Duncan’s Economic Blog

The German Model: Myths & Reality

Posted in Uncategorized by duncanseconomicblog on March 25, 2011

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).

12 Responses

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  1. Tom said, on March 25, 2011 at 11:57 am

    Rather than witter at Duncan on Twitter, two points sprung up here:

    1) Germany tends to have a partnership model based on long term relationships between banks and industries, which can help overcome temporary shocks and aids strategic investment rather than short term profiteering and the insanity of banks forcing the company into liquidation because it’ll make them money

    2) If Osborne thinks he can turn the UK into Germany without a class of proper industrialists (by which I mean strong leaders who understand both how finance operates *and* the professional detail of their industry) he’s bonkers. We’re not making them any more for much the same reason we’re not making much of anything any more – Thatcherite anti-professionalism kills them at source. Germany, by marked contrast, fetishes professionalism to an often absurd degree (try calling a Doktor ‘Herr’ sometime). A bit of that and a lot less managerialism would be very welcome.

    • duncanseconomicblog said, on March 25, 2011 at 12:53 pm

      Fully agree on both points.

  2. Stephen said, on March 25, 2011 at 1:47 pm

    A question about real wage stagnation in Germany?

    Did this stagnation make equivalent real wages in Germany lower than other EU countries (e.g. are Doctors paid less than in Portugal, Greece, Spain)– or did it bring them down closer to the level of the rest of the EU?

  3. Indy said, on March 25, 2011 at 5:37 pm

    Out of interest, do we have any apples-to-apples wage stagnation figures available?

    Workers in Mittelstand vs workers in similar firms in the UK?
    Or even just median wage stagnation in the UK and Germany?

    I haven’t had much success at digging them out.

  4. Stephen Boyd said, on March 25, 2011 at 9:05 pm

    Should be noted that labour costs in Germany remain significantly higher than in the UK (55,000 euros per employee compared to 39,500 according to Eurostat yearbook) and, despite recent reform, the labour market much more stringently regulated:

    http://www.oecd.org/document/11/0,3746,en_2649_37457_42695243_1_1_1_37457,00.html

    Seems to me that the UK is light years from developing the German culture in finance, industrial relations, innovation and management. The risible ‘enemies of enterprise’ approach to economic development embedded in the Budget will shift us further away from the German model – not closer to it.

    Of course, as the periphery suffers, Germany is benefitting massively from euro membership. A floating deutschemark would rocket…

  5. Dave Holden said, on March 25, 2011 at 9:20 pm

    Which to me highlights how unhelpful the myopia induced from viewing these issues from a set political perspective actually is.

  6. Adam Lent said, on March 25, 2011 at 9:29 pm

    Good post and thanks for the plug. I can’t insert the link for some reason but Beyond Brics has a post today outlining more evidence of the severe upward pressure on Chinese wages. Maybe Germany will be in a position to loosen its hold on wages and still compete in export markets soon. The key point being that low wage inflation is not necessarily a condition for export success even if it has played a part since the rise of the East over the last two decades.

  7. yorksranter said, on March 26, 2011 at 7:24 pm

    There’s a simple reason why everyone is fascinated with Germany – it’s the best example of how to run a medium-sized workshop economy in northern Europe that also has a significant financial centre and a media speciality (publishing in their case). And there’s the history – 1914 was a brothers’ war…

    From my point of view, the distinction is that Osborne wants to be more like Germany but doesn’t have any clear idea of how to get there. And he imagines that policy preferences Germany can afford because its industries are so good, like the Bundesbank model euro and the high savings rate, are the reason they are so good. Also, it’s not obvious that the world needs another competitive devaluer.

    Of course, you can overestimate the importance of the Lohnzurückhaltung. It’s not like Porsche or AudiVW or BMW or Daimler Benz or Hugo Boss are price leaders in their respective markets:-) In my own industry, Rohde & Schwarz will sell you a spectrum analyser for €10,000, which is fantastically expensive when you think there are mobile phone apps that will give you a significant fraction of its features, and you could run something like BeagleBoard to get them working in the cellular bands for €500, but serious mobile network engineers keep buying them. They have reasons, one being that the main reason for replacing one is that a guy with an AK47 took it…

  8. Stephen said, on March 28, 2011 at 9:55 am

    Hi Duncan
    thanks for the link…but reading that I’m still not clear whether EU wages in the periphery countries have just been rising to the EU average (albeit without any increase in productivity) and German wages regressing to this average. The link explains the direction of travel but not location of relative wages.

    I really don’t know and am genuinely curious..it certainly seems to me that many of my German friends- in professional and research jobs– are still what I would consider: very well paid.

    This question seems very germane (sic) if we are going to eulogise the thrifty Germans or slag off the feckless PIGS.

  9. […] note how German wages have declined in recent years – something I have written about myself. However this phenomenon, whilst not desirable, is global (and also present in the […]


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