For a few years after the Berlin Wall fell in 1989 the economic position of East Germany was compared unfavourably with that of the Czech Republic. The Czechs had to rely on their advantage of cheap labour for their re-entry into the world of western market economies. East Germany, on the other hand, was almost immediately plugged in to the German wage and welfare system, which it could not afford. As a result it became a depressed zone which many people tried to leave and which depended on transfers from the more prosperous western parts of Germany.
All that is now passing. The German version of the European social model has been crumbling, especially on its eastern edges. German workers have accepted very low pay increases or sometimes even taken pay cuts in order to preserve their employment prospects. This has been linked with other symptoms such as a drop in the unionisation percentage of the German labour force. It might make good headlines to compare Angela Merkel to Margaret Thatcher, but the comparison does not work. The changes have been internally generated by the private sector with help from reforms inaugurated in the closing years of the Schröder government.
One would have thought that all the many commentators who were calling for structural reform must have meant aligning labour costs more closely to labour market conditions. But now that this is happening they continue grumbling and asking for “flexibility” – to which one can only ask: what do they mean except platitudinous preaching?
If we look at the eurozone as a whole, the growth rate of real gross domestic product has been below that of the US and UK in every year bar one since 1997. Now, however, all that is changing. The eurozone growth rate looks as if it will comfortably exceed that of the US when we have the full third quarter figures.
It is too early to jump for joy. A research paper by three European Central Bank economists has shown pretty convincingly that this narrowing of the gap is cyclical and does not represent a real productivity spurt.* Allowing for differences in hours worked, holidays and so on, productivity in the eurozone was not very different from that of the US in the mid-1990s. But since then US productivity has put on a spurt which the eurozone has been unable or unwilling to follow.
The authors attribute the difference to the much greater advance of information technology in the US. Their main policy recommendation – worthy of a British prime minister’s speech – is more spending on research and development, as if that were an independent cause of progress rather than something that may or may not come of its own accord in a dynamic economy. Japan in its miracle growth years spent very little on R&D.
More important in my view are the signs that there is less involuntary idleness in the eurozone than there used to be. Few commentators have noticed that the unemployment rate there has dropped from more than 10 per cent in the late 1990s to below 8 per cent on the latest count. Meanwhile, British unemployment has been creeping up, although still 2½ percentage points below the eurozone rate. Unemployment figures on their own can, however, be misleading. More convincing is the comparison made in the Goldman Sachs October 12 European Weekly Analyst showing the eurozone labour participation rates rising strongly, although not quite all the way to the US rates.
The eurozone has suffered from the “one monetary policy fits all” syndrome. But Germany is escaping from it by internal changes while Italy has not yet found a substitute for its inability to devalue. There has, however, been a slight downward adjustment of the Italian government bond rating by one of the big credit rating agencies. This is confirmation of a long-held view that the bond market would be a more effective influence for fiscal virtue than any number of growth and stability pacts.
An article in the October issue of the British Journal of Political Science by two Dutch scholars examines a relatively new doctrine with the horrible name of “post-productivism”, which asserts that people would prefer to work less, even if this means earning less but having more free time. The European growth lag cannot be completely explained in these terms, but we are getting there as most estimates now show a very small amount of slack in European labour markets.
The simultaneous acceleration of eurozone growth and retardation of that of America should be beneficial in reducing the world imbalances on which so much is said. There is too much fuss made about European public sector deficits and low saving rates which are helpful in offsetting the very high saving rates in east Asia and thus preventing a world slump. Why not stop pulling long faces and leave eurozone countries to their own devices?
*Labour Productivity Developments in the Euro Area, Occasional Paper 53