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Rewriting economic history

by Jerome a Paris Mon Dec 3rd, 2007 at 09:05:56 AM EST

Daniel Gros, of the CEPS, a relatively mainstream thinktank, compares Germany and France's economic performance. As can be expected in an article in the WSJ, one is doing worse than the other. But, while unsurprising, the arguments used show a fascinating attempt at rewriting history. The hard nugget of reality to explain away is that France's growth has been higher than Germany's for every year over the past 10 years - except the last one. Of course, that last tidbit can thus be used to spin everything:

In a nutshell, weak domestic demand over the past eight years has forced German industry to seek its fortunes abroad, whereas the opposite happened in France.

Why was domestic demand so weak in Germany? It basically comes down to a stark difference in the evolution of the two countries' real estate sectors. The key facts here are quite simple: In Germany, real housing prices peaked around 1995 and then declined continuously. France, on the other hand, experienced an unprecedented real estate boom over the last decade. French house prices have doubled relative to those in Germany.

This different evolution of house prices goes a long way to explain the different evolution in domestic demand -- which grew strongly in France, but was stagnant in Germany -- and thus the differences in overall growth rates.

The underlying direct cause for the different growth rates is indeed correct: stronger demand in France than in Germany. Where the subtle revisionism comes in is in explaining where that demand is coming from. Saying that it comes from France's frothy housing market is cunning:

  • it moves the discussion away from wages, which have been stagnant in Germany (like in the US) but not in France; the debate on sharing growth between labor and capital is thus sidestepped;
  • it allows to put France in the same group as the US and UK as they move towards a housing bubble crash and, again, sidestep the debate about where consumption growth has come from (unsustainable debt in the Anglo economies, income growth in France), and suggest that France will continue to do badly as the US goes down;
  • of course, it suggests that French banks have behaved just as "exuberantly" as UK and US ones in lending to the population (which is largely false), and that the financial crisis is not a specifically "Anglo" creature...
This is not surprising. Expect more attempts to deny the reality and specificity of the "Anglo Disease" as it becomes unavoidable...

Previous "Anglo Disease" content:

It's worse than that, if the piece you quote is anything to go by. He's implicitly saying that the only engine for domestic growth is asset inflation...
by Metatone (metatone [a|t] gmail (dot) com) on Mon Dec 3rd, 2007 at 09:33:23 AM EST
He's implicitly saying it's the right thing to do...
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 3rd, 2007 at 09:51:25 AM EST
[ Parent ]
I now count three explanations for Germany's weak internal demand:
  • stagnant wages leading to less available income
  • stagnant real estate prices leading to less available debt
  • stagnant population growth and ageing leading to a higher propensity to save
The last explanation has been forwarded by Edward Hugh and Claus Vistesen. Of course, an ageing population that does not grow might also be expected to cause stagnant real estate prices.

As consumer confidence has been relatively high throughout 2007, the demographic thesis has lost a bit in power.

by nanne (zwaerdenmaecker@gmail.com) on Mon Dec 3rd, 2007 at 10:03:40 AM EST
A sub-point to your first item would be job exporting.

In the 90s, German businesses woke up to the fact that they had the equivalent a "little India" at their back door, i.e. countries with a motivated workforce - many of whom spoke German - willing to work for cheap (except that this workforce had a higher proportion of skilled industrial trades).

Consequently, throughout the 90s German industrial companies - both large majors and SMEs - transferred a lot of their manufacturing east.

This has contributed greatly not only to stagnant incomes but to a general atmosphere of insecurity.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Mon Dec 3rd, 2007 at 10:42:58 AM EST
[ Parent ]
Yeah. I read a recent report, though, that many of these businesses, especially the SMEs, are now coming back to Germany -- management issues, lower productivity, hidden costs, etc. all played into the fact that the east was far less attractive than it had seemed.

Think it was in the Spiegel but I don't know for sure...

by nanne (zwaerdenmaecker@gmail.com) on Mon Dec 3rd, 2007 at 11:59:53 AM EST
[ Parent ]
I'd like to understand how a property boom fuels domestic consumption anyway. Some make money out of it, and so may spend. But there's a buyer for every seller, and rising prices mean the buyers are having to raise higher loans (constricting their available income as they repay higher annuities).

Unless refinancing mortgages allows a third group, those who have owned property for some time but are not selling, to pull "value" out of their asset and spend money. But that kind of credit was not available in the French banking system.

From memory, the French property boom ran from around 2000 to probably, last year. Not ten years.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 3rd, 2007 at 10:04:11 AM EST
The "Mortgage Equity Withdrawal" transmission belt is direct from housing wealth to consumption, but only relevant to the anglo world. Everybody in France seems to understand it is insane, except Sarkozy (who is pushing for it with other's money, and has now made it legally "available", but nobody would use it anyway). There is still a real but less efficient "psychological" transmission belt (like: your saving rate gets down to zero if you feel your house is already saving for you).

I think the difference in house prices between France and Germany boils down to one very simple fundamental: demographics. France is in a mini baby-boom, whereas Germany is plainly dying in the nursing home. The same kind of fundamental will drive the long-term recovery of other markets, like Ireland (OK long term), or Spain (no kids, will crash forever once the retired britons are forced to pull back with there pound-denominated pension slashed 30% by the coming pound crash)


by Pierre on Mon Dec 3rd, 2007 at 10:26:03 AM EST
[ Parent ]
your saving rate gets down to zero if you feel your house is already saving for you

Yes, there could be a "wealth effect". But one would expect it to bring down the savings rate, which hasn't happened in France. It is somewhere between 15 and 16%, as it was in 1999 before the boom. There was an uptick in 2001, 2002, then an easing off, but no really significant fall.

In fact, this can fit with my point above: as the grasshoppers spend (because they have made money on the boom), the ants save (because they are faced with a rising barrier of house prices and feel forced to save yet more).

Your demographic point offers an at least partial explanation for increased domestic consumption because the demand for new housing is (still) high and the building industry is at full stretch, creating jobs. (Quand le bâtiment va...) However, if credit doesn't follow, new housing will slow down and construction workers get laid off. From anecdotal local evidence, I know that demand for new housing is stymied by difficult credit conditions, and builders' order-books are emptying.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 3rd, 2007 at 11:45:58 AM EST
[ Parent ]
It's not just that.

I believe that Germany has a much higher proportion of rented property than anywhere else and that Germans are quite happy with that.

We have seen quite a few "locusts" catching a cold by buying up thousands of German properties, thinking they could bring in the joys of mortgage slavery, and thereby turn a nice profit, only to find that most tenants are quite happy with the way things are...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Dec 3rd, 2007 at 12:44:50 PM EST
[ Parent ]
I have read a fair amount of 19th century British economic and social theory.  Although many Victorian arguments have been dusted off to justify 21st century neoliberalism and the Washington Consensus, this tradition does not explain the particular combination of asset inflation, debt economy, the shift of risk sharing and labor arbitrage.  Perhaps it is merely what you do if you want to split off the value going to the Middle Class while still presenting the impression of economic growth for that class.  I have tried to follow Jerome's comments on neoliberal policies that result in the "Anglo Disease", but have yet to see a concise outline.  If I have missed it I would appreciate the reference.
by bellumregio on Mon Dec 3rd, 2007 at 12:07:51 PM EST
The Anglo disease is a reprise of the so-called 'Dutch disease', which supposedly an process that develops when a country gets too rich from one sector of its economy, and other sectors are thereby destroyed. Originally, this was thought to apply to Dutch gas, although you can also go back to Spanish gold (well, gold the Spanish looted from the Americas). If I received my stories correctly Adam Smith basically made the same argument over 200 years ago.

Anyway, the financial sector is thought to have done the same to the UK and the USA. There's something to that, in that these countries have a very low share of manufacturing in their GDPs compared to other 'western' countries.

Now that the house of cards built on the fancy financial constructs drawn up by economists, contract lawyers and investment bankers is falling down, the UK and USA are thought to be at much more risk than continental Europe or Japan. That's how we can talk about a 'disease' rather than successful specialisation.

At least that's what I've gathered...

Anyway, I've started wondering recently, what about Norwegian gas? Their reserves are much bigger than the Dutch and they're a smaller country with less industry. Is or was there a Norwegian disease?

by nanne (zwaerdenmaecker@gmail.com) on Mon Dec 3rd, 2007 at 06:16:59 PM EST
[ Parent ]
No time for an extensive answer, but:

a) I think there are signs of the issue in Norway. (I don't know if Solveig would agree with this.)

b) The Norwegian government seem to have looked at the results of the Dutch situation and created the oil fund and other government vehicles to try and avoid it happening, with some apparent success. (I think Solveig might agree with this.)

by Metatone (metatone [a|t] gmail (dot) com) on Mon Dec 3rd, 2007 at 06:55:00 PM EST
[ Parent ]
I have no time for a long answer either, but I can confirm that every Norwegian government since oil was discovered has been very aware of the dangers of becoming too dependent on the oil industry.

I would say we have been quite successful in maintaining a diverse knowledge based industry spread over the whole country - although small scale compared to those in more industrial nations.  Much of this new industry is, of course, related to oil.  Every oil company that drills on the Norwegian shelf, has always had to source a certain percentage of their services from local firms.  This has given us unique  knowhow in certain niche areas.  

Education has been key to achieving this.  I believe the Norwegian population has one of the highest levels of education in the world - and education has always been free (nothing to do with oil-money).

Could write more on various efforts to diversify, but need to stop here...


by Solveig (link2ageataol.com) on Mon Dec 3rd, 2007 at 08:04:24 PM EST
[ Parent ]
This comment intrigues me, bellumregio, and I'm not sure I understand it. When you say:

this tradition does not explain the particular combination of asset inflation, debt economy, the shift of risk sharing and labor arbitrage

do you mean, by this tradition, neoliberalism/Washington Consensus, or the C19 British tradition?

I'm not out to make an argumentative point, I'm just interested in what your thinking is. Can you expand?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Dec 4th, 2007 at 09:38:36 AM EST
[ Parent ]
I added links to the whole "Anglo Disease" series to to the diary after the fold. Maybe you can find a concise statement of the concept in the first one.

We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 09:45:25 AM EST
[ Parent ]

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