see a focus on their country & their requirements

        France is NOT Paris

        • post_x_it

          “They are likely to vote FN big style” – yes, exactly, thank you for proving my point. Of all parties the FN has the most old-school French socialist economic policies. They would take the entire universe into state ownership and have everyone retire at 40. This stuff sells in France. Realism doesn’t.

          • John Smith

            So anti immigration & leaving the EU are ‘socialist ‘ policies.
            You had better tell Hollande that

            • post_x_it

              Significantly increasing the minimum wage, reducing the retirement age back to 60 for everyone with a promise of higher pensions, protectionist measures such as higher tariffs and a ban on outsourcing, increasing taxation on higher incomes and on large companies, introducing taxation on capital… these are all socialist policies, and they’re all part of the FN’s programme.
              As regards leaving the EU, the FN’s reasons are very different from UKIP. The FN sees the EU as a conspiracy to impose rabid capitalism on France. So – yes – they take a socialist angle on that one as well.

    • Terry Field

      The French want MORE socialist big state ‘protection’, not less. That is the central appeal of the national socialist Front Nationale.

  • Andrew Smith

    The problem for Germany has been its recent success. Growth and increased tax revenues stemming from the Schröder reforms suddenly convinced everybody that not only can they now “redistribute” the wealth created, but it will carry on like this for ever with no need for investment or further reforms.

    It’s the age-old problem of Social Democracy – the cake is there to be eaten, no-one need worry that more might need to be baked.

  • William Haworth

    The Germans have more land than we do, so they can afford to relax their planning laws. We can only do that at a great cost to our landscapes.

    And managing a declining population, till you get to a stable point that is sustainable, is infinitely preferable to importing lots of young people until your little island is full and we’re all at each others’ throats.

    • GUBU

      Relaxed German attitudes to land use have often been problematic. At great cost to other people’s landscapes.

    • HookesLaw

      Go tell Putin that a declining ageing population is OK.
      Mind you in Russia they do not have much of an age problem – they are all dying off before they get old.

      Managing a population is of course dead easy
      http://www.economist.com/blogs/banyan/2014/03/japans-demography

      • post_x_it

        Yes, and doesn’t Gaza have the most favourable demographics in the entire world? More than half the population are under 18.

    • Terry Field

      70% of british land is privately owned and state owned in a way that means it NEVER comes near the market place.

  • kyalami

    Come and “liberalise land use” around here and you’ll get a pitchfork where the sun don’t shine, sonny.

  • Tom M

    It worries me when I read of someone writing that we are doing better than Germany. When I buy something it has a better than even chance of being made in Germany. The things they make are made by German companies. When I look around the UK such manufacturing that exists cars or pharmaceuticals for example, are imported and foreigners have to show us how to make them.
    Apart from our bankers gambling with our money just what is it that we do that is going to cause us to overtake Germany?

    • HookesLaw

      ‘When I buy something it has a better than even chance of being made in Germany.’ — like what? And better than even? Phones Laptops? Made in China or South Korea. Televisions Fridges – South Korea. Clothes – China Korea Asia. If a German buys an Opel Ampera its made on Merseyside.

      We may not be doing worse than Germany but I doubt we are doing much better. And of course when it comes to taking lessons from anybody or anything it would be sensible to take the right lessons.

      • returntochivalry

        Of course. How can we be paying our way in the world if our balance of payments are constantly in the red unlike Germany’s which is the other way around.

      • post_x_it

        German industry is one step further up the value chain. The Chinese, Koreans, Turks etc. are doing all the manufacturing. The machines they use are made by the Germans.

    • Alexsandr

      wander round birmingham and the black country. Still plenty of metal bashing going on there
      our computer software is some of the best in the world, including games
      our engineers and architects are up there. Ove Arup and Norman Foster

      OK we dont have the massive employers any more – but now we have robots.

      • HookesLaw

        You are right. And we might add that whilst manufacturing has declined as a proportion of the economy it has in fact grown in real terms.
        Lets face it there is no way manufacturing could match the growth in coffee shops where all the young mothers meet every day to chat and show off their babies.

        Austin Morris in Oxford used to employ 25000 now they make more cars with more added value with 5000.
        Where we have fallen down is in not manufacturing the robots.

        http://www.ft.com/cms/s/0/a5220492-a838-11e2-b031-00144feabdc0.html#axzz3ANpWPIKr

        • Chris Morriss

          But coffee shops simply move money around without adding any value. Keeping money in circulation is necessary, but you cannot do without enterprises that actually increase the wealth of the nation.

          • Terry Field

            Do the unskilled, un-employed, pissed-upon poor enjoy the coffee shops?

    • John Smith

      We used to be very good at making chemicals, ICI et al
      Then the EU foisted climate change taxes on us & the industry disappeared to the far & middle east
      Now its going to the USA, who have discovered fracking makes for cheap energy

      • post_x_it

        ICI is going strong, except it’s under Dutch ownership now.

        • John Smith

          Akzo Nobel, at least they kept the Dulux name. . .

      • Makroon

        Nothing to do with the EU. The “brilliant” city boys decided that it should be broken up and sold off “to release value” (to them).
        Astra-Zeneca is still going strong though.

        • John Smith

          Partly true on ICI, a combination of poor senior management & strident unions provided the coup de gras.
          I was referring more to post ICI chemical industry

          I see they are fighting back by importing cheaper energy, in the form of shale gas from the USA
          Ineos & Sabic so far .. .

  • fundamentallyflawed

    The UK have a major advantage over the Germans and French.. No Euro millstone around its neck

    • Tom M

      Maybe so for the French but the Euro was a Godsend for Germany.

      • Alexsandr

        it wasnt luck. the Germans designed it that way.

        • Andy

          To quote ‘It is just a German racket to take over Europe’.

        • Tom M

          I could agree with that Alexandr.

    • Mynydd

      Thanks to Mr Brown saying no.

      • Inverted Meniscus

        Labour Troll.

      • Inverted Meniscus

        But no thanks for the £168 billion structural deficit and the 7.4% contraction of the economy. Oh and the destruction of private pension provisions, failed banking regulations, Gold sales at rock bottom prices etc etc etc.

        • HookesLaw

          It is better for us not being in the Euro, but I don’t think many are fooled by brown’s reasons. There was no way he was going to give up the power he had as Chancellor.

          A realtively low value for the Euro for Germany has in fact helped its exports. Other factors may mitgate against that perhaps (?)

        • Alexsandr

          and the effect of uncontrolled immigration on GDP/capita

      • Colonel Mustard

        Brown was a communist saboteur who will be best remembered for his vindictive budgeting and scorched earth policy.

        Gold
        Pensions
        Tax
        Dodgy Bookkeeping
        Shadow government creation

        • monty61

          Do you really believe that? I much prefer the theory that he was simply utterly wrong/useless on pretty much every count.

          • HookesLaw

            There are many many books to be written on Gordon Brown… but I’m not sure that anyone has yet been born who could master the tortuous labyrinthine task. There is the added danger that it might drive the writer mad.

            I do think though that your 2 lines are a good start.

            • lgrundy

              There are many many books to be written on Gordon Brown…

              My own favourite is Vernon Coleman’s 2007 pre-crash masterpiece Gordon is a Moron: The Definitive and Objective Analysis of Gordon Brown’s Decade as Chancellor of the Exchequer.

              • GUBU

                I very much doubt there will be any more books written about Mr Brown – what write worth his salt wants a couple of year’s work almost instantaneously remaindered?

                There may be, however, the odd article or two in the British Journal Of Psychiatry…

                • AtMyDeskToday

                  Interestingly, prior to entering parliament as an MP, he worked as an on-contract employee for STV in Glasgow. He applied for a full time position (studio production manager I believe) and was turned down on the fact that was judged to have no empathy with the common man. Great socialist?

              • HookesLaw

                Like I said there is a danger of it driving you mad.
                I see that the the curse of Brown has struck and the book is for sale for 1p

                • ButcombeMan

                  There is really interesting thought about how the history books will judge Blair & Brown, in a 100 years.

                  Blair corrupt and Brown economically illiterate?

          • Andy

            He was an arrogant sh*t head. He ought to be hanged.

            • Chris Morriss

              No, he was simply incompetent, so only deserves a prison sentence.
              Tony Blair on the other hand…

              • Andy

                Can’t they both be hanged on the same gallows at the same time ? Least we save on executioners fees.

          • Colonel Mustard

            Yes, like many Labour politicians he was driven by a half-baked Marxism he could never admit to. And much of the outcome of that imperative was vindictive and destructive in consequence whilst masquerading as “progress”, “change”, “reform, etc. Since Labour and the left in Britain never admit to being “utterly wrong/useless on pretty much every count” they condemn us to their repeated experiments in failure as they try to secure a Marxist outcome without a mandate.

          • Terry Field

            And also mentally ill?

        • Wessex Man

          he was and is also a Scot who signed to Scottish Claim of Right and for that very reason along with all the other Scottish Labour MPs at that date should never have sought to govern the English!

        • Tomzz1

          The only reason Brown didn’t join the Euro was because Blair wanted to.

      • Andy

        Thanks to Sir John Major negotiating an opt out.

      • Conway

        It was the one thing he did right! It’s just as well Blair wasn’t anti-euro or we’d have been in it right up to our necks.

      • post_x_it

        Stroke of luck. He almost certainly did so for the wrong reasons.

    • dado_trunking

      Make no mistake – the failing economies of the periphery will soon be removed from the trough. Bank of Scotland bank notes will no longer be accepted legal tender in England and Wales.

      • Alexsandr

        they are not legal tender now. even in scotland.
        each scottish or NI banknote is backed by a bank of england note

        • dado_trunking

          my words: time the sponging periphery is removed from the trough.

        • HookesLaw

          I was surprised to read… ”Scottish Banknotes are legal currency – i.e. they are approved by the UK Parliament. However, Scottish Bank notes are not
          Legal Tender, not even in Scotland. In fact, no banknote whatsoever (including Bank of England notes!) qualifies for the term ‘legal tender’ north of the border”
          http://www.scotbanks.org.uk/legal_position.php

          So much for it being ‘oor poond an weel keeep it!’. Apologies for fake John Laurie accent.

          As the weblink says …’Legal tender has a very narrow technical meaning in relation to the settlement of debt. If a debtor pays in legal tender the exact amount he owes under the terms of a contract, he has good defence in law if he is subsequently sued for non-payment of the debt. In ordinary everyday transactions, the term ‘legal tender’ has very little
          practical application.”

  • dado_trunking
    • Inverted Meniscus

      Don’t start at all. Nobody understands WTF you are talking about anyway.

    • Alexsandr

      why does the government need to own any of eurostar trains? What does the government have to offer a company like this?

      • dado_trunking

        It’s a peoples’ asset in readiness of disposal. Then, once you have sold your last asset, you will think about selling your daughters.

        • HookesLaw

          Hopefully we will have sold you off (not that we would get much) before we have to sell our daughters.

        • GUBU

          How much are you offering? It’s about time at least one of them moved out of the house.

        • Alexsandr

          Eurostar is run by london and continental railways. It was a private company till 2009 when it was bailed out by the DfT.

          • Andy

            But should have been allowed to go bankrupt and someone would have bought it. That’s how it works.

        • post_x_it

          Why should government own any assets at all? That’s just people’s capital, tied up and unproductive.

          • dado_trunking

            it’s unproductive to own your own energy sectors (like most well off European nations and Russia do)? That’s a nice little red herring right there.

    • HookesLaw

      Eurostar is just a train company. As far as we are concedrned its less than half a train company. Whats the big deal?
      Shortly the line it runs on is going to be opened tp competition. Good time to get out.

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