Why is Germany doing so well?
There’s been a lot of talk since America’s dismal employment situation summary was released on Friday about why Germany has done so well during the global economic recovery.
Here’s David Leonhardt of the NY Times:
The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government.
Leonhardt points to a few things aiding recovery: exports, the lack of a housing bubble, and fiscal stabilisers.
Here’s another interesting factoid from that article:
The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country.
Is this related to German success?
Leonhardt followed this with a few charts in a post at the NYT’s Economix blog.
Despite the longer-term rise in German wages, the past decade has been marked by wage restraint. And that has made German goods more cost competitive in exporting.
My concern is the global growth slowdown. In February, I wrote:
if the European periphery spirals down, it will drag Germany down with it via trade and financial linkages. Germany needs to develop internal demand, especially if it is going to pay for its social programs. Nearly 5 million people in Spain are out of work. Unemployment is low in Germany, which could offer hope for the Spanish jobless. Germany has the lure of high wages and Spanish workers have the benefit of being highly education and skilled. Outmigration from Spain to Germany could be a win-win for both nations and a reinforcement of the advantages of European integration.
Overall, we should credit Germany for building a recovery based not just on exports, but on capital investment and saving. One reason that Germany is a manufacturing and export powerhouse is because it has invested in those businesses. Certainly, wage restraint over the past decade by German labour unions has kept German companies in the mix. But, at heart, the German export story is about investment in human and physical capital. And that is definitely worthy of emulation.
The video below adds some useful colour (hat tip Jenny).