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Work and prosperity
16 September 2013

The German economic model is a poor alternative to Anglo-Saxon capitalism

The financial crisis of 2008 was too frightening for any sane person to enjoy, but for the centre-left there was some grim satisfaction to be had. With Wall Street and the City of London in meltdown, they could point to Germany’s robust stakeholder economy and say: ‘I told you so.’ Then came the Eurozone crisis and things got more complicated – very few people were right about casino capitalism and the single currency (though plenty were wrong about both). 

One can always argue that the German economic model has proven itself in spite of the Eurozone – and that it is only Germany’s economic strength that has held the single currency together. But in an article for the Peterson Institute for International Economics, Adam Posen takes a very different view:

  • “If Germany's economic model is the future of Europe, we should all be quite troubled…”

Indeed, leftwingers might like to note the essential ingredient in “Germany's path to competitiveness”:

  • “... cutting the cost of labor. Make no mistake; that has been the basis of the nation's export success in the past dozen years, and exports have been its sole consistent source of growth in that period. But low wages are not the basis on which a rich nation should compete.”

Remarkably, “Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe.” Ah, but at least there’s been plenty of investment in the country’s future prosperity, right?  

  • “Ideally, a wealthy country should stay competitive through research and development, and capital investment. Instead, total gross fixed investment has fallen steadily in Germany, from 24 percent to less than 18 percent of GDP, since 1991... 
  • “The other way for a rich country to stay at the top of the value-added chain, and thus compete on productivity, is to invest in human capital—that is, to educate its workforce. In Canada, France, Japan, Poland, Spain, the United Kingdom, and the United States, the share of young workers with advanced education is at least 10 percent higher than in Germany—in most of them, 20 percent higher or more…”

Germany’s educational saving grace is its system of apprenticeships, but the country has not built on this established strength. Compared to other OECD countries German productivity growth is lacklustre and manufacturing employment is shrinking away:

  • “With these productivity numbers, it is no wonder German business is competing only by reducing relative wages and moving production east.
  • “...The export obsession has distracted policymakers from recapitalizing its banks, deregulating its service sector and incentivizing the reallocation of capital away from old industries.”

Instead of restructuring its economy, Germany restructured its exchange rate – through membership of the Eurozone. Not only did this artificially reduce the price of the country's exports, it also enabled Germany’s trading partners to borrow lots of money to pay for them.

Far from being an unfortunate and undeserved burden on the German economic model, the Eurozone crisis is, in part, a consequence of it. Angela Merkel’s aim now is to ensure the survival of the single currency by pressuring other member states to follow Germany’s example and squeeze their workers’ wages too.

Of course, no one owes any of these countries a living – but to create a lean and mean workforce across the Eurozone will undermine the competitive advantage on which Germany depends.


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