German capitalism is the model now
Matthew Lynn May 07, 2010
"Never underestimate the Germans." It's a phrase we'll no doubt hear over and over again as the World Cup kicks off in a few weeks' time, as a relatively talentless team uses its reserves of power, discipline and organisation to secure itself at least a place in the semi-finals.
And just as 'never underestimate the Germans' is a good rule in football, it's not a bad one in economics either.
After two decades of underperformance, as it absorbed the horrendous problems of the old East Germany, the country seemed to have lost its way. Unemployment soared, growth dived, and its confidence evaporated. But now it seems to be reclaiming its traditional role as Europe's dominant economy. It is the most creditworthy country in the world.
It is one of the few that isn't burdened with huge consumer or corporate debts. During the Greek crisis, it's the nation that has called all the shots. Over the next few years, Europe will have to get used to the Germans being the dominant force again. And that may be no bad thing.
After the Wirtschaftswunder – or economic miracle – of the 1950s and 1960s, we got used to Germany being the economic powerhouse of Europe. The deutschemark was the continent's strongest currency – so much so that in the 1980s the British and the French both took to shadowing it as the only way of bringing inflation under control.
The last two decades, however, saw a relentless decline. The integration of East Germany after the fall of the Berlin Wall in 1989 proved far tougher than expected. Frankfurt lost out to London as Europe's main financial centre – the Germans were never really cut out for the debt-fuelled, casino capitalism of the last ten years. They don't like borrowing money, aren't interested in owning their own homes, and don't even think much of stockmarkets.
Indeed, so far had Germany fallen that only a few years ago even the British seemed set to outstrip them. In 2004, the chief economic adviser to Barclays published a report predicting that Britain's economy would be larger than Germany's by 2025, despite their larger population. There was nothing fanciful about it. If you projected the growth numbers forwards, that was how it worked out.
But lines on a graph are a poor way of predicting anything. This decade, the Germans will be back, in a big way.
True, the economy was hit hard by the credit crunch (GDP shrunk by 5% in 2009) as global trade slumped.
And some of its regional banks lost a bundle. But it has rebounded quickly. The economy is forecast to grow by 1.5% this year. Its corporate giants are powering ahead. Total net income at German firms that have reported earnings so far this quarter has almost tripled, compared with a 54% profit increase for Western Europe, according to Bloomberg. Industrial production is accelerating, and unemployment falling.
The rapid emergence of the economies of Brazil, Russia, India and China has left most of the developed world scratching its head and wondering how to earn a living. The Germans just get on with selling them more stuff. Exports to China are rising by 13% a year, and to Brazil and India by more than 30% a year. Germany remains tied with China as the world's top exporter. But while China mostly exports cheap stuff, churned out by workers on low wages, the Germans export luxury cars, complex chemicals, and expensive machine tools, made by people on good salaries.
Indeed, Germany seems far better placed for the future than almost any other developed country. It has an export-based, manufacturing economy that sells the stuff the emerging economies need. It didn't have a housing bubble and its consumers, while never great spenders, aren't burdened by debts. McKinsey has measured the combined growth of corporate, consumer, and government debt from 2000 to 2008. In Germany, it only grew by 7% over the whole eight years, compared with 157% in Britain, 150% in Spain, and 70% in the US.
That's nice for the Germans, but it also matters for the rest of us, for two reasons.
First, the Germans are likely to become much more dominant within the global economy. The more money you have, the more power you command. Germany can take the lead in sorting out the Greek mess because it will be paying for it. Expect the same to be true of every financial crisis that comes around in the next few years.
Next, successful countries set a template. In the last decade, everyone wanted to copy the debt-fuelled Anglo-Saxon model. In the next few years, the German model will become far more fashionable. And this reassertion of German values may be no bad thing. Rhineland capitalism is, in many ways, the most attractive way of doing business. It values thrift, hard work, saving and making things. It believes in sound money and is suspicious of inflation. It doesn't have much time for deficit spending, and doesn't believe you can cure a debt crisis with more debt.
The Germans, of course, take it to extremes. But an injection of Teutonic economic sternness is probably precisely what the rest of the world could do with right now.
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