A (positive) German shock?

Eurozone Watch has two articles about Germany and Italy that offer support for an optimistic view of the European economy. For a start, Sebastian Dullein argues that a comparison of Germany today and the US after the early 90s recession shows that Germany might be on the brink of a productivity surge. Dullein argues that labour productivity growth at the moment is being depressed by the re-absorption of the long-term unemployed, which also happened in the US in the early 90s. He quotes a figure of 7.6 per cent for productivity change (per employee, rather than per hour worked) in the metalworking industries (in Germany, a term that covers most of the industrial sector), which is positively stellar – after all, the US didn’t pass 2 per cent per-hour until 1998, well into the boom.

He also criticises Wolfgang Munchau for arguing (in essence) that there had been no structural reforms that accounted for productivity growth, and therefore that there was no growth. At this, I think I heard J.K. Galbraith’s ghost chuckle into his martini – it is indeed a fine example of all that is wrong with economics as a discipline that one can argue that we must all reform because there is a crisis, the evidence of that crisis being that one’s reforms have not been adopted.

An alternative argument would be that there was not all that much wrong with German firms in the first place. It is suggested that R&D spending is too low, but Dullein argues that it’s picking up. And anyway, their products can’t be that bad, as the rest of the world wants to buy German exports more than anything else. He also notes that there has been a wave of capital investment since 2002.

This possible German shock is already reverberating interestingly. Italy, for example, is experiencing better economic times, with growth picking up and strong industrial order books – especially on orders from France and Germany for capital goods. The growth is despite an increase in the tax take, with the result that the government is likely to have a chunk of change on hand. The OECD and the EU Commission would rather like to see that used to cut the monster public debt, still running at over 100 per cent of GDP. But the political situation might make that unlikely.

That might be the good news, though. When wasn’t the Italian government up to its eyes in debt? And it’s almost traditional that political turmoil in Italy is accompanied by good economic news. The difficult bit, though, is that Italian inflation is running somewhat slower than German – this implies, of course, an improvement in the terms-of-trade. Probably, Italy has done some internal disinflation, being unable to devalue – but this implies that wages have suffered relatively. The question is how to redistribute the benefit of the German shock without killing the golden goose.

Es Lebe Das Exportventil!

Chris “Stumbling and Mumbling” Dillow has a very interesting post on signs of German economic recovery. Interestingly, the bellwether Ifo confidence index has shown a dramatic uptick, reaching its highest level since 1991. Dillow proceeds to examine its correlation with the DAX stock market index.

Now, as Chris points out, DAX-constituents are likely to be the most globalised German businesses. The DAX tracks the Ifo with about a three month lag. This all suggests that a) the most globalised German businesses are feeling chirpy, as you’d expect in an economy struggling to raise domestic demand that trades with several raging boomers, and b) that some things never change.

Back before the Second World War, before the Nazi seizure of power, there was something known as the Exportventil in German. This means something like “export safety valve” in translation. What it meant in practice was that German industrialists believed that exporting was a hedge against the economic and political instability at home, and duly specialised in exporting as much stuff as possible. That is pretty much exactly opposite to what you’d expect – after all, you normally assume that German businesses know more about Germany than Country X and therefore face lower risks at home, not to mention the foreign exchange risk involved.

There were good reasons for this, though – economic conditions inside Germany were dire, the devaluation of the mark was helpful – and alternatively you could price your products in hard currency and thus protect yourself against the hyperinflation. It also helped that you had a stream of foreign-denominated revenue, which meant you could borrow in the US. The downside of the Exportventil, though, was that German businesses were highly operationally geared with respect to world trade, and German banks tended to have long-term German assets and short-term US and sterling liabilities.

The onset of the great depression, of course, slashed demand for German exports – and the beggar-your-neighbour policies drained world trade of liquidity, which hit the Germans twice as hard because of export dependence. So the safety valve turned out to be more of a seacock that let more water into the ship. Germany, however, still seems to love exporting – which perhaps explains the strong “home bias” that Chris claims to have identified.

In a tangential theme regarding historical legacies and the way things don’t change, check out this post at Veronica Khokhlova’s. Seems the Ukrainian electoral map divides along the ancient border of Kievan Rus..