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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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