In my Money Week column this week, I've been explaining why the German economy is back in Europe'd driving seat. Here's a taster....
In a few weeks time, with the World Cup underway, we’ll no doubt get used to Gary Lineker and Alan Hansen reminding us to ‘never underestimate the Germans’. It’s their stock phrase, as a relatively talentless team uses reserves of power, discipline and organisation to secure itself at least a place in the semi-finals.
Just as ‘Never underestimate the Germans’ is a good rule in football, so it’s not a bad one in economics either. After two decades of under-performance, as it absorbed the horrendous problems of the old eastern Germany, the country seemed to have lost its way. Unemployment soared, growth nosedived, and its confidence evaporated.
Now there are signs that it’s re-claiming its traditional role as Europe’s dominant economy. It is the most creditworthy country in the world. It is one of the few that isn’t burdened with massive consumer or corporate debts. During the Greek crisis, it has taken an assertive role, the one nation that got to call the shots. Over the next few years, Europe will have to get used to the Germans being the dominant force again. That may be no bad thing. The German model of capitalism – engineering-based, export-led, debt-averse – is one that the rest of the world might start to find appealing again in the coming decade.
After the Wirtschaftswunder – or economic miracle – of the 1950s and 1960s, we’d got used to Germany being the economic powerhouse of Europe. The deutschemark was the continent’s strongest currency – so much so that in the 1980s, the British and the French both took to shadowing it, as the only way of bringing inflation under control.
The last two decades, however, saw a steady, relentless decline. The integration of Eastern Germany after the fall of the Berlin Wall in 1989 proved far tougher than anyone expected. The euro disguised the strength of its currency. Frankfurt lost out to London as Europe’s main financial centre. Indeed, the Germans were never really cut out for the financially-driven, debt-fuelled, casino capitalism of the last ten years. They don’t like to borrow money, aren’t interested in owning their own homes, and don’t even think much of stock markets.
Indeed, so far had Germany fallen that only a few years ago, even the British could imagine themselves outstripping the Germans. In 2004 for example, the chief economic adviser to Barclays published a report predicting that the British economy would be larger than the German by 2025 despite their larger population. There was nothing fanciful about it. If you projected the growth numbers forwards, that was how it worked out.
Except that lines on a graph are a poor way of predicting anything. This decade, the Germans will be back, and in a big way. True, the economy was hard hit by the credit crunch (the economy shrunk by 5% in 2009). The sudden dip in world trade hit its export economy as suddenly as any, and some of its regional banks lost a bundle during the credit crunch.
But it has bounced back quickly. The economy is forecast to grow by a respectable 1.5% this year. Its corporate giants are powering ahead. Total net income at German companies that have reported earnings so far this quarter have almost tripled, compared with a 54 percent profit increase for Western Europe as a whole, according to Bloomberg figures. Industrial production is accelerating., and unemployment is falling fast.
The rapid emergence of the BRIC economies of Brazil, Russia, India and China has left most of the developed world scratching their heads and wondering how to earn a living. The Germans just get on with selling them more stuff. Exports to China are now rising by 13% annually, and to Brazil and India by more than 30% a year. Indeed, Germany is still tied with China as the world’s largest exporter. But while China mostly exports cheap stuff, churned out by worker on miniscule wages, the Germans export luxury cars, complex chemicals, and expensive machine tools, made by people on good salaries.
Indeed, looking forward, German seems far better placed than almost any other developed country. It has an export-based, manufacturing economy that sells the stuff the emerging economies need. It didn’t have a housing bubble, and its consumers, while never great spenders, aren’t burdened down by debts. McKinsey has measured the combined growth of corporate, consumer, and government debt from 2000 to 2008. In Germany, it only grew by 7% over the whole eight years, compared with 157% in the UK, 150% in Spain, and 70% in the US.
That’s nice for the German, obviously enough. They won’t be running out of beer and sausages any time soon. But it also matters for the rest of the world in two ways.
First, the Germans are likely to become much more dominant within the global economy. The more money you have, the more power. Germany can take the lead role in sorting out the mess in Greece because it will be paying for it. Expect the same to be true of every financial crisis that comes around in the next few years.
Next, successful countries set a template. In the last decade, everyone wanted to copy the Anglo-Saxon model. It’s debt-fuelled, de-regulated, financially driven model of economic growth appeared to be delivering results. In the next few years, the German model will become far more fashionable.
The reassertion of German values may be no bad thing. Rhineland capitalism is, in many ways, the most attractive way of doing business. It values thrift, hard work, saving, and making things. It believes in sound money, and is suspicious of inflation. It doesn’t have much time for deficit spending, and doesn’t believe you can cure a debt crisis with more debt.
The Germans – as they usually do – take it to extremes. But an injection of Teutonic economic sternness is probably precisely what the rest of the world could do with right now.