I was in Berlin last week, a sweltering week. I was immediately struck with the efficiency of their public services; there was eight of us on a boy’s holiday when we came out of the airport to catch a bus to our hotel; the buses arrived precisely on time and left on time. We were still dithering when the first bus arrived, and we were told to stand back so the bus could go on time – lesson learnt.
Over the week we went on a number of tours that took us to the Bundestag, different locations to look at the wall, Checkpoint Charlie and Potsdam (where the KGB was and Putin until 1990). The guides were not afraid to make it clear: how Germany was split between the allies and the Russians, how Berlin was divided by the wall, the devastation that was left behind after the war and for years having an overt presence of foreign armies on their soil reminding them that they had lost the war. The interesting thing about this (and the same was noted from brief discussions with locals about the aftermath of the war) was that they didn’t seem to be any bitterness as they had accepted their fate (although one local was very adamant that the Germans had no control over their foreign policy). Obviously, there is animosity, but it was well contained.
I guess there are a number of positives for the Germans in all this. The Russians have now left, and the allies who still have armies stationed there are there as much to serve to defend Germany as anything else; the country has been reunited, and in the intervening years Germany has developed one of the strongest and robust economies in the world – so not so bad after all.
The attitude we observed reminded me of the Clinton’s quote “It’s the economy, stupid” (Clinton’s campaign used the phrase during the prevailing recession in the US to help him win the Presidency) the German’s have benefited from not having to spend much on their own defence and of course being part of a very large EU market.
Clearly, the Germans picked themselves up, took advantage of the opportunities they had and developed a sound economy that provides a good standard of living for their people. We have all that, and we are looking to throw all this away by leaving the EU. The Guardian – 24th July 2018 – reports Rees-Mogg has now accepted that he no longer believes leaving the EU will bring us an economic benefit and even if we did get one we may be waiting 50 years before it arrives. If we do leave the EU will we be as accepting and not so indignant after experiencing our own possible calamity brought about by the Tories? – it really is all about the economy.
* Cllr. Tahir Maher is a member of the LDV editorial team
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Germany has developed one of the strongest and robust economies in the world – so not so bad after all.
Or is it? The German economy is actually much too strong and is causing its trading partners, especially euro trading partners, no end of trouble. As the WSJ says below Germany’s “coffers are overflowing” , and it is with euros that have been sucked away, via their huge export surplus, from other EU economies that need them much more.
If anyone doubts my oft made point that taxes are to prevent inflation rather than collect spending money for the Govt, they might want to think about why “no one is talking about tax cuts”. I certainly would be if I were German! And maybe a bit of extra spending too.
The reason of course is that the Germans are paranoid about inflation. They’d rather not have that extra 0.1% inflation, and it wouldn’t be much more than that, especially if it meant any of their precious euros being allowed to escape the country!
https://www.wsj.com/articles/germanys-coffers-are-overflowing-but-no-one-is-talking-about-tax-cuts-1518868801
If anyone doubts my oft made point that taxes are to prevent inflation rather than collect spending money for the Govt
Don’t recall you making this point, because a natural implication of it is that the Bank of England, tasked with managing inflation, should, instead of tinkering with the BoE interest rate, be directly adjusting tax (and import duty) rates; of which there are many to choose from …
Professor Muellbaeur recently wrote:
In the UK, higher interest rates, reduce the cash flows of debtors, and as UK household debt levels are high this implies a clear overall negative effect on household spending. Higher interest rates tend to reduce house prices, reducing spending through the channel of home equity withdrawal. Higher interest rates also lower stock market prices and income growth prospects (both exacerbated by a more appreciated Sterling exchange rate), with further negative effects on spending.
In Germany by contrast, since liquid assets substantially exceed household debt, higher interest rates tend to have positive net effect on aggregate consumer spending,
given income and asset prices. The housing wealth effect on spending when house prices fall, works in reverse. However, it also operates more slowly as there are mainly fixed rate mortgages in Germany. The effects of higher interest rates on spending via the exchange rate and via business investment operate in the conventional direction in both economies. But the overall effects on spending will be considerably weaker than in the UK. Maclennan et al. (1998) pointed to the problems for monetary union of such differences, a key argument for the UK not adopting the euro.
In both countries there are multiple channels that connect housing market institutions with productivity growth. In the UK, far more than in Germany, the fraction of total bank loans secured on mortgages has risen greatly since 1980. Since much of the extra lending has gone into higher house prices rather than volumes of housing, UK finance has been diverted from more productive uses.
Productivity growth in the wider economy tends to be enhanced by high levels of investment. There is a two way relationship between investment and growth. Low
levels of UK house-building through supply constraints have contributed to a slower rate of economic growth; and simultaneously the poorer economic growth of the
aggregate economy has held back aggregate investment in the UK, outside of housing. This has reduced productivity growth in the UK.
Germany has gained competitive advantages in the Eurozone from its lower housing costs, which is one factor contributing to the divergences in unit labour costs between the member countries.
However, this has contributed to the imbalances between Germany and other Eurozone members.
@ Roland,
We’ve had taxation long before the BoE was tasked with running the economy! That’s been a big part of the problem. Interest rates do need to be adjusted from time to time but they shouldn’t be considered the sole means by which to regulate the economy. We’ve had the Govt applying fiscal contraction to the economy at the same time as the BoE has desperately been trying to keep it going with lower and lower interest rates.
The result is that they are clsoe to zero with nowhere else to go! Then we have the problem of asset bubbles and too much private sector debt.
Money is just a tax voucher. Taxes, payable in a particular currency, make money worth something now there is no gold or silver backing to any modern currency. What else is there?
http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html
@JoeB,
“…..In Germany by contrast, since liquid assets substantially exceed household debt, higher interest rates tend to have positive net effect on aggregate consumer spending”
This is possibly a second order effect. Lending, in both countries, works the same way. It initially enables the borrower to spend more. There’s no point borrowing money if you don’t plan to spend it. But then the borrower has to repay the loan. Over time they doesn’t have any more spending money than they would if they hadn’t borrowed. So after a while we have a situation of debt deflation as the borrowers are actually spending less than if they hadn’t borrowed in the first place.
So the UK Govt then encourages the BoE to lower rates and encourage yet more private sector borrowing to make up for too much previous borrowing. That’s where we are now!
Because Germany has a steady influx of euros into its economy there’s no real need for any large scale net borrowing -either by Govt or the Private Sector. That’s the only reason for the differences seen.
Peter Martin,
the point that Professor Muelbauer makes is that German savings are concentrated in liquid assets not overweight in housing equity as is the case in the UK. As a consequence, higher interest rates tend to spur aggregate consumer spending in Germany, in contrast to the depressive impact of higher interest rates in the UK.
The stock market wealth effect on spending is also smaller than in the UK given lower
German participation in the stock market, as a consequence of the differences in the ratios to income of illiquid financial assets between the UK and Germany.
The ratio of German house prices to average disposable household income was on a declining trend between 1970 and 2010; even after the recent property boom, this ratio
is close to its levels in the mid-1990s, and well below its 1980 levels. As Muellbauer says: “Factors which account for the different behaviour of Anglo and German housing
markets are economic growth, demography, inflation, real interest rates, structural differences in the provision of mortgage credit, the financial liberalisation which
occurred in Britain, and the differences in tax regimes, in the provision and regulation of rented housing and in the system of land use planning. A comparative analysis
of these factors “helps to explain substantial parts of the differences in macro-economic behaviour between Britain and Germany.
German households prefer savings accounts to riskier stock market investments even though they yield virtually nothing.
University education is free in all 16 federal states in Germany. Almost half of Germans rent rather than own their homes; tenants have more rights than in the UK and rent rises are controlled. And German state pensions are generous compared to the UK, paying out 60 per cent or more of median income.
However, an ageing population may see a reversal of these saving and consumption trends and you can’t eat banknotes – no matter how many you have saved.
@ JoeB,
Yes I understand the Prof’s argument. But it’s also quite likely that higher interest rates in Germany will encourage even more saving, and even less borrowing, both of which will lead to even less spending. So I’d be interested to know just how much real data there is to support the theory. One criticism I would have of the economic mainstream is that they don’t adopt the usual scientific principle that data come first then theories have to follow to explain the facts. The nonsense that is the so-called theory of ‘rational expectations’ being a case in point.
You are right that Germans can’t eat banknotes. But at least they could paper the wall with them. They can’t do anything at all with digits on the computers of the ECB which is where their savings end up. The problem for the ECB is that the Germans have lots of credits but the Italians, Greeks and others have lots of liabilities! We can’t say the ECB is bankrupt because they can of course create as many euros as they please but that’s the only way the Germans will ever get their money back if they do decide to stop saving and start spending!
@ Tahir,
” If we do leave the EU ……. own possible calamity brought about by the Tories?…….it really is all about the economy.”
This is where many Remainers go wrong. Sure, it is partly about the economy but, as I’ve pointed out many times, being locked into a free trading trading bloc with a aggressive net exporter like Germany is always going to give us deficit and debt problems.
However, it’s not ALL about the economy. It’s likely that Ireland, for example, would have been better off from the 20s to the 70s had they chosen to stay part of the UK. But nevertheless the Irish people chose independence. It is this desire for Independence, and a desire for National self determination that Remainers don’t quite get. Sure, it often manifests itself in odd ways when people get upset about the shape of bananas or the allowable power on a vacuum cleaner but it is an indication of disquiet about the situation.
The difficulties of leaving the EU have been greater than many would have anticipated. This is primarily because we have lost, over the years, more independence than has been generally acknowledged. Getting it back isn’t quite as easy as many thought.
@ Peter
You know this point about self-determination is a bit overplayed. According to the House of Lords library, only 13.2% of our laws have anything to do with Brussels and the laws in the EU are made by faceless bureaucrats Commissioners (Commissioners only propose the laws. It’s the elected council of the EU that makes them).
We have self-determination quite frankly I believe its a fallacy to believe we don’t in the EU. We are in a club (the largest economic area in the world) and good luck to Germany for taking advantage of it – why can’t we do the same, as part of the club we do have to adhere to some rules – ok it’s not the end of the world. I don’t think your comparison re Ireland really works as we are in different economic conditions now than what we have experienced since the 1920s. Having easy access to the largest market in the world is one we as a country will regret.
Hi Tahir,
Yes I understand the arguments. But it’s not just about laws. It wasn’t about laws in Ireland’s case. They ended up with a similar set of laws after independence as they had before.
It is much more about a sense of national identity. I see it myself in my own relationship. My wife is of a more middle class origin that myself. She loves all thing French and European. She’s more Lib Dem/Green in her outlook. She doesn’t really share my leftish socialism. She sees herself as European. I see myself as British/English. It was never a problem before the referendum but it’s a big point of disagreement now.
Tahir,
The rot goes back a long way. After the war they didn’t have an Attlee or Bevin to tell them that they had won and could relax and enjoy the fruits of victory.
They knew they were in a deep hole and had to work and strive to rebuild and not just sit back and plan unlimited free health care and a welfare state.
They have also more respect for engineers and the “Ingenieur” has the status of Accountant or Doctor. Here, the word engineer is used by anyone who fancies the title. German engineering is superb and is the foundation of their economy. I am a Fellow of the Institute of Mechanical Engineers and am proud to say I have dissuaded our three children from following me. Two are accountants and the other an architect.
The country may want more engineers but as it continues to despise them well, it doesn’t deserve them does it?
They also respect and regard manufacturing. The pages of stuff I read on this site from those who share, at great length, their ideas about reviving our manufacturing factories, when it is clear they have never set foot inside one, makes me groan with despair.
So we are not Germany and to follow their path will require not just some magic “Industrial Strategy” but a major attitude reversal by our elites, which, of course, is anathema to them.
@Innocent Bystander
I agree with you – we need a lot more engineers. At the moment India has over 140k engineers graduating every year in the UK we have 46k a year. Future forecast for the UK is for 265,000 skilled entrants required annually to meet the demand for engineering enterprises through to 2024 (says someone who is an Accountant)
@Peter Martin,
The Irish parliament voted to join the UK in 1801 in exchange for Catholic emancipation (which was not forthcoming for a further 28 years). During the following century and a bit they suffered a famine which decimated the population – and which could easily have been alleviated by the rest of the UK had it been government policy to do so. They also lost largely lost their native language (which was government policy). When they rebelled they were crushed brutally. On one occasion tanks entered Croke Park and fired on spectators at a football game.
They had good reason to want to leave the UK and to place national identity above short term economic well-being. When you go through that kind of experience you know you really are trying to escape a tyrannical superstate determined to crush your own culture and nation.
The EU has never behaved in this way towards any member, certainly not the UK. The loss of national identity literally centres around trivia like the shape of bananas. Most of the supposed EU regulations attacking our culture have been fabricated anyway. https://blogs.ec.europa.eu/ECintheUK/euromyths-a-z-index/
For this reason, I maintain that any comparison between Ireland’s desire to leave the UK and the Brexit vote is invalid. The fact that something like 92% of the Irish supported EU membership in a recent poll bears this out. After all, they have the same regulations on their bananas as we do.
“we need a lot more engineers”
Two of our sons went to a grammar school. They have become accountants. Only one of their peer group studied engineering (at Cambridge) and became a Chartered Engineer.
(But he moved to Texas many years ago, Britain being such a dire place to be an engineer).
I can’t help but notice that of the many voices who support STEM and declare our need for engineers, none, absolutely none, are prepared to be engineers themselves.
” 92% of the Irish supported EU membership in a recent poll ”
That’s not much of a shock seeing how much they contribute to the EU budget (compared to the UK, for example).
@ Teresa Wilson,
I agree with you re Ireland. They did have valid reasons to want to leave. But what about Scotland? Are you saying that they can’t leave the UK unless British tanks fire on crowds in Celtic Park? If the Scottish people want their own National identity then good luck to them. I’d say the same about Catalonia and the the Basque country.
The loss of national identity is mainly centred on the EU imposing rules on what democratically elected govts can and cannot do. No-one, apart from the UK is allowed to run more than a 3% budget deficit for example. That’s a very strong rule against what Govts are allowed to borrow. But there are no rules at all on what companies and individuals can borrow. That’s a little more important than the shape of a banana, don’t you think?
If we go crawling back now we won’t be treated like the prodigal son. We’ll soon have to toe the line with these kinds of silly rules too.
“we need a lot more engineers”
This has been said as long as I remember. Incidentally I’m an engineer myself! The Electronic variety.
We used, as young students, used to get talks from various local worthies who often would espouse the same sentiments and congratulate us on our choice of future profession. Being a young clever-dick type I often used to ask them at the end how best I could switch from being an engineer to something that would pay a bit better!
Or sometimes I just asked why, if there was a shortage of engineers, that the laws of supply and demand didn’t take hold and salaries didn’t rise accordingly?
Peter,
Please accept my best regards on hearing that you are an engineer. I was pleased to hear it.
Peter Martin – ‘The problem for the ECB is that the Germans have lots of credits but the Italians, Greeks and others have lots of liabilities! We can’t say the ECB is bankrupt because they can of course create as many euros as they please but that’s the only way the Germans will ever get their money back if they do decide to stop saving and start spending!’
But they can’t do that – that’s a big part of the problem with the EMU. The Germans have put a debt brake into their constitution. So even though German spending is very much in the interests of the currency union, the German constitution says that’s not going to happen. Those who implore us to think of this as an economic project and not a political one are wrong for exactly reasons such as this – it is profoundly political. A monetary union needs a political union or we end up with the imbalances we see now. We need an optimum political zone.
As you say the ECB can just write off the TARGET2 balances so they are not a problem in that sense. But it is a huge political problem in that they would be writing off a German asset. I suspect the ‘populists’ would not be sanguine.
I was speaking with some German academics and there is a suggestion that one upshot of the debt brake might be tuition fees, at least in some Lander. I understand the subject is no longer the taboo it was.
‘we need a lot more engineers’
It’s not quite that straightforward – https://www.timeshighereducation.com/features/does-the-uk-really-need-more-engineers/2011723.article
Jackie,
You are right and that is why I would discourage anyone from entering engineering. There are no careers any more and the ones who advocate it never, ever, would contemplate it for themselves.
It’s part of the general fallacy of “investing in skills”. Why? The vacancies come first? The demand for skills comes after.
As someone who works in the rail industry – I can assure you we need more engineers
@ Tahir,
I tend to agree with you. I know from my own experience that I could probably have earned more money if I’d been an accountant or a lawyer but I also would probably have been bored rigid. As an engineer, I’ve never been short of work, I’ve always earned enough to live on and I’ve often looked forward to Monday mornings if I’ve been working on something that has created some personal enthisuaism!
So, money isn’t everything and young people just follow their natural inclinations. Having said that, a similar level of recognition for the engineering profession that we see in Germany wouldn’t go amiss here too!
The German success story is not just economic. After the end of the war, British lawyers worked with Geman anti-Nazis on a new constitution which would reflect German realities and traditions (the Lander) and avoid the weaknesses of Weimar. The result was a constitution strongly devolved and with sensible safeguards against both extremism and instability.