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EU Economics: Germany leads Euro Zone revival

Friday, February 25, 2011
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I attended the World Traders Tacitus Lecture at the Guildhall last night. The talk on “Dealing With a Changing World - Germany’s Role In the Global Economy” was delivered by Georg Boomgaarden the German Ambassador and, whilst robustly pro-European from the first sentence, it offered a first-rate focus on the position of the German economy within Europe and the global system. I have attached a presentation drawing on some notes made during the talk – useful perhaps for A2 Macro EU context questions given Germany’s prominence within the Euro Zone? The presentation can be found in streamed form and also as a pdf file for handouts.

Streamed: Dealing With a Changing World - Germany’s Role In the Global Economy

Slide Handout(pdf)

The German economy shows resilience:The largest economy in the European Union
Manufacturing contributes 25% of GDP more than twice the value added from manufacturing in the UK
Industrial and export sectors hit hard by global recession – country is exposed to global trade cycles because of the high income elasticity of demand for their manufactured products
But export rebound in second half of 2010 helped to propel the economy out of recession
Domestic demand now key to sustaining this growth – rebound in consumer confidence will help

Falling unemploymentDespite the recession, 6.8% unemployment in Germany is the lowest for 20 years - government subsidies for “short-time” working schemes helped to smooth over effects of downturn
Unemployment in East Germany lower than in California
Germany had achieved a balanced budget before the global financial crisis and this gave it more freedom to use fiscal policy to boost demand
German fiscal stimulus was worth 4.5% of GDP
Economy more stable than PIGS
Germany avoided an asset price bubble - house prices barely increased in 20 years.
Painful labour market reforms have boosted competitiveness – shown by a fall in relative unit labour costs
Higher labour productivity and several years of wage restraint has helped to bring down relative unit labour costs for Germany – leading to an improvement in international competitiveness
This is important within a single currency where the possibility of a devaluation of the exchange rate within the system is taken away

Strong supply-side – strong trade!
Germany’s wealth lies in its human capital and commitment to research and development.
Next wave of globalisation will favour businesses and countries that develop competitive advantage in high value manufacturing and consumer services
German industry is highly capital and research intensive
Small and medium sized enterprises (SMEs) provide a distinctive contribution to the economy as does their regional banking system
Importance of research - RD input from businesses such as Bosch which generates 15 new patents a day!
German companies can now leverage the pick-up in global demand driven by fast-growing economies such as China’s

More focus on the economic in economic and monetary union
The global financial crisis hit German industry hard
But recovery has been robust
Structural strengths:
Strong productivity growth and wage restraint has lowered unit labour costs (a form of internal devaluation of currency)
Fiscal policy in better shape than many other EU countries
Underlying strength of the Mittelstand – small to medium sized enterprises
Banking system more resilient and willing to lend to fund R&D
Higher levels of household saving and stable property market
Strong non-price competitiveness – design / brand / performance
Germany committed to the Euro but they want more emphasis on the economic in economic and monetary union

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