Friday, 10 July 2009

A Tale of Two Economies ...

Stephanie Flanders, following a recent visit to Germany, posted a great blog today entitled "The tale of Two Economies", which compares the very different economies of Germany (export led) and the UK (borrowing led).

The differences are stark, and the two countries also have very different strategies for dealing with the current financial crisis too (as highlighted by Germany's ministers - e.g. see the links provided below). 

In Germany most people tend to i) class a house as a home, ii) rent rather than buy, iii) save rather than spend and tend not to iv) invest or speculate in property.  In the UK (and the USA) however people have tended to do the complete opposite ... 

So who is positioned best to cope with the current financial crisis? ... and who has already indebted their nation for generations to come?  Take a look at these interviews with Germany's finance minister, and economics minister, and the fact that Germany's exports are already starting to grow again ...

... and take a look at Stephanie's blog too, and the additional comments that I have made and others have made below ...


Post 14 (Leanomist) wrote: 

Thanks Stephanie - good work. We are now starting to address some of the real issues, which countries like Germany have understood for years (nb Germany also appear to understand the current crisis better than our Government does, and they are tackling it in very different ways - e.g. they are not taking the 'easy option' and burdening future generations with huge debts)!

To survive in a global economy the UK will have to be far more innovative and create more products & services other countries need and actually want to buy (e.g. beyond trying to sell Germany beer!) ... because they add value, solve problems and offer new (and unique) ways to improve people's lives! 

The UK cannot rely, and in fact really does not need, another credit fuelled consumer boom (e.g. based on more housing asset price inflation) and we need to avoid this happening (as it will only worsen our borrowing & trade deficits, and create even worse problems further down the line).

The answer is to stop focusing most of our time, energy and resources on 'gambling' (investment banking, house prices), 'banking' and other services that 'move money' or 'count money' (i.e. 'manipulating' wealth - activities which should arguably be taxed more from an ethical point of view), and focus them more on innovation and creating more products/services people value that we can export and which will actually bring in money (i.e. 'creating wealth' - which should arguably be taxed less).

But will anything like this happen any time soon? I don't think so - not until we have 'leaders' who are able to act responsibly and see beyond their own career/wallet (ie. who don't apply Poweromics*), or until things get so bad that apathy within the general public diminishes to a point where they decide to take responsibility for improving the situation themselves ...

David Clift, a Future 500 Leader

* Poweromics = People using position and power for their own personal gain, based on poor moral values, self interest and greed. has more examples/information.

PS I agree with a number of comments already made, including 2, 6, 9 and 11 (nb I am one of those who, like yourself and many others, have raised this issue on a number of occasions - let's hope Stephanie goes further down this road now - please don't disappoint us now you've started Stephanie) ...


Post 2 John_from_Hendon wrote:

Stephanie wrote
"most of the rise in borrowing over the past decade went into the housing market"

Oh dear, Oh dear, Oh dear,

It has vanished then into asset price inflatuion NOT into building productive capacity! We have thus seen nothing for all of our borrowing. If only we had bought something we could use or make something with!

I remember the German Housing market: Second-hand houses cost less than new ones as they are, how do I put it, "Second-Hand"!

The Germans have not dug a huge hole and filled it with debt then... Like we did.

We have stocked up a huge level of latent and actual inflation and currency depreciation which is disastrous. The money men (The Banks that we 'love' so much!) have siphoned off our houses to no advantage to us, indeed to our huge disadvantage!

Why did we let this happen? 

Why did you as a representative of an economical commentator not complain about this at the time?

It was, and still is, the hight of idiocy to see increasing house prices as a sign of something good - it is not, it is a terrible apocalyptic sign of national decline, and banking collapse!


Post 6 Wee-Scamp wrote:

If Germany is the export champion then the UK has been the import champion. Our trade deficit is legendary. That apart we have of course allowed the financial services sector to make money out of selling our companies off to overseas buyers and there has been little real investment in new companies capable of becoming export meisters in their own right. It's been the economic equivalent of the slow train crash.

There's little doubt that the Govt (especially the Treasury) and the City have let the UK down badly in the last three decades or so and certainly since the big bang... In fact you can track the growth of the trade deficit since the big bang and watch it get bigger and bigger.. At the time of the big bang it was modest but by 1997 it was �11bn.... Now it's probably incalcuable. 

What we can be sure of is that when the economic recovery starts Germany will still have most if not all of its industry intact. We'll have a bunch of badly managed and crippled banks. 


Post 11: hants_gw wrote:

This is quite a provocative entry.

"With consumers likely to be saving more and spending less, export-led growth is our main hope of a healthy rate of economic growth"

Exporting what exactly? And to whom?

My apologies to various people who have asked essentially that question over the last few months, but it never gets an answer. Supposing I were a wealthy German who wanted to do his bit for global economic balance by buying British, what is on offer? Novelty beers apparently.

Since "export-led growth is our main hope of a healthy rate of economic growth", what is the government doing to make sure that happens? I'm not aware of anything. Perhaps that is just ignorance on my part, but I seem to be well aware of plenty that the government is doing to prop up incompetently run banks.

By the way, what happens after the exports don't materialise?

"Germany's addiction to exports is a problem as well."

Ah yes. Those wicked, wicked Germans with their naughty habit of designing and building high-quality, well-engineered products that people want to buy. It's just not playing the game is it. The next thing you know they'll have banks run by financially literate people; banks that make real profits by investing in real businesses. Good grief, where does it end?

"Yet, on the basis of my trip, I don't think there's much chance of Germany becoming more like Britain or America, despite the big hit they have taken in the past year."

Yes it's a puzzle isn't it? Why would the ant want to become a grasshopper?

Some of the original entry makes a lot of sense, notably the observation that Britain needs to export more (actually lots more) - but having said that why not think through the consequences. If exports are so essential, why isn't that fact visible in the government's behaviour? Where is the support for exporters? As best I can tell the current government's top priority is to increase public spending. I have never heard a government representative talk about boosting exports.