<<<	articles
Almost a new economic miracle Samuel Brittan Financial Times 13/04/07 Something is stirring in the heartlands of the European Union - by which I mean the 12 original members of the eurozone. While we could recognise the technical achievement of establishing the euro, the overall economic record has long seemed abysmal; and the politicians who signed platitudinous communiqués calling for reform seemed to be whistling in the dark. In every year after 2000, up to and including 2005, the growth rate of the eurozone was less than that of the UK and usually less than that of the US, while unemployment was higher. The International Monetary Fund is sceptical of the apologia that lower labour utilisation might just reflect a preference for leisure, remarking in its new World Economic Outlook that "the much higher incidence of unemployment [than in the US], more extensive limits on working hours and heavy taxes on labour income all suggest that the outcome only partly reflects voluntary choices". Yet something is changing. It is a frequent feature of economic analysis that no sooner has a trend become conventional wisdom than it begins to change. The eurozone growth rate has at last started to pick up and overtook that of both the UK and the US in the last few months of 2006. Neither recessions nor booms go on forever. As the IMF remarks: "It is too early to assess definitively to what extent the present expansion may have reflected improving underlying economic conditions as well as a cyclical upswing." But it is hard to write off the experience of Germany, which accounts for nearly 30 per cent of eurozone output, quite so easily. The early reaction of German business to fierce cost pressures was to seek investment outlets abroad, both in the new members of the EU and in Asia. Now, however, German domestic growth, previously one of the lowest in the eurozone, is one of the highest. Probably more significant is the behaviour of unemployment, which peaked in 2005 at 10 per cent of the labour force and is now down to 7.7 per cent on standardised international definitions. Perhaps most surprising to those familiar with the pessimistic tone of so much high-brow German writing has been the rise in business optimism. The rise in value added tax introduced at the beginning of this year by the Merkel government looks as if it will make at most a dent. The Bundesbank is not noted for being a cheerleader. But its February analysis of German conditions is headed "Upturn with a bright outlook". Export success seems to have bred more confidence at home. The Bundesbank remarks that for the first time since 2000 there has been no further rise in the household savings ratio. At the same time "investment is clearly on the up". So, far from there being a fiscal stimulus the German budget deficit has fallen from around 4 per cent of gross domestic product earlier this decade to 1.3 per cent, the lowest in the Group of Seven industrial countries apart from Canada. While half of all unemployment is long-term and the productivity gap with the US continues to grow, the country is hardly yet a model, but it is at least time to recognise the turnround. What is so fascinating about the change is that it owes comparatively little to official policy. The government is using some of the extra VAT revenues to reduce social charges. But most of the turnround seems to reflect spontaneous behaviour by both business and labour. German businesses had to contend with both the rise in the euro and the "one size fits all" policies of the European Central Bank. In the end, however slowly and reluctantly, the German economy has adjusted. It became conventional to say that Germany was prevented by the European monetary union from having a needed devaluation. But Germany has had a real devaluation. It has been one of the very few countries apart from Japan to experience an actual fall in unit labour costs in manufacturing. While the nominal trade-weighted exchange rate for the euro has risen by more than 20 per cent since the beginning of 2000, the real effective German rate has fallen by nearly 10 per cent. There is nothing inevitable in what has happened. Italy, if you believe the statistics, has suffered a 35 per cent real appreciation over the same period and is now proving just the drag on the eurozone that German pessimists had feared at the outset. What I find heartening about what has happened is that the Germans have pulled themselves up by their bootstraps and have not waited for a Thatcher or Erhard to wake them up. None of this vindicates the "one size fits all" policy of the monetary union; nor does it suggest that the UK should throw away the inestimable advantage of a floating exchange rate to join the euro. Milton Friedman once put the case for a floating exchange rate by comparing it with daylight saving time, which spared us the need to get up an hour earlier to take advantage of the extra sunlight. Nevertheless, if the government refuses to fix a date for changing the clocks, we can as a last resort rise a little earlier.
<<<	articles
Published on www.samuelbrittan.co.uk Contact - samuel dot brittan at ft dot com