Thursday, September 02, 2010

Has Germany become Europe's locomotive?

By Philip Whyte

The German economy has been growing exceptionally strongly of late. In the second quarter of 2010, it expanded faster than any other economy in the G7 and faster than at any time since the country’s reunification in 1990. Industrial output is surging. The rate of unemployment has been declining for over a year and is now well below the eurozone average (let alone levels in the US). Consumer spending and business investment are picking up – and households and firms are generally less burdened with debt than their counterparts in highly leveraged economies like the UK and the US. Germany, in short, seems to have emerged strongly from the Great Recession. Indeed, some observers think it has entered a self-sustained recovery – and that it is starting to act as Europe’s ‘growth locomotive’.


If this were true, it would be welcome. Over the past decade, Germany has not been a great source of demand for the world or the European economy: in real terms, domestic demand is only about 3 per cent higher now than it was back in 2000. For most of the noughties, Germany was structurally reliant on exports for its economic growth: without debt-fuelled spending elsewhere in the world economy, it would barely have grown at all. So any sign of a sustained recovery in German domestic demand would be good news for the country itself and the rest of the world. Not only would it reduce Germany’s reliance on unsustainable (and hence destabilising) foreign profligacy. It would also allow the eurozone and the world economy to rebalance at a higher level of output and employment than otherwise.

Sadly, it may be premature to conclude that Germany has embarked on a durable, self-sustained recovery that will help to lift growth elsewhere. Much has been made of the scale of Germany’s rebound in the second quarter of 2010. But it needs to be placed in context. Germany resembles a bungee jumper in the spring-back phase. It is rebounding faster than neighbouring France. But this is partly because it fell much further on the way down. The size of Germany’s manufacturing sector has resulted in greater output volatility. Germany was hit disproportionately hard in 2008-09 when manufacturers scrambled to run down stocks, but it has since benefited as the stock cycle has reversed. Even after its recent rebound, however, German output is still lower relative to pre-crisis levels than in France.

Besides, the pattern of the recent upturn casts doubt on the view that Germany is acting as a ‘locomotive’ for other countries. The pick-up in domestic demand in the second quarter of 2010 came after three consecutive quarters in which household consumption fell. As for business investment, it is still a long way below pre-crisis levels. If Germany really had become a locomotive for the rest of the EU, net trade would be exerting a drag on its own economic growth. Yet the reverse is the case: net trade has boosted German GDP growth in three of the past five quarters. True, exports to Asia are making a greater contribution to growth. But Germany’s recovery is doing little to rebalance activity in the EU. Indeed, Germany’s trade surplus with the rest of the EU has risen compared with the first half of 2009.

There is a final reason to be sceptical about the prospect of Europe’s largest economy becoming a locomotive for the rest of the EU: it is not clear that German policy-makers want it to become one. As far as they are concerned, the global financial crisis has discredited profligacy and vindicated German prudence. The lesson of the crisis, they believe, is that countries must learn to live within their means. For them, the direction of change is clear: it is for the erstwhile dissolute to shape up, not for Germany to become more spend-thrift. Any suggestion that Germany needs to adjust tends to be met with bemusement, irritation and contempt. Germany has no lessons to take (least of all from irresponsible Anglo-Saxons). And any attempt to hobble German ‘competitiveness’ will be fiercely resisted.

The hopes currently being vested in Germany may consequently be misplaced. The strength of the country’s recovery is partly an optical illusion created by the depth of the downturn which preceded it. Much of the recovery is being driven by net trade. Domestic demand is still fragile and could weaken as the government’s fiscal stimulus is withdrawn and the stock cycle becomes less favourable. And German policy-makers have yet to be persuaded that it is in their country’s interest to reduce its reliance on export-led growth. In short, Germany is not yet acting as a ‘growth locomotive’ for the rest of Europe. And other EU countries, particularly in the highly indebted geographical periphery, may have to get used to the idea that the region’s largest economy may not be about to become one any time soon.

Philip Whyte is a senior research fellow at the Centre for European Reform

4 comments:

Anonymous said...

I well remember the times when US/UK representatives literally laughed at the German way of running their economy. Too focused on producing industries, too export reliant and with a much too small services sector and little -debt financed - demand inside the country. Then the (and let's face the reality here) anglo-saxon debt/risk/leverage-dabbeling sent the western economies into oblivion. If the Germany way of acting would have resulted even slightly in a comparable mess, Berlin would have to stay in the corner and be silent for at least a decade. Not so the anglo-saxon economy-experts. Right after Europe is slowly recovering they start to sing the same old (lame) lamento about Germany. To say this clearly: Yes, Germany should slightly adapt, bolster interior demand and be a bit less export focused. BUT not and never in the way the anglo-saxon financial community wants it to. Over years Germany paid ten times the sum of the UK into the EU wallet (net!)... Germany played a major part in not letting Greece go down the speculative drain and yes, the German way of handling things didn't (and won't) generate as much profit as the anglo-saxon financial industry in good times... but it won't generate as much of a desaster either. Personally I believe a bit more of this German prudence indeed isn't such a bad idea at all.

rolf said...

A medium--sized mature economy with a potential (steady state) growth rate of 1.5 % will never be able to pull a large number of heavy wagons out of the mud. In trying it by the end of eighties , Japan, a similarly mature slowly growing economy, ended in the mud.
The picture of a mature economy growing close to its steady state acting as a "growth locomotive" in a dynamicly growing world economy (growing by 3-4 % annually) is dated and meaningless.
If a catchword is needed, Germany could be first described as a pacemaker whose efficient companies can spur structural change and productivity gains in partner countries by wiping their inefficient industries out of the market and enabling young fresh entrants to find access to resources formerly occupied by the old inefficient industries. That is an important contribution to growth in partner countries but not via the demand side but via the supply side which is the relevant side for medium-term growth.
Second, Germany, by its priority to fiscal consolidation now anchored in the constitution, could be described as a benchmark or yardstick for assessing the quality and credibility of fiscal consolidation in partner countries as measured by the deviation of government bond rates in these countries to German governance bond rates. Financial markets need such yardsticks.

Looking only at German exports diffuses the fact that Germany is also the most open economy in the EU in terms of import shares. An import/GDP ratio of 41 % (2008) is unmatched in the EU compared to countries of similar size like UK or France.Furthermore, exports are measured as gross output and thus hide the fact that they include a large number of imported inputs which are assembled in Germany("Bazaar "economy). Germany's end of pipe role in cross-border value added chains explains the high import share. That role is beneficial for the partners.

Finally, Germany policy- makers must not be persuaded that it is in their country's interest to reduce its reliance on export-led growth. That has never been their job in the past and they wisely refrain from subscribing to it today. As a member of the Euro-zone, Germany neither pursues an exchange rate policy undervaluing its currency or provides export-stimulating instruments like export subsidies. Nor does it have a direct influence on wage negotiations except for the government sector which however has been decoupled from wage negoations in the private sector. Germanys economic structure simply reflects a high degree of persistence in terms of the traditionally high importance of the manufacturing sector. In adjusting and fine-tuning that structure permanently to meet the demand of both European and non-European markets , it has been very succcessful to penetrate into new markets and to meet changing demand in emerging markets like China. That success is owed to the companies themselves rather than to the government. This structure, however, is not costless, especially when external demand falls in a synchronised way all other the world (as in 2009). And it means an impulse for recovery, respectively, if world demand recovers synchronisedly due to the stimulus programmes set up in each country (as in 2010).
Rolf J.Langhammer, The Kiel Institute for the World Economy, Kiel, Germany

StefaniWeiss said...

No locomotive, nowhere ...

I wish to share with you a slightly different view by a German economist which nevertheless might be taken into further consideration while judging German economic and political performances by CER.
At least that would be appriciated:



"A medium--sized mature economy with a potential (steady state) growth rate of 1.5 % will never be able to pull a large number of heavy wagons out of the mud. In trying it by the end of eighties , Japan, a similarly mature slowly growing economy, ended in the mud.
The picture of a mature economy growing close to its steady state acting as a "growth locomotive" in a dynamicly growing world economy (growing by 3-4 %annually ) is dated and meaningless.
If a catchword is really needed, Germany could be first described as a pacemaker whose efficient companies can spur structural change and productivity gains in partner countries by wiping their inefficient industries out of the market and enabling young fresh entrants to find access to resources formerly occupied by the old inefficient industries. That is an important contribution to growth in partner countries but not via the demand side but via the supply side which is the relevant force for medium-term growth.
Second, Germany, by its priority to fiscal consolidation now anchored in the constitution, is a benchmark or yardstick for assessing the quality and credibility of fiscal consolidation in partner countries as measured by the deviation of government bond rates in these countries to German governance bond rates. Financial markets need such yardsticks.

Looking only at German exports diffuses the fact that Germany is also the most open economy in the EU in terms of import shares. An import/GDP share of 41 % is unmatched in the EU compared to countries of similar size like UK or France. Furthermore, exports are measured as gross output and thus hide the fact that they include a large number of imported inputs which are assembled in Germany("Bazaar "economy). Germany's end of pipe role in cross-border value added chains explains the high import share. That role is beneficial for the partners.

Finally, Germany policy- makers must not be persuaded that it is in their country's interest to reduce its reliance on export-led grwoth. That has never been their job in the past and they wisely refrain from subscribing to it today.As a member of the Euro-zone, Germany neither pursues an exchange rate policy undervaluing its currency or provides export-stimulating instruments like export subsidies. Nor does it have a direct influence on wage negotiations except for the government sector which, however, has been decoupled from wage negotiations in the private sector. Germany's economic structure simply reflects a high degree of persistence in terms of the traditionally high importance of the manufacturing sector. In adjusting and fine-tuning that structure permanently to meet the demand of both European and non-European markets (together with its affiliates abroad) , it has been very succcessful in penetrating new markets. That success is basically owed to the companies themselves rather than to the government. This structure is not costless, especially when external demand falls in a synchronised way all other the world (as 2009). Vice versa, it spurs GDP growth,if world demand recovers synchronisedly due to the stimulus programs set up in each country.
To change that structure, requires a more courageous stance of the German government to liberalise (and privatise) service sectors like health and education than the governments has revealed until today. It is certainly the better way than to demand wage increases which would threaten job growth in the labour market. Finally, forget about the locomotive!"

tenax_technologies said...

The picture of a mature economy growing close to its steady state acting as a "growth locomotive" in a dynamicly growing world economy (growing by 3-4 %annually ) is dated and meaningless.
If a catchword is really needed, Germany could be first described as a pacemaker whose efficient companies can spur structural change and productivity gains in partner countries by wiping their inefficient industries out of the market and enabling young fresh entrants to find access to resources formerly occupied by the old inefficient industries. That is an important contribution to growth in partner countries but not via the demand side but via the supply side which is the relevant force for medium-term growth.

Looking only at German exports diffuses the fact that Germany is also the most open economy in the EU in terms of import shares. An import/GDP ratio of 41 % (2008) is unmatched in the EU compared to countries of similar size like UK or France.Furthermore, exports are measured as gross output and thus hide the fact that they include a large number of imported inputs which are assembled in Germany("Bazaar "economy). Germany's end of pipe role in cross-border value added chains explains the high import share. That role is beneficial for the partners.

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