Toscafund Discussion Paper 17 January 2013 Britain’s Got Growth II: beating Germany on penalties
Author: Executive Summary Dr Savvas Savouri Germany boasts a population close to 82 million, Britain 20 million less. While Contact information Germany’s influence over its neighbours grows (forging what seems a "Greater Toscafund Asset Management LLP Germany") Britain appears incapable of even ensuring its own Union. 90 Long Acre London WC2E 9RA The consensus tells us Germany's growth future is superior to Britain's. Indeed, it England scolds Britain’s banks, government and households for not following the t: +44 (0) 20 7845 6100 budgetary disciplines of their German counterparts. The charge levelled at Britain f: +44 (0) 20 7845 6101 is that it has allowed itself to lose the growth game. e: [email protected] The argument favouring Germany centres on the claim its trade-facing factories w: www.toscafund.com are well placed to meet the emerging world’s appetite for consumer and capital goods. The critique continues that Britain’s lack of global comparative advantage will condemn it to tepid growth in the years ahead. The case favouring Germany’s future over Britain’s would seem clear. Or is it? This research aims to expose the two myths that lie at the heart of the growth preference for Germany over Britain: the “impregnability” of the German economy to the deep austerity “penalties” its authorities are imposing on important trade partner neighbours; the other, Britain’s “lack of global purpose”.
Chart 1: Population: historic & forecasts: Germany vs. GB Chart 2: Real GDP: Germany versus GB 90 6
85 4 80 2 75
70 % 0 Millions 65 -2 60 -4 55
50 -6 1950 1965 1980 1995 2010 2025 2040 2055 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 UK Germany Germany UK Source: OECD, ONS, UN, Toscafund, All forecasts Toscafund For Britain and Germany changing demographics will as much reflect relative economic strengths as determine them. Not only will the penalties being imposed by Germany on its distressed EU partners hit its exports to them, it will force a considerable evacuation of labour and capital, of which Britain will prove a significant recipient. According to the UN, Britain will boast a larger population than Germany by 2055. We believe this watershed could come sooner (chart 1). Whenever its timing, Britain will be more populace than Germany within a generation. As Britain’s population growth out-paces Germany's, so will GDP (chart 2), the gap created not only by events unfolding across Europe but more widely. Britain’s economy is sure to exploit the emerging world's appetite for its business services, education and health and leisure. As Britain benefits from soft sector export growth to the emerging world, German hard exports to these markets will come up against ever more competitive rivals. In the years ahead Greater Germany will quite frankly be up against a Greater Britain.
1 Toscafund Discussion Paper 17 January 2013 Britain’s Got Growth II: beating Germany on penalties
1 Introduction Germany and Britain have somehow both come to be surrounded by a form of economic mythology; as flattering for one as it is unsympathetic to the other. Let us begin with Germany. Listening and reading to commentary relating to it, one could easily come to believe the German economy is proof against the perils that befall "lesser" nations. Confidence in its super-normal qualities is not confined to those observing the German economy from without. Many of those within it are happy to boast of their economy’s infallibility. We see things quite differently. Whatever the perception, the reality is that Germany will be unable to escape Europe’s ugly economic realities. Indeed, one can argue that the behaviour of Germany towards its needy neighbours is undermining its own economic fortunes. If this is the case why is the consensus that all will be well with it? The answer lies, as it does with so much that is wrong in the world of economics and finance, with peering through the rear view mirror rather than the windscreen. Of course it is true that for much of the last seven decades first the economy of West and then of unified Germany remained largely resilient even when neighbours found themselves in difficulties. We will try to understand the reasons for this before turning to why things are quite different now. We would claim that the economic strength Germany has boasted for much of the last seven decades has nothing to do with it being “a winner”. Rather we would suggest it has more to do with being “a loser” in 1945 and its strategically "lucky" position as the Cold War gripped Europe. Let us turn the clock back to explain our thinking. 2 Plans for post-war Germany: A Great Escape Even before the war in Europe had ended plans were being drawn up for what territorial and economic form Germany would take once it was defeated. Tasked with planning Germany’s “peace” was US Secretary of the Treasury, Henry Morgenthau, a man with considerable influence, having been a major force in planning President Roosevelt’s New Deal. And, Morgenthau had a very clear idea of what was required and it did not bode well for Germans. The Morgenthau Plan was uncompromising; Germany should be split into three, with the largest rump, North Germany reduced to a largely agricultural economy. President Roosevelt was a keen supporter of this strategy and quickly commissioned the Joint Chiefs of Staff to draft a framework for the terms of occupation along the lines suggested. The Directive which followed, JCS 1067, ordered the US military government of occupation to “… take no steps towards the economic rehabilitation of Germany [or] designs to maintain or strengthen the German economy“. JCS 1067 was policed by a team of US Treasury officials who had been seconded to the Army and who became known as the “Morgenthau boys”. Occupation saw the wholesale dismantling of German plant and machinery and its transportation out of the country, all under the guise of “industrial disarmament”. Most often this valuable equipment ended up in United States. There was also a concerted plan to deconstruct what remained of the German banking system, under the banner of decartelisation. At the same time Paris organised the annexation of the important coal mining area of the Saar, and began preparing it for assimilation into France. Against such a backdrop economic events across Germany in the years immediately after 1945 progressed as they had in the years following 1918; with rampant inflation, a collapsing currency and food shortages. Just as it seemed it would sink into economic chaos the chill winds of the Cold War began to blow into a gale that would quickly revise the American attitude toward West Germany. At first the new US President Harry Truman was sympathetic to the concerns of his predecessor regarding the risks an economically strong Germany posed. However, the onset of the Cold War made him appreciate the need for a friendly and stable nation in the centre of a fractured Europe. Indeed, Herbert Hoover, the man who Roosevelt had replaced as President put it starkly in a speech in March 1947. Hoover’s words carried this stark Malthusian warning: “There is the illusion that the New Germany left after the annexations can be reduced to a ‘pastoral state’. It cannot be done unless we exterminate or move 25 million people out of it”. Truman’s Realpolitik of restoring Germany to an industrial state was supported by Secretary of State George Marshall and in late 1947 JCS 1067 was replaced by JCS 1069. This recognised that “an orderly, prosperous Europe requires the economic contributions of a stable and productive Germany”. The generosity extended to West Germany would prompt the Wirtschaftswunder or the German Economic Miracle that is the cornerstone of the mythology that now surrounds it. Having been initially denied access to Marshall Aid this changed from 1949. The considerable financial capital West Germany began to receive from this point allowed it to reindustrialise; acquiring capital equipment exported from the US, an early form of vendor financing. Additionally, there was the boost from replacing the worthless Reichsmark with the more stable Deutschmark. Indeed, Frankfurt continued to manage the Deutschmark long after exchange rate anti-
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