Government and Institutions

We could do worse – follow Germany

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 whilst 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 which seem as if they are specifically designed to reduce growth.

But Germany has taken a turn for the worse too. After the Schroder’s reforms led to significantly improved outcomes in the 2000s, 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 whilst 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.

This article was orginially published on The Spectator Coffee House

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

3 thoughts on “We could do worse – follow Germany”

  1. Posted 20/08/2014 at 07:45 | Permalink

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  2. Posted 23/08/2014 at 20:59 | Permalink

    “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. ”

    More rubbish. House prices have perfectly tracked real wages in Germany for over 40 years. As they have in all parts of Europe. Even so, given their head start on us in the early 80s, land is just as expensive in Germany as here. So, quite what planning has to do with anything is baffling. Except if fulfils an ideological delusion that the State is the root of all evil.

  3. Posted 26/08/2014 at 16:02 | Permalink

    “House prices have perfectly tracked real wages in Germany for over 40 years” -No, they haven’t. They have tracked inflation, not wages. They have stayed constant in real terms, so median multiples have been shrinking. See here

    “So, quite what planning has to do with anything is baffling.” Indeed, there’s only about half a tonne of literature showing the connection between land use restrictions and house prices.

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