Virtue has been duly rewarded. That, at least, would seem to be the immediate conclusion to be drawn from the divergent paths taken by the German economy and that of much of the rest of the eurozone, notably Italy. Germany, which has clamped down on wages, brought in sweeping labour market reforms, cut its budget deficit, and boosted exports, has grown by 0.5 per cent in the first quarter of this year. Italy, which has done none of those things, shrank by 0.8 per cent. France, which under Nicolas Sarkozy had followed a more or less middle course, had a middling experience: a flat quarter.
So if the figures turn out to be right – and European economic statistics need to be treated with almost as much caution as British ones – it would seem that the eurozone members doing best are those that have followed austerity, and those that have done worst have let things rip.
But that would be too sweeping a conclusion. There must be some truth in the point that competitiveness is the key to economic growth, and if you compare the competitiveness and industrial production for Germany vis-à-vis those of France and Italy that message is clear. Germany wins on both counts, France is in the middle and Italy at the bottom – though Spain is lower still.
However, Germany's relative success is the result not just of a few years' austerity but of two generations and more of accumulated industrial excellence: the ability to make the things that the new rich of Asia, in particular, want to buy. Germany got its macro-economic policies more right than most, but its great contribution is the competence of its export sector.
So, while there is a temptation to see this in terms of the relationship with France, the difficulties of Greece and the future of the euro, there is an even bigger message here. This is that Europe's future prosperity will depend not on its macro-economic policies (though some of us think these have been abysmal), but rather on the competence of its businesses community.
I find that rather hopeful. If you look at Europe's best businesses they are outstanding by world standards. That goes for Germany but it also is true for France, Italy and Spain. Greece's best businesses do very well, too. Europe can prosper if it focuses on selling to the rest of the world, for the world economy as a whole is doing just fine.
There is a message here for the UK, too. We have just had some trade figures that show exports to Europe have been weak, as you might expect under the circumstances. But Europe apart, exports are not at all bad. Britain is gradually reducing its dependence on the eurozone, down to 45.3 per cent of our total exports. That is the lowest since data began in 1988, and down from 56 per cent 10 years ago and 53 per cent five years ago. Those figures are for goods exports; the proportion of non-goods exports is far lower still.
This is not the result of any conscious policy to detach ourselves; rather it is the mathematical effect of non-eurozone markets growing faster. That is what holds out hope for eurozone states, too, as Germany has demonstrated. If only other European countries can control their costs in the way Germany has done, they too can share in global growth.
Competitiveness can be maintained in two ways: one is the way Germany did, holding down wages and, hence, consumption; the other is the way southern European countries used before the euro was introduced – periodic devaluations. That story has been running hot and strong in the past few days and clearly there will be many bumpy months ahead. Meanwhile, instead of attacking the Germans, we should perhaps applaud what their exporters have achieved, which is pretty impressive.
Good news from the Bank?
The main focus today is the Bank of England's quarterly Inflation Report, which will be crawled over for justification as to why the monetary committee is not extending quantitative easing, despite figures suggesting that the UK economy is back in recession. Part of the answer is doubtless that the Bank does not believe the data. Part may also be that its worries about inflation have risen a few points. And another part – though it can't say this – is that it must reserve its firepower in case of really serious disruption in Europe.
Classic theory says that in the event of a run on the banking system or other collapse in confidence, central banks should print money without limit. But doing that just because the economy is growing too slowly is, well, questionable. It may even have damaged growth by feeding through into inflation. Money growth of GDP has been strong; it is real growth that has been so disappointing.
There is a further twist: the impact of the safe haven status of sterling and gilts. Money is flooding in. That has pushed up the pound and cut the cost of government borrowing. Might this help cut inflation and narrow the deficit? In theory, it must be good for the UK. It's about time Mervyn King was able to report that things came out better than expected instead of the reverse.Reuse content