Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Europe.Is.Doomed (6) - 'impressive' German economy needs (what else) "reform"

by Jerome a Paris Mon May 19th, 2008 at 09:58:01 AM EST

Usually, I ignore editorial in papers - it's usually the microwaved edition of stale conventional wisdom. But lately, it's become quite fascinating, as the pundit class tries to process the financial crisis, energy prices or dollar weakness (in other words, grappling with Anglo Disease, Countdown Oil or Europe. Is. Doomed syndromes).

This week-end, the FT has it all, with a new name for the Anglo Disease (the nasty decade), concern trolling for the euro (The euro's success could also be its downfall - to be fair, this is an Op-Ed, not an editorial), and German envy (Germany through the looking glass). That last article deserves a detailed commentary follow me below the fold.

A proud member of the Europe.Is.Doomed series.



For leaders of a country that is so good at this globalisation business, Germany's political class is not exactly embracing the idea: raving about locusts, monsters, mutants, caravan capitalists and, most recently, monsters once again. Presumably the Jabberwock is next. Yet despite the depredations of this fearsome menagerie, Germany's prowess as an exporter is enviable - a looking-glass puzzle indeed.

Hmmm:

  • maybe the financial capitalists have very little to do with Germany's export success, which is built on outstanding engineering, highly qualified workforces, and long term relationships?

  • or is it that Germany still has politicians willing to express leftwing ideas? I understand these have become unseemly to print in English-language newspapers, but they are - gasp - still openly expressed in some countries, where it is allowed (gasp again, presumably) to criticize globalisation and, worse, to not consider it inevitable or, even, desirable in the way it's been promoted lately.


Germany's economy is a conundrum in other ways. The obvious successes are likely to be fleeting, while the real triumphs have gone unappreciated. This is a mysterious and risky combination.

In case there was any ambiguity here:

  • obvious successes: those made possible by the "Rhenan capaitalism" model;

  • real triumphs: those made possible by "reform"


Consider the apparent successes first. Germany's export performance has been impressive. According to Eurostat, Germany's trade surplus of €33.9bn in January and February this year equalled the deficits of the UK and France put together; that is no small feat. Better yet was sensational first-quarter economic growth of 1.5 per cent. In these troubled times, that looks more like an annual growth figure than a quarterly one.

A quick look at EU statistics tells me that the UK has a €23bn trade deficit, while France had a €10bn trade deficit  - it's fascinating to learn these days how the French economy is similar to the UK one - not just its trade deficit (ignoring any tourism surplus/deficit), but its budget deficit (ignoring its position relative to the 3% Maastricht limit) or its housing bubble (ignoring banks's recklessness) are now regularly compared to the UK's - I'm sure this has nohing to do with the fact that these look bad, and that misery loves company. Heck, even France's and UK's GDP are comparable these days...

Anyway, Germany looks good compared to France, thus one of the big eurozone economies looks bad and all is well.


Yet a good chunk of that growth is the result of a construction boom, made possible thanks to a mild winter. Another element may be catching up from underestimates for economic growth in the fourth quarter of last year.

It's cyclical, it's linked to "special factors", it's just a catch up. What's clear is that these good numbers do not reflect any underlying reality.


This is not to say that the boom is an illusion - simply that it cannot continue in the short term. The strong euro is already boosting imports and slowing export growth. As businesses continue to adjust prices to reflect the euro's strength, the trade surplus is likely to shrink. Growth in Germany's trading partners is slumping and the country is struggling to complement its export performance with stronger domestic spending. This quarter, the economy is fighting stronger headwinds.

Hmmm. Let's look at recent numbers, from the already quoted EU trade numbers

(in EUR bn)
Eurozone exports, Feb. 2007: 115.3
Eurozone exports, Feb. 2008: 129.3

Eurozone imports, Feb. 2007: 116.9
Eurozone imports, Feb. 2008: 128.6

And that's with the euro going from roughly 1.30 to the dollar in February last year to 1.47 in February this year.

The "headwinds" have been announced for over a year (and before that, Germany was going to suffer from the VAT increase in early 2007 - remember how that particular decision, which made it possible for Germany to have a budget surplus last year, was seen as a horrible thing back then?). And yet, here we are, a year later, with new euro records - and new export records. It has to be unsustainable.


For all that, the strange thing is that Germany is well positioned for the medium term. The current upswing has provided the stage for the labour market reforms of Gerhard Schröder, the former chancellor, to prove their effectiveness: employers have been far more willing to take on new workers, and quickly, than in the previous upturn of the late 1990s. That should be the real cause for celebration, but the good news has been masked by a general fear of global economic turbulence and particularly by high fuel prices, which have seriously dented consumer spending power.

Ah, I see - it's not reform that cut wages that are the cause for lower spending power - it's high fuel prices. How conveeeeenient. And businesses are the good guys, see: despite the "turbulence", they have been willing to hire people in record numbers. See how nice they are - it has nothing to do with crushed wages and record demand, promise, it's only "reform" in action as promised.


Chancellor Angela Merkel can hardly be expected to trumpet the achievements of a previous government, but she should build on them. Germany must renew its commitment to reform.

See how open minded we are: we're perfectly willing to praise a leftwing government (as long as it does neoliberal policies).

And how consistent we are: anything good that happens is thanks to "reform", and anything bad that happens (or threatens to happen, if only in our vivid imaginations), is aused by the lack thereof.

Display:
should warrant its own post (as part of the unfarily neglected "Anglo Disease" series):


Since recovering from recession in the early 1990s, the UK has benefited from a favourable world economy. Commodity prices have been low, and sterling strong. Globalisation, in particular China's entry into the international trading system, has pushed down manufactured goods prices, a sector the UK had all but abandoned in the 1980s.

The results for the economy were twofold. First, a positive shift in the terms of trade, as the sale of expensive financial services in exchange for cheap manufactures made Britons richer. Second, the steady fall in Chinese prices kept inflation down, and made economic management much simpler.

The final part of the story is the independence of the Bank of England in 1997, and a spectacular increase in public spending, starting in 2000. The result: a nice decade.

Most of those forces are now absent. China is starting to cause inflation as it sucks in commodities and its people increase their own consumption. Sterling has slumped. Capacity for further public spending is exhausted. In the next decade, growth will have to be earned through higher productivity, and inflation will be harder to control.

(...) compared with importing cheap Chinese goods, this kind of growth will involve hard work, to make British workers more productive.  (...) The economy may have to rebalance a little away from financial services. But nothing is likely to make the 2010s as pleasant for the economy as the nice decade.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun May 18th, 2008 at 04:29:05 PM EST
Anglo Disease in the UK is all about those "expensively priced Financial Services."

In the next decade, growth will have to be earned through higher productivity, and inflation will be harder to control.

A tacit admission that the Financial Services haven't actually increased their productivity, indeed the boom in Financial Services didn't involve any increase in productivity.

by Metatone (metatone [a|t] gmail (dot) com) on Sun May 18th, 2008 at 06:33:49 PM EST
[ Parent ]
A tacit admission that the Financial Services haven't actually increased their productivity, indeed the boom in Financial Services didn't involve any increase in productivity.

pull the other one!

next you'll be telling me they actually do produce something.

apart for jobs for dog-walkers, lol

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun May 18th, 2008 at 07:30:42 PM EST
[ Parent ]
financial services (let's be kind: beyond a certain threshhold) do wealth capture, not wealth creation.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon May 19th, 2008 at 03:46:33 AM EST
[ Parent ]
Another editorial piece woth noting:


Hard labour

Gordon Brown's pledge to introduce stronger rights for agency workers - and allow millions more employees to demand flexible working - is hard to swallow. This double dose of planned legislation would mark an extension of employment laws for which there is little need. Big employers will cope. But small businesses must be wondering what they did to deserve this body blow.

(...)

Downing Street's backing for union demands to give nearly 1.5m "temps" statutory rights to the same basic pay as permanent workers, albeit after a probable qualifying period of about 12 weeks, flies in the face of its earlier opposition to European Union proposals that should never have emerged from the deep freeze.

(...)

There is a limit to how much flexibility workplaces can accommodate. As more staff request flexible hours, the bias in favour of acceptance may weaken. Workers without children may resent having to cover for colleagues' absences. Bosses could say yes to staff they want to keep and no to those they can lose.

With the economic slowdown yet to bite, and unemployment starting to rise, this is the worst moment to introduce burdensome new employment law. Mr Brown should rethink before he makes another mistake.

Remember the rule:

  • when things are improving, you don't want to threaten the upwards movement;
  • when things are doing well, you don't want to cause the economy to slow down;
  • when things are turning south, you don't want to make things worse;
  • when things are going badly, it's the perfect time to "reform" and deregulate labor markets - workers will be in no position to resist.

There is no good time to share wealth with workers

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun May 18th, 2008 at 04:48:31 PM EST
"There is no good time to share wealth with workers" is surely the title of an article that needs to be written, because, beyond all the arcaneness of business that most people don't wish to understand, it is a simple arresting idea that doesn't require any knowledge of business. It is an explanation of why we're fucked.

You can't be me, I'm taken
by Sven Triloqvist on Sun May 18th, 2008 at 05:41:44 PM EST
[ Parent ]
Definitely agree with this.
by Metatone (metatone [a|t] gmail (dot) com) on Sun May 18th, 2008 at 06:28:52 PM EST
[ Parent ]
Jerome, you are a university economist. So isn't the conventional wisdom, that job protection measures are bad in the upswing, as enterprises don't want to employ new people, preventing unemployment going down fast, but good in the downturn, as enterprises can't get easily rid of the people they have?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Sun May 18th, 2008 at 07:16:29 PM EST
[ Parent ]
is that it's never good, as I noted above. There is no good time for labor market rigidity, and no good time for wage increases.

But I'm not a university economist.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon May 19th, 2008 at 03:48:15 AM EST
[ Parent ]
To turn what Martin says into conventional wisdom would be a small victory.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon May 19th, 2008 at 06:49:14 AM EST
[ Parent ]
It's refreshing (?) to see the word "flexibility" used so often... pejoratively.

The right of employers to demand and apply flexibility in ways that suit them: good.

The right of employees to obtain flexibility in ways that suit them: bad.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2008 at 03:32:09 AM EST
[ Parent ]

The euro is showing all the signs of strain of being the new international key currency. Manufacturers in Europe complain that its rise is imposing new levels of pain. Politicians in many countries across Europe are pressing to have more influence on monetary policy. For many of their constituents, the euro has become one of the whipping boys of globalisation. The euro is a much younger currency than the dollar was in 1944 and it exists in a political environment in which the governance structures for the new currency are not clearly defined. That makes the internal stakes within Europe much higher.

Yet the external, geopolitical stakes of currency shifts are high too. Unlike Britain in the aftermath of the second world war, the US remains indisputably the world's only superpower. It will resent what it will call the deflationary impact of the Europeans and deploy a formidable arsenal of diplomatic powers to defend the status of the dollar.

In 1944 the dollar became the world's key currency because the US was both the world's leading economic and military power. In 2008, the European Union has many economic advantages but also substantial political vulnerabilities. It is not easy being the world's main currency. It is even possible that the new strains might lead to the break-up of the monetary union.

So:

  • European manufacturers are unhappy (true, but Eurozone exports are still at a record high);

  • the US is unhappy, and will use a 'formidable arsenal' to change that (but the main weapon in the arsenal is Europe's apparently endless willingness to bend over);

As usual with econommists, reality-making trumps reality...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun May 18th, 2008 at 05:23:34 PM EST
Hey, wait, they are saying that the Euro is already the world's key currency! The replacement took place without much fanfare, didn't it?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Sun May 18th, 2008 at 05:25:29 PM EST
[ Parent ]
you're choosing reality over reality-making.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun May 18th, 2008 at 05:30:35 PM EST
[ Parent ]
There was in fact a New Bretton Woods Conference that re-ordered world currencies, officially instating the euro as top dog, but the media forgot to report on it.

(That whole piece is based on assimilating the euro to the Bretton Woods dollar, which is, to say the least, a whopping strawman).

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2008 at 03:43:56 AM EST
[ Parent ]
They're also saying the world's main currency is doomed.

Confused much?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon May 19th, 2008 at 07:29:27 AM EST
[ Parent ]
Well, we used to say that the Dollar was doomed when it was still the main currency.

What they're saying is that the Euro is doomed because it is the main currency, which doesn't compute.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Fri May 23rd, 2008 at 08:55:33 AM EST
[ Parent ]
J, your excellent deconstruction may help me get back to the right frame of mind this morning, Danke.  I seem to have awoken with Bah Humbug! disease, trying to reconcile containment vessel technologies with burning piles of garbage in Naples while the firemen get stoned and the cooks want organic food and no GMOs, and mobile phones produce bleh babies.

Whatever the Op-Eds have to say, your analyses always make me smile, especially when i remember that now i'm often paid with the world's major currency.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Mon May 19th, 2008 at 03:40:46 AM EST
Does Germany still have politicians willing to express leftwing ideas? Why not!?!

FT.com  - German president complains of financial markets 'monster'

Global financial markets have become "a monster" that "must be put back in its place", the German president has said, comparing bankers with alchemists who were responsible for "massive destruction of assets".

In some of the toughest comments by a leading European politician since the start of the subprime crisis, Horst Köhler - a former head of the International Monetary Fund - called for tougher regulations and the reconstruction of a "continental European banking culture".

by das monde on Mon May 19th, 2008 at 05:23:46 AM EST
The fun thing is that Köhler is not even left-wing - and as former IMF head, his views are largely neoliberal! I should really finish this diary... maybe when back from work.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon May 19th, 2008 at 06:52:56 AM EST
[ Parent ]
called for tougher regulations and the reconstruction of a "continental European banking culture".

But don't forget he was as well head of the Sparkassenverband, which is fighting privatisation of the public banking sector in Germany tooth and nail.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Mon May 19th, 2008 at 09:38:35 AM EST
[ Parent ]
Germany must renew its commitment to reform.

XYZ must renew its commitment to reform.

I see that written so often and am always miffed that noone in any position to do so will ask them "at what point would you say the reforms are done?"

The true answer would be never, short of de facto slavery. (of course, if they meant environmental reform, I'd be inclined to agree with the need for ever more).

I'm all for going down fighting if going down I must, but when you are not on a clear course to oblivion, why should change, any change, be necessarily better than no rush to change?
Or indeed, should Germany commit to reform, why not consider the possibility of reforming wages upwards?

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Mon May 19th, 2008 at 07:20:35 AM EST
Be serious.
by Colman (colman at eurotrib.com) on Mon May 19th, 2008 at 07:22:23 AM EST
[ Parent ]
As the Economist notes with regularity, the tragedy of France and Germany is that things are not going badly enough to justify "reform" (which is, btw, the core insight of Naomi Klein's "Shock Therapy": that "reform" is only implemented when a big enough crisis, whether natural or man-made (coup, etc...) happens).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon May 19th, 2008 at 08:01:06 AM EST
[ Parent ]
As a treat for Jérôme and the rest of us, surrounded as we are by the plutocratic press, lets revisit the Bullshit Britain artilce, written by Larry Elliot in the Guardian, some time ago.

When you get down to it, this is a country that tries to make its living from talk, talk and more talk.

One way of looking at Britain is as one big offshore hedge fund churning speculators' money while asset-strippers draw up plans for the few remaining factories to be turned into industrial theme parks.

And it really would not do to say that Britain is a servant economy, even though there are at least four million people "in service" and the proportion of the population employed by the well-off to do their cooking, cleaning, childcare and gardening is as high as it was in the 1860s.

More than half of the UK's effort in R&D is spent in just two sectors, pharmaceuticals and aerospace - two sectors, incidentally, where support from the government via the NHS and the Ministry of Defence has been considerable over many decades.

This article was produced to announce the realease of the book "Fantasy Island" by  Larry Elliot and Dan Atkinson. This fact supports the idea that words close to the truth can appear in the mainstream press only by quoting someone who is not a reporter, or something written in a format other than a newspaper.

by findmeaDoorIntoSummer on Mon May 19th, 2008 at 08:32:37 AM EST
Doom seems to be such a superior strategy that Continental Europe should consider (re-)packaging and exporting it, especially to the Anglo-American market.  Others than ET, I mean.  Make it sound happy, as in "the dawn of a doom of a dream" -- e e cummins

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2008 at 10:20:11 PM EST


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries

Democracy on trial

by IdiotSavant - Feb 14
14 comments

A Special Place in Hell

by Frank Schnittger - Feb 14
43 comments

Ingeniería Una Revolución

by Oui - Feb 7
14 comments

Trust

by Frank Schnittger - Jan 31
53 comments

Black-Ops Mercenaries On the Internet

by Oui - Jan 31
14 comments