Sunday, 11 August 2013

Should the UK be more like Germany?

My latest article at Pieria discusses the UK 's trade performance in relation to Germany's.

"The UK's trade performance is dismal. The UK imports too much, doesn't export enough and runs a massive trade deficit. We are told we should all tighten our belts, buy British and work harder for less pay so that the UK can become an export-led economy with a lovely trade surplus, just like Germany. After all, that's the way to economic success, isn't it?"

Read on.......


  1. a perpetual positive balance of payments means you are exporting the products of your efforts with no reward.

  2. Thank oyu. This is an article that definitely needed to be written, and dinero's comment here neatly sums it up in one sentence.

    I know this is an over-simplification, but I have been arguing with people for years, saying that if you have a work-force of domestic producers and an overlapping set of domestic consumers, then if you pay your work-force the full value of what they produce - net of Government spending and investment - they will be able to afford to consume the value of what they produce, and your trade balance will be nil.

    If you force domestic wages down to the point where domestic consumers cannot afford to consume all they produce, then you will create a surplus for export, and if you let wages rise too far, consumers will consume what they produce and imports in addition.

    And where do Germany and the UK stand? Germany produces about ten percent more GDP/head, but OECD average wages in Germany are $40k while those in the UK are $44k. So the German work-force produces more, and pays itself less. Then it's no mystery why Germany has a trade surplus and the UK the reverse. It's just German workers making the trade-off between a slightly lower standard of living from not consuming all they produce, for a lower unemployment rate due to this concealed export subsidy.

    And yes, this policy really is dangerous. Germany proved that in the Thirties when the collapse in World caused worse unemployment in Germany than elsewhere, with very far-reaching consequences.

    And why do we in the UK seem to care so much about our own position? I think it's because the British public have a folk memory of trade deficits being economically destructive that dates from the Bretton Woods era of fixed exchange rates, when a persistent trade deficit eventually showed up as a series of embarrassing Sterling devaluations that eroded national self-esteem.

    Today, we should not worry so much, since Sterling is trading more or less in the middle of a trading range that goes back to the nineties, and our trade deficit is actually corrected, over a long enough time frame, as a similar amount of FDI into the UK.

    But the punters want their hyper-simplified stories, the more sensational the better, so I don't think we will be free of the notion that a trade deficit means that the sky is falling, any time soon.

  3. Frances,

    Re your closing question about the movement in income on the current account.

    I can't claim to know the numbers in detail, but most of the fall in the UK's net foreign income in 2012 (about 80% of it) was due to a fall in net income on direct investment rather than portfolio or other. Returns on direct investment are obviously more volatile anyway, so they normally account for most of the movement.

  4. you have awesome post........!!!!

  5. I'm a bit late to the party, but just have to say that it will take more than Michael Pettis' declaring the death of culture for it to be reality. German tribes have been thrifty since the Romans, at least, and anyone who, unlike Pettis, doesn't consider people to be single-cell automatons populating simplistic models, and would acquaint themselves with contemporary Germans can't fail to notice it's still there.

    It seems unlikely to be an accident that they, along with other thrifty cultures like China, are perennial exporters (net of the business cycle) despite policies that are not that different than any other country (every politician like exports... Schröder main contribution was to change the benefit system to be more UK-like, why didn't it have the same effect in the UK which had a headstart in having a UK-like benefit system?).

    Death-of-culture policy prescriptions are unlikely to work, because should people turn out to do culture, they will route around them. If German banks can't channel the surplus, it will flow somewhere else, to say non-German banks or non-bank institutions. A good policymaker will not try to abolish culture, but rather choose the tension release mechanisms that are least damaging.