John Bruton

Opinions & Ideas

Category: growth

FRUGALITY IS THE EXPLANATION FOR GERMANY’S SUCCESS

I was in Germany recently, and it caused me to ponder why Germany’s economy continues to do so well, despite the huge costs of absorbing the former Communist East.

What makes some countries grow, while others stagnate?

Obviously the age profile of a country is important.

If more of the population is elderly or retired, one will have slower growth. In 10 years time Germany may not be so dynamic for that reason.

But, at the moment, Germany is doing well.

For example, German and British car factories are running profitably at 80% of capacity production, while Italian car factories are only using 46% of their capacity, and French car factories only 62%. Running at less than 75% of capacity means running at a loss.

Rigid labour laws may explain why French and Italian factories have not been able to reduce capacity in response to reduced demand for new cars.

In Germany, youth unemployment is only 5%, while in southern Europe it is 25%.
Meanwhile, France is beginning to worry about the performance of its schools. There are suggestions that it has dropped 14 places in Mathematics between 2003 and 2009 in the OECD Pisa tests conducted in 65 countries.

China, Korea, and Finland regularly come near the top in these tests. Education for the elite in France is excellent, whereas German education is more broad based, and its apprenticeship system imparts vital skills to a larger proportion of the population.
The German Minister for Science told me that German Scientists produce 10% of all the scientific papers in the world with only 0.1% of the world’s population. China spends four times as much on research as Germany, but China produces fewer scientific papers. Specialist scientific institutes, like the Max Planck Institute, which are separated from universities (and from university politics) play an important role.
But perhaps the reason for Germany’s success can be put in a single word…..frugality
Writing of the Germans in the early 16th century the Florentine diplomat, Niccolo Machiavelli said

“The reason why private citizens are rich is that they live as if they were poor……Nobody cares for what he has not, but only for what is necessary to him”

This is as true today, as it was 500 years ago.

80% OF NEW JOBS TO COME FROM VERY SMALL FIRMS

I was in the United States for the past week for the Irish International Financial Services Centre, meeting businesses with substantial investments and employment in the international financial sector all over Ireland , in Dublin , Cork,  Arklow, Claremorris , Letterkenny and  Carlow.

I visited  Chicago, Minneapolis and New York.
The United States economy is recovering and the budget deficit is coming down.

The US budget deficit is around 6.4% of GDP, as against average Eurozone budget deficits of 2.7%.The Irish deficit about 7% of GDP.
The US economy is expected to grow by 1.7% this year, whereas the eurozone economy will contract by 0.8%. Ireland, unlike the rest of the eurozone will grow by 0.5%.

On the other hand the United States has a balance of payments deficit of  3.3%, against a eurozone surplus of 1.3%.  Ireland’s balance of payments surplus is 3.5% of GDP, although this is mitigated by  greater than average repatriation of profits.
There are limits to the extent to which a country can grow by importing more than it is exporting. But the United States has accessed new energy resources, which will help it a lot in the medium term. Europe is not in that position. It is, and will remain, a large net importer of energy.
Worries were expressed to me that the proposed Financial Transaction tax in some EU countries, and the generally more stringent pay limits in the financial sector, will divert some financial employment from Europe. Hyper cautious regulation may have the same effect. 
There was high praise for the quality of the workforce available in Ireland, especially as regards their flexibility and maths skills.

I was told that the nature of work will change radically in coming years. Because of technological development, 80% of new job growth in the US will come in firms now employing less than 5 people. This plays to Ireland’s strengths, in that it is  easier to set up a new business in Ireland than it is in most of the rest of the world.

A POSITIVE PROPOSAL TO BOOST GROWTH

What is needed to restore growth to Europe’s economy?

This is a critical question for Ireland.

The financial viability of any country with substantial debts, depends on the inter relationship of three factors

  1. Interest rates that are low and affordable
  2. Growth rates in the economy that are sufficiently high to generate tax revenues to pay off debts over time

  3. Whether the Government is running a primary surplus (that means that its revenue is  higher than its spending if one leaves out of account the spending that o in interest on debts)




It looks as if the ECB and the US Federal Reserve are going to  keep interest rates low for a long time to come and there is little risk on inflation in the  short term. So condition number one for a return to financial viability is being met. This is the big difference between now and the 1980’s when international interest rates were kept cripplingly high.


The third condition has yet to be met.   While the Government is meeting its immediate EU/IMF targets , but Government spending still exceeds Government  revenue by an amount that is greater than the  amount  being spent on paying interest on existing debt. 
That is why reducing spending and increasing revenue are still such a priority.



But what about the second condition, growth.



The longer term(2016 to 2025) growth potential of the Irish economy is better than most EU countries because of Ireland’s age profile, its type of industry and its general flexibility. But, in the shorter term, things are not so good. Growth projections have had to be reduced because of a decline in international trade.



So, in the absence of a boost from international trade, we depend on the production of credible policies to boost the European growth rates, independently of what is happening in the rest of the world.



In the late 1930s the Great Depression in Europe was ended by a surge in investment, in armaments. Not a cure we need to use now!



But perhaps there is another form of security related investment that would make sense for Europe today……..investment in climate security?



Climate change is happening, and it is a threat to the lives of  millions of people, especially in drought  ridden part of the world. Our Long term ability to feed ourselves is being put under threat. The depletion of phosphate and potash resources  mean that soil conservation, and the avoidance of soil loss through climate change, should be a top priority, if we want to be able to feed the  9 billion people we will soon have  living on our globe.



In the 1990’s, the EU set itself a goal of reducing CO2 emissions by 2020 to 20% below their 1990 levels. Thanks to the recession, that goal will now be easily achieved in most countries.



The German Ministry of the Environment commissioned a report in 2011 which  suggested that  the EU should scrap the old 20% target as too unambitious, and set itself a new target, to reduce CO2 emissions to 30% below the  1990 level by 2020, and accompany that new target  with a major  EU wide investment programme in cogeneration of heat and power, insulating all older buildings, enhancing the power grid, and  building new wind turbines.



The report suggests that this investment programme would increase the growth rate of the overall EU economy from  a potential 2.2% to 2.8% .



In Germanys case, it suggests the unemployment rate could, as a result of the additional investment, be 2.9 percentage points lower than it would otherwise be, and in Ireland’s case, unemployment could be  3.3 percentage points lower.   Detailed estimates are produced for most EU countries



The biggest potential increase in employment identified in the report  was be in the construction sector, a sector in which Ireland has  substantial under used resources.



The detailed measures proposed in 2011 report undoubtedly need further work and updating, but they provide a basis  for injecting some hope into the debate about Europe’s future and a sense that we are taking charge of events again.

It would be a good idea for this German paper of 2011 to be put on the agenda for the EU Summit of December 2012.

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