Since the year 2000, the UK economy has done pretty poorly, with a growth rate of only 1.7% a year compared with 7% in China, a large but poor country and 5% in Singapore, a small but rich one. But Germany has done even worse than we have, with average growth over the last two decades of only 1.4% per annum. Why are both the UK and Germany losing out year after year to the East?
In the UK’s case, the answer is fairly straightforward. Our economy, especially for manufacturing, is uncompetitive. Our share of world trade has gone down from 4.4% in 2000 to 2.5% now, as we have steadily deindustrialised. Even as late as 1970, nearly a third of our national income came from manufacturing — now, it is less than 10%. Our exchange rate has been much too high, making it generally uneconomical to site new manufacturing facilities in the UK. No wonder we have a low growth rate.
But Germany does not suffer from our competitiveness problem. German export prices are super-competitive. Ever since the establishment of the Eurozone in 1998, when Germany dropped the Deutsche Mark and adopted the euro, the German economy has been shielded from its currency getting stronger from revaluation by the struggling performance of the other Eurozone members. The average German balance of payments surplus every year recently has been about €300bn, whereas the Eurozone as a whole has averaged a surplus of about only €80bn. The difference is the total deficit of €220bn chalked up by the other Eurozone members. This is what holds the German euro down.
And it is this significant deficit that explains why the impressive strength of the German industry has not done more to get the German growth rate up. German export prices are so competitive that other countries in the Eurozone can’t compete with them. They can’t devalue, so they have to deflate their economies to avoid their foreign payments becoming unmanageably unbalanced. Italy, for example, has had no increase in living standards since before 2000, and the situation in Greece is much worse still. The result is that the demand for German exports, despite their competitiveness, has grown only slowly, dragging down the German growth rate in the process. Germany might have helped by expanding public spending and getting its surpluses down but has refused to do so.
Nevertheless, Germany has a lot to teach the UK. If we are going to do better in future, the only way this will happen is if we have a UK manufacturing revival, and we can learn a lot from Germany about how to get this to happen. They are much better than we are at providing long term funds for their industries and ensure that their workforce is well educated and trained. Furthermore, their infrastructure is generally better than ours, and they generally spend much more than we do on research and development and investment for the future.
Is there anything which the Germans can learn from us? The key lesson is probably not to rely as heavily as we do on services, especially financial services, where it is surprisingly difficult to raise productivity. Also, not to run surpluses on the scale they do, destabilising their customers’ economies and thus the whole of the Eurozone. Maybe we can all learn from each other about a major problem we have in common. Both the UK and Germany have huge disparities in wealth and income between the richest and poorest regions of the country – in Germany’s case because of the heritage of reunification and in the UK’s case because of deindustrialisation. In both cases, more industrialisation would help.
And this takes us back to the fact that, for different reasons, both the UK and Germany have economies which are growing very slowly, with low levels of investment compared to the world average — 17% of GDP in the UK’s case and 19% in Germany compared to a world average of 25% — and over 40% in China. Our living standards in Europe are much higher on average than those in countries such as China and India, but they are catching up fast as economic power swings away from Europe to the East. We, therefore, have a common interest with the most powerful country in Europe to do better. Maybe we are better placed to do this outside the euro than Germany is. We still have our own central bank and monetary independence to use if we are minded to do so. Germany is stuck in the euro with little prospect of this changing in the foreseeable future. Maybe, despite the odds, we could get our growth rate up with a manufacturing revival, but Germany can’t do the same because it is bound to the euro.