The Economics of the German VAT Hike

I am very happy to be back here at AFOE, if not only, for a brief one-stop guest post about the economics of the German VAT hike and more specifically how market commentators and analists might just be reading the German economy somewhat falsely at the moment in the sense that they are not taking into account the implications of the sustained and evolving process of ageing in the German society. Indeed as Edward noted just a few days ago here at AFOE we might actually be talking about a clash of paradigms or at least a clash between two ways of looking at and interpreting the economic data coming out of Germany and indeed of the entire Eurozone. There are consequently many venues on which this diagreement is fielded and an important one of these is the German economy and more specifically the significance of the VAT hike and below the fold I will give my view on this topic.
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North Sea neuroses

Matthias Matussek, once London correspondent of Der Spiegel and now its culture editor, not to mention brother of top diplomat Thomas Matussek, has a book out. Wir Deutschen: warum die anderen uns gern haben können is meant to be a call for a renewed German patriotism and pride in culture. This would usually suggest a very dull book, but I enjoyed it immensely. Not for the right reasons, though.

Matussek’s approach is idiosyncratic, not that there is anything wrong with that, and the book is really a collection of essays, on topics ranging from Heinrich Heine and Angela Merkel to Britain, Britain, the German economy, Vergangenheitsbewältigung, the World Cup, Britain, Danish cartoonists, the East after reunification, and Britain. In fact, an obsession with Britain runs through this book like letters through a stick of rock-hardly a page passes without comparing some German institution, writer, company, statesman or building to one in Britain, and no chapter is complete with a volley of snark directed roughly westward.

Now, it is a truism that Britain and Germany share a mutual obsession. But this would be less interesting if it wasn’t for the sheer wordcount devoted to complaining about the British obsession with Germany. There is a complete chapter on Anglo-German relations, which I looked forward to-the possibilities are immense. Would he dig into the pre-1914 closeness that gave Bradford a Little Germany (and its own Nazi, Ernst-Wilhelm Bohle, born there in 1903 and later Rudolf Hess’s right hand) and Leeds a Dortmund Square, Robert Graves a relative on the Oberste Heeresleitung?

Nah. Instead, most of the chapter is dedicated to the results of a trip to Germany for some schoolteachers his brother’s embassy organised, and a pleasant but uninformative weekend in the country with John Le Carré.
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Optimism On The German Economy

Both New Economist and MacroBlog seem very upbeat about the prospects for the German economy. Macroblog cites Bloomberg and says “Things are definitely looking up“. New Economist is rather more guarded, pointing to the IMF forecast, and the recent Federal Statistics Office announcement that second quarter growth came in at 0%. But New Economist find faith in an (old) Economist view that things are getting better in Germany’s surprising economy (ask Doug on the main page about the surprising bit 🙂 ). As New Economist says “Of course the Economist can get it wrong, but in thbis case maybe they’re onto something”, while as Edward replies “of course the IMF can get it wrong, but in this case maybe they’re onto something”

The Financial Times definitely comes down on the side of the optimism camp, but in their case with significant prudence:

However, fears Germany?s election system might result in a fractious ?grand coalition? between the CDU and Social Democrats may have damped expectations more recently and economists remain cautious about the strength of any German upswing. Holger Schmieding, economist at Bank of America, warned that expectations were fickle and that ?the economic upswings heralded by major surges in the ZEW in mid-2002 and early 2004 both turned out to be disappointingly shallow and short-lived?.

As for me, well, for my part
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No Fire Without Smoke

First a bit of ‘breaking news’ for German readers: the main factor which has lead to the massive round of cost cutting and staff reductions in Germany has not been the activity of a small group of hedge funds, the main culprit, let’s get it out of the cupboard, has been the high euro.

Whilst the contents of G7 meetings are never formally disclosed, it has been a more or less open secret that for some time now that the focus of recent meetings has been on how to overcome perceived imbalances in the global economy, and in particular how to force through ‘structural reforms’ in countries like Germany and Japan where such reforms are enormously politically unpopular. So the structural reforms have been pushed via the indirect route: making them virually inevitable due to cost pressures in export dependent economies.
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The UK as number one

Since the 1960s Germany has had the largest economy in the EU but Nigel Griffiths, the UK trade minister, thinks all that might change :

“I think that construction and manufacturing alone as sectors could ensure that within 10 years we [the UK] overtake the German economy. We’ve got to see whether we cannot become the third biggest economy in the world* in terms of gross domestic product. I think that is feasible.”

Now before our British readers start singing ‘Land of Hope and Glory’ and waving their Union flags, an important point. He’s talking rubbish.
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