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.
Ok it’s not complete rubbish, for it is true that the UK economy has gained ground on the Germany economy. After German unification, when the addition of East Germany (as unproductive as it was) boosted Germany’s overall GDP, the UK economy was only 61% as large as the German economy. Today, according to the IMF the UK economy is about 70% of the size of the German economy (when measured in Purchasing Power Parity, which corrects for short-term exchange rate fluctations. In market exchange rates it is about 73% of the German size).
But it is rubbish, nonetheless. To go from 70% or 73% to over 100% is a much tougher task than to go from 61% to 70%. It would require the UK to grow faster than the German economy by over 40% over the next ten years, or an annual growth rate of 3.6% higher. This would be difficult enough over ten years if the German economy remained stagnant, but assuming as in the past a sluggish but growing German economy it would require the UK to grow at nearly 5% a year.
You do not need to be a student of British economic history to know that this is unlikely. The UK rarely manages 2.5% to 2.75% per growth a year over a sustained period. Thus only if the German economy entered a recessionary period and contracted over the ten years would Griffiths’ aim be feasible, and given the knock-on effects on the UK it would still be highly unlikely even in this doomsday scenario.
All-in-all then, Griffiths is fantasising about the UK overtaking Germany. This is a common British trait, notably 1980s Chancellor Nigel Lawson’s ‘economic miracle’ (which ended in double-digit inflation and over 3m unemployment), and the (particularly apt) famous claim by John Major in 1992 that he expected the pound to replace the Deutschmark as the strongest currency in Europe, just a few months beore the pound plunged by 20% taking Major’s premiership with it.
In the meantime it would perhaps be a good idea (as he obviously cares so much) to watch out for the UK slipping to third in Europe, not first. For France, will for the first time since 1999 have a larger economy on a market exchange rate basis if the euro averages 0.70 sterling or higher during the year. We’re currently on 0.694.
* I’ll concentrate on whether the UK could overtake Germany, not whether it could become the world’s 3rd largest economy. Otherwise we would need to mention China, which Griffiths seems oblivious to but which already has a larger economy in PPP terms, and soon will on market-exchange rate measures if current trends continue (it stood at end-2002 at 81% the size of the UK).