Germany is not turning on itself

I’ve recently read some interesting but somewhat shocking article, recommended by FT alphaville, in The Globe and Mail (Canada): “Germany’s season of angst: why a prosperous nation is turning on itself”. Fortunately, the author Doug Saunders is wrong.

Describing Germany’s booming economy, he writes:

These are, by several measures, the most successful people in the world. Yet it is very hard to find anyone here who is happy about this state of affairs.

And from my personal anecdotal evidence, he is right. When I talk to my fellow Germans about the economic situation, I have the same impression. But why is that? Doug’s interpretation, that Germany is afraid of change, involvement with the outside world, immigration or technological progress may be fitting with an earlier image of Germany. But I find other explanation much more plausible.

For starters, Germans fear the consequences of the Euro crisis in part because some politicians, academics and the media deliberately nurture fear. From “defending the Euro” to Prof Sinn’s exaggerated Target-2 arguments, from claims of high inflation to a Lehman-moment, the Germans are being told that the economic risks for them are huge and imminent, which is only partly correct (if at all). Interesting enough, the political risks – that the German taxpayers will become the major creditors of the periphery thanks to fear-induced bailouts (money and friendship…) – is discussed much less often.

But more importantly, Germans have lived through 15 years (!) of near-stagnation or mind-bogglingly high unemployment or both. That shapes your expectations in two important ways.

First, Germany knows how difficult it is to integrate and reform an economically (much more) devastated country of roughly the size of Greece. In fact, they have just been through it. So not only are they jolly well fed up with paying for something like that: after cumulated net public transfers of €1400bn (it’s not a typo), there are still €6bn in net transfers going to Eastern Germany. Per month. (The brain drain from former Eastern Germany was heavy, so how much “Western” Germany really payed is debatable.) At the same time, many Germans feel obliged to help European friends according to a recent poll:

A new survey finds that 60 percent of Germans believe their country has to help Greece in the eurozone debt crisis — like it or not.

Anyone caught in this tension will stray to extremes at times (like the person that Doug interviewed). The trigger may be when the Greek press retaliates with Nazi-jargon to German tabloids’ disgraceful headlines. Or when German politicians – supported by part of the German press – keep talking about “rescuing Greece” instead of being honest about what is actually being rescued: German investors and banks.

Second, after a decade-and-a-half-long economic struggle, Germans simply cannot believe that those times have finally passed for good, which is fully understandable for a country in whose national psyche security comes first. And no, Doug, the German boom is neither built on the birth of the Euro nor on “a deliberate strategy to keep labour costs low and productivity high”. It is built on Germany having re(!)-gained its competitiveness (warning: shameless cross-linking) and an ECB that will have to conduct too loose monetary policy for Germany in the years to come.

Doug’s other examples, immigration and a new protest movement, as well as nuclear power and the Libya war, have multiple roots that are too complex to discuss in a single post. He might have a point here, but there are more sympathetic and equally plausible explanations. For instance, the success of a populist and alarmist book by Thilo Sarrazin about the alleged decline of Germany is a late response of the German public to problems that have been piling up largely unaddressed over the last 30 years. In this context, Doug much too easily dismisses the internationally underappreciated contrast to Italy, Netherlands, France or even Sweden (!), not to mention Austria, that no right-wing populist party has made it into the federal parliament during the last 20 years, despite an unmatched economic malaise and a proportional election system.

Germany is not turning on itself. Germans just have a hard time dealing with and making sense of the current economic situation – and who could blame them? But if you give it some time, you will see that the 2006 & 2010 World Cup euphoria was not just a break from a national state of angst.

21 thoughts on “Germany is not turning on itself

  1. Pingback: Kantoos @ A Fistful of Euros | Kantoos Economics

  2. 1) German competitiviness is based on their Lohnzurueckhaltung, not on innovation. This is not a sustainable model.

    2) This is a feudalic country with feudalistic elites and miriads of slaves working for food. The typical german paranoia is the main instrument to keep the slaves where they are. Ask Adolf for further details. In fact this is nation living permanently in state of permanent mass psychosis. (aka carnivorous sheep)

  3. 1) German competitiviness is based on their Lohnzurueckhaltung, not on innovation. This is not a sustainable model.

    That is strong distortion of the truth. It is based on both. Many German companies are on the leading edge technologically, despite a deplorable technophobia in large parts of the public.

    2) This is a feudalic country with feudalistic elites and miriads of slaves working for food. The typical german paranoia is the main instrument to keep the slaves where they are.

    German median income is quite high. Also the middle class is quite large. Now, from the German school system you can conclude that many in Germany are not shy about admitting that they consider some born members of the underclass, but that is not the same thing as having a large underclass under a small elite.

  4. But more importantly, Germans have lived through 15 years (!) of near-stagnation or mind-bogglingly high unemployment or both. That shapes your expectations in two important ways.
    However, the situation in many other countries (like in Italy where I live) has not been better (if anything it has been worse).

    http://www.wolframalpha.com/input/?i=italy+real+gdp+growth+1992-2007
    http://www.wolframalpha.com/input/?i=italy+unemployment+1992-2007

    So when we compare the germans to other european nations, I think we can conclude that the germans fared quite well and still do.
    Do the germans realize this?
    If they realize this, do they believe that this happened because EU policies disproportionately benefited Germany, or do they believe that this happened because germans work harder, are smarter etc. ?

  5. In this context, Doug much too easily dismisses the internationally underappreciated contrast to Italy, Netherlands, France or even Sweden (!), not to mention Austria, that no right-wing populist party has made it into the federal parliament during the last 20 years, despite an unmatched economic malaise and a proportional election system.

    I believe there is a 5% threshold parties need to pass before being represented in parliament.

  6. @Random Lurker
    “So when we compare the germans to other european nations, I think we can conclude that the germans fared quite well and still do.
    Do the germans realize this?”

    By what measurement? In the early 90′s Germany was #3 in per capita GDP in the EU. When the crisis began in 2008 it wasn’t even in the first half of the old EU15. Italy is by no means a very good comparison because they arguably were the worst performer of all in the Western world.

  7. I do not know any other European nation with so low social mobility of lower classes and so high level of asymmetric unearned privileges of the respective Bildungsbuergertum. A typical German Steuerbeamte will benefit from privileges characteristic for upper classes in other societies, and the sheep will pay for that.

  8. @GS

    In “absolute” terms of GDP per capita:

    http://en.wikipedia.org/wiki/List_of_sovereign_states_in_Europe_by_GDP_%28nominal%29_per_capita

    If we compare the per capita GDP (Im’ using the IMF stat), the only “big” european nation that can be compared to Germany is France, but the two have very similar levels.
    On the other hand, if you compare Germany to Spain, Germany has +30% per capita GDP than spain, which is a quite big difference.

    It is true that some nations like Ireland or Norway have still higer GDP per capita, but those nations are really small in terms of inhabitants, and in my opinion this means that we cannot make the comparison because those nations could be hyperspecialized in a particular field, like finance for Ireland, whereas for a bigger nations this is harder.

  9. Also, when I say that Germany is faring well, I mean that there are not “hard” explanations to why german per capita GDP is higer than, say, greek per capita GDP, since it seems hard to say that Germany can make use of better technologies than those available to the greeks, or that german workers are so much more skilled or more hard working than greek ones, so that my baseline expectation would be mostly equal per capita GDP across the EU.

  10. @Random Lurker
    Surely the gap between Germany and Spain was much bigger than 25 % (it’s closer to that than 30 %) ten or twenty years ago. Based on a comparison of where Germany stood relative to everyone else in 1990 or even 2000 there’s no way you can say Germany fared quite well since then. In absolute numbers it’s been overtaken by several countries, even by France. The fact that Germany still has average GDP numbers is mainly a result of having been among the leading group in terms of GDP 20 years ago. Germany today is nowhere near being a GDP leader. And that relative decline and lack of growth pretty much can be seen in nearly every aspect that effects living standards: eroding infrastructure, falling wages, large welfare cuts etc. Even the current relatively low unemployment rate is misleading. You should take a look on how many employed people are on welfare benefits (Hartz IV) in order to make a living. The numbers are mind boggling and far higher than they were when unemployment peaked six years ago.

  11. Thanks for the interesting discussion. Just one quick reply to Random Lurker:

    It is true that every country had its problems (although the periphery in particular has done well, as has France, and even Italy in the last 10 years). And I am no expert on Italy, but the German case at least was driven by two massive shocks: reunification and the increase in capital costs, in part through the Euro. In Italy on the other hand, the political and institutional environment may hinder a more positive economic development.

    Working hard or being smarter is not the way I look at things.

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  13. Random Lurker, you say that there is no hard reason for why German GDP per capita should be higher than the Greek one. But just “working hard” or even having the same level of education (or rather skill) does not make a country wealthier. Why does the Italian region Lombardia have a GDP that is more than twice as high as the one in Campania? As far as I know, there is no significant difference in the matura exam results after high school between Italian regions, but there is a huge difference in GDP per capita between regions (also in the North of Italy, compare Liguria and Lombardia, e.g. here: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/1-24022011-AP/EN/1-24022011-AP-EN.PDF ). There are so many more things that make an economy successful.

    And by the way, I don’t think that there is any important economic measure that does not show the relative decline Germany suffered from during the last two decades. The absolute level might still be higher than in many big European countries, but compared to the development in other countries (esp. English-speaking countries) Germany did horribly. It obvious that Germans do not want another two decades like this, just because other countries who did relatively better before have had the illusion of wealth by accumulating debt.

  14. I don’t think “working harder” is a valid explanation for anything much. People in southern Europe don’t put in fewer hours. They may not have as much capital to work with. But since when are workers expected to bring their own capital? And are you working harder if you turn up for more hours, but with better equipment?

    The companies they work in may not be as well organised as German ones. I’d jump in the Regent’s Canal if either of those weren’t true. But you can’t blame the workers for the management’s incompetence or the corruption of the state.

    More broadly, the problem is that the success of Germany’s “economic struggle” is part of the problem. Some of it will be genuine productivity gains. But a lot of it is just that German workers got less for their labour.

    Now, when this effect in terms of world trade is achieved by adjusting the value of the currency, we call it a “beggar-thy-neighbour devaluation” and say it’s a bad thing. When it’s achieved by cutting real wages, we call it an “internal devaluation” and that’s nothing but ponies.

    This is just the logic of class, isn’t it?

  15. But you can’t blame the workers for the management’s incompetence or the corruption of the state.

    That is a moral judgement. Morals don’t apply. You can’t let wages exceed revenue. It is as simple as that.
    It would actually be better if laziness were the problem, as it is much easier to remedy than incompetence.

    But a lot of it is just that German workers got less for their labour.

    Yet unemployment was reduced.

  16. @ GS and various others:
    Of course I agree that, in RELATIVE terms, Germany fared worse than Greece and many others. But in ABSOLUTE terms Germany still fares better than most: If you gain 1000€ a month, and I gain 500€/month, buth then I get a raise and gain 800€/month, you are still faring petter than me.
    Part of the idea of the EU was that capital, workers and goods could circulate freely in the whole EU. I think that a natural expectation is that wages would equalize among the various countries, so that wages in poorer countries had to grow, whereas wages in wealthier countries would not grow (they could well fall).
    In part this happened, but in a big part we are seeing an unequal economy as happens in some coutries with a wealthier and a poorer part (such as northern and southern Italy, or western and eastern Germany).
    I think this is a problem.

    @The other Oliver
    Yet unemployment was reduced.
    But by “forcing” exports, this policy created trade deficits in other nations such as Greece, so that in some sense, unemployment was just “outsurced”.

  17. @ Alex

    “beggar-thy-neighbour” is a debated issue, and I tend to see it as a good thing, actually: in a period of weak aggregate demand, if countries try to devalue “competitively” (I don’t like that term), they are all using monetary policy to boost their AD, which is exactly what is needed.

    @ Random

    The “forcing exports” hypothesis needs a little more explanation. I would always start with the capital account and work from there.

  18. @Kantoos

    the “forcing export” hypothesis:

    1) Germany’s businesses sell stuf which has an high “added value”
    2) But business retains a big share of this added value, while german workers are comparatively underpaid relative to their productivity (while in absolute terms overpaid relative to many other european workers).
    3) Hence, german “demand”, that is mostly made by worker’s consumption, is not enough to absorb the equivalent of german “supply”.
    4) Thus other economies (like Greece for example) are not able to export to Germany.
    5) In the meanwhile, German business has a lot of money that doesn’t know where to invest. Hence this money is sent to the financial markets. In the end, this “excess capital” ends up financing consumption in debtor countries, until – well, I think you understand my point.

  19. Isn’t the mindboggling unemployment in Germany in large part due to the significant population that grew up in the DDR regime, and have had difficulty adapting? I recall predictions made in the press post-reunification asserting that a large portion of these folks would be “unemployable” due to the communist mentality ingrained in their minds. Consider a German born in say Dresden in 1950; fortyish as reunification proceeded. That individual still had/has a long time to live needing some means of support.

  20. Funny. In the current Foreign Policy, Steve Rattner writes,

    As Americans fret about persistent economic challenges, particularly high unemployment, a nearly opposite mood pervades Germany. Neither the economic crises in the rest of the eurozone nor the instability in the Middle East has dampened a deep-seated conviction among German business leaders and economists that two decades after the costly reintegration of East Germany the country has reestablished its position as an economic juggernaut.

    So is he right, or full of it, or what?