Germany makes economic comeback
Britain’s economic ascendancy in Europe could soon come to an end as German competitiveness recovers, writes Christopher Smallwood. A few days ago, Wolfgang Munchau, the FT’s European affairs commentator, suggested that Britain’s economic ascendancy in Europe could be coming to an end. “What masquerades as an economic miracle in the UK may in fact be nothing other than an old-fashioned Keynesian spending boom,” he thundered. What we had seen under New Labour could simply be “the first part of a boom-and-bust cycle” — with a long bust to come.
The speed with which German industry is making itself newly competitive is simply amazing. Hourly labour costs in Germany, which were 20% higher than in France as recently as 1997, are now only 5% higher, and the rate of progress shows no sign of abating. German business is sorting itself out. Put these two observations together and we have an intriguing question. Could it be that over the next five to ten years, Britain and Germany could swap roles, with Germany becoming the economic powerhouse of Europe, while Britain is once again seen as a less efficient trading partner, suffering from its traditional weaknesses of skill shortages and inadequate investment? To answer this, we must ask why Britain has boomed, and what the sequence of events in Germany is likely to be as its industry becomes steadily more competitive. The British side of the story is scarcely a secret. The principal driver of growth during the Labour years, similar to the US, has been rampant consumer spending. Gordon Brown has presided over the most extended spending spree ever recorded, financed by an unprecedented increase in household debt. And in the last parliament, the economy received a huge additional boost as the government’s finances swung from a £15 billion surplus in 2000-1 to a deficit of about £35 billion now in order to pay for rapid growth in public spending.
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