Odd European out

The Economist had some interesting stories last week – among them a very interesting one on Germany’s economy, and another on the EU’s relationship with Russia. The one on Russia is available free here.

As for Germany the Economist estimates some interesting figures.

Germany used to be one of Europe’s richest nations. In the late 1980s its GDP per head was 20% higher than the average of the European Union. But estimates by the Economist suggest that Germany’s GDP per head fell 1%below the EU average last year (measured at purchasing-power parity, to take account of differences in prices). Only four of the EU’s 15 members now have a lower income per head.

Amazing stuff. The model of the Germany economy can no longer be sustained given its ageing population and its somewhat outdated welfare system. But is the same true for the rest of Europe? We always hear about how the US economy is always outperforming Europe – but no, read this:

Yet in many ways Europe excluding Germany looks a bit like America. For example, over the past decade GDP per head in the rest of the EU grew by an average of 2.3% – even faster than America’s 2.1% average growth. European business are often accused if being inefficient and unprofitable, hobbled by high wage costs and red tape. Yet a new study by Goldman Sachs finds that, while corporate America’s rate of return on capital is twice that in Germany, the rate of return in the rest of the EU is even higher. And though it is true that European labour markets are in general less flexible than America’s, Europe outside of Germany has been creating just as many jobs as America. Over the past decade, employment has risen by an average of only 0.2% a year in Germany, against a rate of 1.3% a year in the rest of the EU, exactly the same pace of increase as in America.

What? The Economist praising the rest of Europe? Fascinating figures though. C’mon Germany, get your ass in gear!

5 thoughts on “Odd European out”

  1. I’m no economist, but it seems possible at least that the areas of Europe that are thriving are doing so at the expense of Germany. Just as I’m sure I could find regions (say the southwest) of the US that are thriving at the expense of underperforming regions (say the northeast).

    If European companies or capital can find better returns in Spain (aren’t Volkswagen making a lot of cars there now?) or Portugal or Ireland, they’ll move there. I would imagine a more valid argument based on these numbers is that the EU has been a disaster for Germany.

    It’s now possible that Poland, Hungary, the Czech Republic and others will play the same role in the coming decade that Spain, Portugal & Ireland played in the past decade. This region of the EU will undoubtedly outperform some of the wealthier, costlier regions of the current 15 member-EU.

    And, of course, German unification was an economic disaster, but a lesson learned?

  2. Interesting thoughts John – but was German unification not a necessary event in the post-Soviet era? In what other way could things have been done?

  3. “In what other way could things have been done?” (I’m working from sketchy memories here, but I think this is what was done.)

    Well, the first thing that comes to mind was the swapping of Ostmarks for Deutschmarks on a one-for-one basis. Another was the provision of western social welfare payments to the East. These were costly unification perks provided by the west to the east.

    Germany went for instant unification. They could have phased it in as is being done with Poland et al in the EU. They are not joining the euro from 2005, but will have to wait. And, they’ve already had a decade of capitalism to get used to it. When Germany was unified, the East Germans were not equipped (infrastructurally, educationally, psychologically) and the developmental/learning curve proved much steeper than the West Germans had expected. It may have been a political necessity, but it should have been planned and implemented better.

  4. It may be hindsight, but it was foresight at one time. I had an economics class in 1991 where the lecturer basically predicted exactly what has befallen Germany. That’s the only reason I have even vague memories of the arguments about German unification.

    Most of the other EC nations were afraid to say anything because at that time Germany was so powerful and so dominant economically. But, there were a lot of people inside the EU who were “concerned” about Germany’s rush to unify. Some of them were worried about a rise in German nationalism, but many were worried that this was policy as economic suicide.

    If you read this http://www.well.ac.uk/cgol/economiclegacy/process.asp you’ll see that many people wanted a slower economic union. “Unification would certainly have taken place at a much more leisurely pace if the economists of the Bundesbank and the governing parties of the West had been able to pursue their original preferences: gradual marketisation of the eastern economy, aiding the Ostmark towards convertibility and alignment with the DM, privatisation of state assets and convergence of fiscal regimes.”

    However, I take this writer’s point that potential East German mass migration made rapid economic union a political necessity.

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