When boring is good

The weekend’s big TV debate between the two main candidates in the German election highlighted both the good and bad sides of German politics. It was a pretty tame affair. Even the German press called it the duel that never was, with both Angela Merkel and the challenger Martin Schulz trading pleasantries rather than political blows. In fairness, neither Merkel nor Schulz are particularly charismatic and the format was not conducive to a lively debate. For one thing there were four interviewers from rival channels, all keen to get their questions across. Moreover the interviewers were perhaps rather more respectful towards the candidates than was warranted by an occasion as important as this. The absence of a studio audience was another buzz-killer and as a result there was no interaction with the general public, which is guaranteed to keep politicians on their toes. That said, German voters like their politicians serious and sober (ironically Schulz is a reformed alcoholic) and do not expect to see their representatives treat the political stage as another branch of showbusiness, as happens elsewhere.

Merkel was deemed to have won on points with Schulz unable to land any decisive blows, and as a result she looks a shoo-in to be re-elected as Chancellor on 24 September. As might be expected, the debate was focused on those issues important to German voters so no surprise that Brexit never got a mention. Immigration topped the bill with a large slice of the available time devoted to this hot topic. But according to Thorsten Benner, Director of the Global Public Policy Institute, immigration is not the biggest problem facing Germany (see box below). Whilst acknowledging his superior knowledge of the German political scene, I am not sure I would totally agree. It is not the biggest economic issue but it remains a huge political problem. After all it has helped fuel the surge in support for AfD, and although they may struggle to pass the 5% threshold required for Bundestag representation, the fact the party has any support at all worries mainstream politicians.

Like most political debates of recent years, the economy did not figure highly. Why should it? After all, Germany is growing relatively rapidly, inflation and unemployment are low and it is an export powerhouse producing some of the highest quality manufactured goods in the world. In short, everything looks to be running smoothly. But as Benner pointed out, the car industry also enjoyed a good run, but it has recently been undone by the problems of dieselgate.

Criticism has come from many other quarters too: The newspaper Die Welt has been particularly critical of the Merkel government of late and following the debate, it pointed out that although Germany is one of the most interesting countries in Europe with the world looking to Berlin, its domestic politics is curiously austere and provincial. In an article last weekend, the newspaper highlighted that Germany has under-invested in infrastructure and education. There is some truth in this: After all, the huge current account surplus represents an excess of domestic saving over investment. But as Wolfgang Schäuble has suggested, it makes sense for an ageing society to save for a rainy day. The problem is that Germany has been running a big surplus for the past 10 years with no sign of a reduction. The fact that what are increasingly seen across Europe as excessively large surpluses are rarely spoken about at home is a sign that the savings investment problem is unlikely to be addressed any time soon.

For all that the debate was a bit dull and skirted around many of the issues which economists might wish to have seen tackled, it was also devoid of the bombast that accompanied the US election and the emotionally-charged atmosphere of the Brexit referendum. For that we should be thankful, since at least one significant western power offers political stability. From an international perspective, four more years of Merkel at the helm would not be the worst outcome in these turbulent times. Those of us dealing with dysfunctional governments in the UK, let alone the US, look to German political stability with a degree of envy.

How to learn from your mistakes

There are many things to admire about modern Germany and a lot of them were evident during a recent visit which, unusually for me, was a private rather than business trip. One of the things that always strikes me is the sense that Germany is still a big manufacturing economy. You notice this in the vicinity of all the big cities, where there is always lots of traffic and a large number of lorries delivering industrial goods. Indeed, a high proportion of the lorries are themselves German made. 

But perhaps the thing that always impresses me the most is the sense that it is a prosperous country where the wealth is shared relatively evenly. According to OECD data, Germany’s income Gini coefficient in 2014 was 0.289 (the lower the number, the higher the degree of equality) which ranks it 13 out of 33 OECD countries. It is certainly well below the UK with a Gini coefficient of 0.356, ranking at 29. We should also not forget that it was Bismarck who introduced the first national pension scheme in Germany in 1889, almost 20 years before the UK followed suit. Travelling around northern Germany, through the smaller towns, they appear solid and well cared for, which in my view is a sign of communities that display a sense of civic pride. Many German economists complain that the infrastructure is crumbling and that the government does not spend enough on maintenance and renewal. I can safely say this is not something which is evident in the same way as it is in Britain, although I guess you have to live there to notice it on a day-to-day basis. 

This is certainly not evident in Hamburg, where the magnificent new conference venue, die Elbphilharmonie, is a symbol of modern German economic confidence. In a sign of the difference between the German and British economic systems visitors are able to visit the Plaza for free, giving a magnificent view of the harbour, whereas comparable venues in London such as The Shard or London Eye levy hefty visitor charges.

There are some things which still grate on the modern traveller. Deutsche Bahn's inability to accept certain forms of plastic payment card is an oddity which I thought had been confined to the past. Even stranger is that a card which works perfectly well in Frankfurt will not work in Hamburg. Indeed, cash is much more widely used in Germany than in Britain, where I rarely carry very much, and cash in circulation across the euro area relative to GDP is three times that in the UK.

During the course of my recent travels, one question which inevitably came up was that of Brexit, with many Germans puzzled as to why the British voted as they did. It is hard to explain to them that the Brexit vote occurred in large part because the UK has rejected many aspects that German society takes so seriously. I have long extolled the virtues of German inclusivity. That is not what we have in the UK where we operate a system in which the devil increasingly takes the hindmost, as the safety net which underpins the more vulnerable elements of society is withdrawn. Many people in the UK simply do not see that the government is acting in their interests and this is something which is hard to explain to many Germans.

We also should never underestimate the desire of modern Germany to learn the lessons of the past. “Never again” means exactly that. I was fortunate enough to speak to people who were children in the immediate post-war period, who told me what it was like to grow up hungry and how they experienced permanent stomach pains without knowing why. The story of how the women and children used to work in the fields removing Colorado beetles to ensure that the potato crop provided sufficient food for the population was a fascinating vignette of how it was back then. Faced with such hardships, it is no surprise that modern Germany has no desire to go back there.

Germany is far from perfect: No modern society is and it may yet find that the great humanitarian gesture of opening its borders to countless numbers of immigrants causes more problems than currently imagined. But its determination to learn from the mistakes of the past is admirable and something the British can themselves learn from. Many people who voted for Brexit, especially older voters, are guilty of looking back to a Britain that never really existed. It may have emerged on the "right" side of history, but we should not forget that once Lend-Lease was terminated in 1945, economic circumstances changed overnight. Nor should we forget that the UK received more Marshall Aid than Germany in the immediate post-war period, but it was wasted by successive British governments trying to cling on to superpower status rather than modernising the domestic economy. The grim period of rationing and slow post-war reconstruction in the UK was at least partly the result of policy failure. Brexit may not be of the same order of magnitude but it still threatens economic hardships which are avoidable and which people may not be ready for. 

As one older German said to me, Brexit is a betrayal of future generations. I happen to believe he is right. Better to try and reform the EU from the inside than cut and run. When even a Guardian journalist points out that the potential loss of banking jobs will put a big hole in government finances, you realise that people are starting to wake up to the fact that Brexit will have real economic consequences. Many of us told you so all along.

Helmut Kohl's legacy

A memorial service was held in Strasbourg yesterday for former German Chancellor Helmut Kohl, who died on 16 June. Whilst his death briefly made headlines in the British press, coverage of what was in effect a European state funeral barely made a splash on this side of the channel. That says a lot about the way the British media thinks of European issues. Kohl was, after all, praised across the continent for being the lead architect in the construction of the EU – an institution which the British electorate rejected 12 short months ago.

Politically, Kohl was a unifier: In addition to his role on the European stage, he will forever be remembered as the Chancellor who reunited Germany. But as the German media has highlighted, one of the great ironies is that he never managed to unify his family: Even in death, he remained estranged from his two sons. Nor, despite the eulogies, did he share Angela Merkel’s vision, particularly with regard to the handling of the euro crisis. Kohl was a historian with no interest in economics. His was the politics of the grand vision, regardless of the cost. Very few politicians of the post-war era would have attempted a project as ambitious as German reunification. But no reputable economist agreed with the decision to convert the Ostmark to the Deutschmark at a rate of 1:1 which gave East Germans a short-lived income boost but which later wiped out the eastern economy.

Many German economists also believe that his push to introduce the euro was badly handled. The decision to introduce a pan-European currency without the appropriate leadership structure in the EU, and without a body to direct common political and economic policies for the euro zone, means that the single currency effectively remains little more than a glorified fixed income mechanism. It was created on the basis of the competitive situation which prevailed in the 1990s, and the pain associated with maintaining competitiveness was always going to require significant domestic adjustment: Even the European Commission was clear about this in the mid-1990s.  As Die Zeit put it, “a currency union was created that only worked when the sun shone.  And when a storm, in the form of a financial crisis, came along, Mr. Kohl’s peace project became the nucleus of the largest European crisis since the war.”

Undoubtedly, Kohl’s solution to the Greek debt crisis would have been to dip deeper into German pockets to find a financial solution. It might even have worked – for a while. But it does not detract from the fact that there are significant faults in the construction of monetary union which need to be fixed. Although Kohl was not honest with his own electorate about the costs of monetary union – living in Germany at the time, I was acutely aware of that – we cannot pin all the blame for the euro zone’s ills on his shoulders. Politicians in other countries signed up willingly to the euro without realising that their own economies would have to bear a far greater share of the adjustment burden than Germany.

The election of Emmanuel Macron as French President has been hailed across the continent as a chance to rebuild the Franco-German axis that drove the European project forward during the 1980s and 1990s. Macron has proposed a common fiscal policy, a joint finance minister and the completion of banking union, and surprisingly he has been given a sympathetic hearing in Berlin. But we cannot so easily turn back the clock to the halcyon days of Kohl and Mitterrand. The world has changed, with the rise of Asia having permanently altered the global economic landscape. Nor is it so certain that the people of Europe today share the vision for their continent which Kohl espoused. His was a vision rooted in the past, designed to ensure that the horrors of the first half of the twentieth century could not be repeated. That was, and is, a laudable goal. But the survey evidence suggests that European electorates remain sceptical of the need for further integration.

Europe in early 1995, after Kohl’s fourth election victory, felt like a good place to be. The EU was a smaller, more manageable institution with just 15 members. It was moving towards convergence at a pace which felt comfortable and although progress towards a single currency was ongoing, there were widespread doubts that it would be operational by 1999. It felt more like a warm and fuzzy aspiration which made the federalists feel good yet was far enough away not to worry the sceptics too much. In my view, that was Kohl’s real achievement: He led the horse to water. It is unfortunate that the purity of the water did not match up to expectations.