Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Is Germany the new role model for Europe?

In the current chaos of the Euro zone, Germany is almost seen as role models (along with France to a lesser degree) for the other failing countries. Their strength is in exporting goods where they are currently ranked as the second largest in the world (this puts them ahead of the USA) and is a big factor in them having the largest economy in Europe.  The Fortune Global 500 includes 37 companies located in Germany and they are one of the leading countries in developing and using eco-friendly technologies. Sounds good right?

It gives strong evidence to the idea that Germany is the future of the Euro, with countries like Greece, Portugal and Italy expected to mimic Germany’s efforts. Germany has consistently pulled the Euro forwards during the bad times, they did this in 2010 by exploiting the weak Euro and moving their exports into overdrive whilst refraining from importing themselves (effectively bringing money into the country and not letting it back out).  One aspect of their economy that other countries could learn from has been there attitude to unemployment; they changed their benefits systems at the start of the century to motivate people back into work, with benefits harshly cut if the healthy were out of work for too long. These harsh methods inevitably brought results, and Germany’s unemployment has dropped since the recession of 2007, while the USA’s for example has risen.  Another interesting factor is that Germany was never really sucked into the housing bubble; German banks required a 40% down payment which restricted the house prices from increasing too much.

But does this really paint the full picture of Germany? There are some inconvenient truths that are usually left out when talking about Germany, like for instance despite many praising there strong recovery after the recession, it is left out that they had one of the largest fiscal stimulus programmes in Europe (the government spending more money, rather than cutting debt).  The praise about low unemployment also hides the truth that many companies were asked to cut hours rather than fire employees, which kept good numbers for the public, but has probably just delayed employment problems for the future. The more damming statistic is that during 2010, Germany actually increased their budget deficit (when other countries were decreasing) and in 2011 had a very low decrease. But that’s not all; Germany’s debt to GDP ratio is 80% which is not role model material at all, with countries like Finland, Denmark and even Spain showing better ratios.

We can also look at the primary balance; this is countries revenue (excluding any new borrowing) minus expenditure (government spending excluding interest on old debt). This has been used to judge countries like Greece and Portugal in current bailout schemes, but looking at Germany’s past primary balance isn’t too convincing with the period before the recession revealing a deficit. Compare this to Italy who have performed well in this regard and are set to achieve a surplus of 3.1% in 2012.

So, is Germany the role model for how Europe can get back on track? The fact is they have a strong economy that negotiated the recession well and might have even done better if they hadn’t be brought down by the Euro crisis. But they have yet to tackle their debt and seem set on increasing borrowing and spending. The hypocrisy of “do as I say not as I do” means they lose my vote, but is there a better option?

By Kane Prior


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3 thoughts on “Is Germany the new role model for Europe?

  1. Tomi Olujide on said:

    good article kane, question: so do you think the major problem (or maybe it is just a coincidence) is that these countries in trouble relied to heavily on tourism as their source of income when like Germany they should have focused on exporting?

    another question lol is it true Portugal, Italy, Greece and Spain are/were in terms of economy collectively called PIGS in a kind of derogatory sense cz of their status compared to UK, Germany etc?

  2. I think definitely that is the case with Spain and Portugal, there were far too reliant on tourism and as a spin off the housing sector. In Spain they have a massive surplus of houses built mainly for tourists, and they arent being used. Everyone knows about Greeces problems, but with Italy they dont have that bad an economy, they just owe too much money in debts. Its hard to say whether copying Germany would have worked, not everyone can dominate exports, and Germany have advantages like more resources. But exports is always a strong quality to fall back on, and it shows that Germany have fared stronger. If you look at the UK they relied on the financial market far too much and have fallen way too far behind in exports.

    Saying that, exports is only like 20% of Germany’s economy, with the Service industry easily dominating (same for most countries) so dont look too much into exports.

    And ha yeah, though Ireland has sort of replaced Italy. Some say PIIIGS to include Ireland, Italy and Iceland.

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