The German Model: Myths & Reality

One facet of the recent economic debate in the UK around policy and rebalancing that I’ve found interesting is the attraction of Germany to both the left and the right.

This is perhaps unsurprising, the ‘German model’ of export and investment led growth is exactly the model that many policy makers seem to be aiming for.

There has always been something of a fascination with ‘Rhineland Capitalism’ on bits of the British left (notably Will Hutton), but recently the right, perhaps thrilled at German attacks on ‘crass Keynesian’, is also showing a great deal of interest.

From the left, Adam Lent wrote an excellent article for the New Statesmen last year writing that:

George Osborne has a secret desire – to turn the UK into Germany. Look back at his speeches and statements before the election, and he makes it clear, with admirable clarity, that he wants to turn the UK into an economic mirror image of itself. His long-term vision is of an economy where exports outstrip imports, where the popular inclination is to save rather than indulge in debt-fuelled spending, where investment in the real economy is flourishing, and where, of course, the public finances are incontrovertibly sound.

Before noting:

Naturally, the Germans always had a healthy respect for free markets and competition. But one cannot overlook the central role that the publicly owned KFW investment bank plays in maintaining high levels of long-term investment. Nor should we ignore the role that genuinely bold skills policies and works councils play in ensuring competitiveness in export markets. Nor the role that a huge research body such as the Fraunhofer Institute plays in constant business innovation. No policies on an equivalent scale are likely to emerge soon from a government that seems pathologically averse to anything that might be judged interventionist or might carry a cost.

From the right, Tim Montgomerie has recently argued that:

If I had to summarise the philosophy of Osborne I’d say it was almost German. He’s fiscally conservative rather than a tax revolutionary. He’s suspicious of casino banking. He places a heavy emphasis on economic fundamentals like skills, high-end manufacturing, science investment and regionalism.

 

It’s strange how the left can look at Germany and note the interventionist approach, the skills policy, the state owned development bank whilst the right looks at the same country and sees an austere, fiscally conservative, export-powerhouse.

 Of course both are, to an extent, correct. The right chooses to ignore the extent of the German stimulus in 2008-2010:

Despite strong reluctance to boost spending and ambivalence about state intervention, Germany adopted the largest fiscal stimulus of all major European countries and the fifth largest in the G-20. In 2009, Germany’s total stimulus amounted to about $130.4 billion, which was almost six times as large as ostensibly statist France’s ($20.5 billion) in monetary terms and nearly five times as large as a percentage of GDP. This German strategy of “Keynesianism by stealth” prioritized tax cuts, subsidies to firms, and other masked measures that did not attract public criticism of public profligacy.

The left meanwhile is usually reluctant to acknowledge that much of Germany’s export competitiveness comes not from the active intervention, the fostering of SMEs and its extensive skills policy but from two decades of stagnating real wages.

Net real wages in Germany have hardly risen since the beginning of the 1990s. Between 2004 and 2008 they even declined. This is a unique development in Germany-never before has a period of rather strong economic growth been accompanied by a decline in net real wages over a period of several years. The key reason for this decline is not higher taxes and social-insurance contributions, as many would hold, but rather extremely slow wage growth, both in absolute terms and from an international perspective. This finding is all the more striking in light of the fact that average employee education levels have risen, which would on its face lead one to expect higher wage levels.

I’m not sure the British right are ready to sign up for wide spread fiscal activism and I’m reasonably convinced that the left wouldn’t support a two decade wage freeze.

There is certainly a lot to learn from Germany but, as ever, things are more nuanced than they seem.

(If anyone is particularly interested in Germany, I’d highly recommend the ‘Germany Seminar’ series on Crooked Timber  and the classic ‘Varieties of Capitalism’ book (which contains a chapter from Lord Stewart Wood) – first chapter available for free here).