During 1990 I travelled all over Germany, and was impressed by its urban areas. For some reason I expected cities in the industrial heartland such as Dusseldorf and Cologne to have a grimy appearance. Instead they were very attractive and convenient. So I see why people are impressed with Germany. Even so, I was perplexed by this Tyler Cowen post, which suggested the German economy was doing well.
The [German] economy is continuing to grow, unemployment has been falling for twelve months, and the long-term fiscal picture is improving. Plenty of vacations are being postponed. You don’t have to think that real shocks caused the downturn to believe that real factors provide the way out. The full story is here.
Beggar thy neighbor? Don’t blame the productive. Besides, a lot of what the Germans are producing and selling is inputs for other people’s production:
“Ulrich Reifenhäuser, managing director and owner of plastics machinery maker Reifenhäuser, said his company was struggling to cope with an order increase of more than 100 per cent in some months this year.”
You may recall that Alex — a prophet of the MarginalRevolution — has long predicted Germany as an economically undervalued country. Now that events have caught up with him, he needs a new pick…
I agree that people shouldn’t be bashing German fiscal policy (although they should be bashing German (aka ECB) monetary policy.) But in what sense is Germany doing well? I looked for the most recent RGDP figures I could find, including estimates for 2010 and 2011, and found this useful IMF link. As you can see from Table 1, Germany had a far more severe recession that the US, and is having a far slower recovery. Indeed the same is true of the entire eurozone. Between 2008 and 2011, the IMF expects 3.8% growth in the US, and negative 1.8% growth in the eurozone. Even accounting for the difference in population growth rates, that’s roughly 4% higher RGDP growth in the US between 2008 and 2011.
When the crisis hit in 2007-08 we were told that it was all caused by deregulation implemented by the evil Republicans, and that this was why Europe was doing better. Indeed RGDP growth in 2008 was a tiny bit higher in the eurozone than in the US. But wasn’t the implication of that explanation that Europe should do better than the US over the next few years? Even if they got hit by spillover from the US subprime/banking crisis, you’d still have expected them to have a milder recession than we had, wouldn’t you? Of course there is one area where they have done better; unemployment has risen much less sharply than in the US, as their governments use various techniques to discourage layoffs. And that’s a good thing. But it still doesn’t explain why output has done so poorly in the eurozone.
Don’t think I am saying “I told you so;” I did not predict this, nor do I have any explanation. A few weeks back I did a post arguing that the European countries had stopped gaining on the US after 1980. My default model is that once countries are fully developed, they should all grow at about the same rate. Those with less efficient (i.e. less neoliberal) models should plateau at a level slightly below the most efficient countries (US, Switzerland, Singapore, etc.) But at that point they should grow at about the same rate, as long as their model doesn’t get even less efficient relative to the US economic model. And it doesn’t look like Europe’s model has regressed relative to the US. Indeed, if anything it has been the US that has been regressing in recent years (even before the Obama election.) It is the US that has slipping in the Heritage Foundation Economic Freedom rankings. So I am just as puzzled as anyone else by the fact that the eurozone, which was already about 20% to 30% behind the US using the 2008 data in my earlier post, now seems set to slip another 4% further behind the US in per capita GDP. And even a relatively efficient eurozone country such as Germany, which avoided the real estate bubble and benefits hugely from a complementary relationship vis-a-vis China, seems set to slip even further behind the US.
Does anyone know what I am missing? I suppose it might have been monetary policy, but the euro has been considerably weaker than the $1.60 levels it hit prior to the crisis. So I am genuinely perplexed by the European situation. I’m not a huge fan of their high tax model, but I don’t see how it explains this sort of dismal economic performance.