Last Tuesday morning, I drove off the Stena ‘Hollandia’ in the Hook of Holland en route to Germany and on to Croatia.
On either side of the road, houses were confidently decked out with sparkling orange flags as the Dutch nation prepared for the semi-finals that night.
They had every reason to be confident. By the time I arrived in Passau in Bavaria, the Netherlands were already one-nil up.
The journey from Holland leads you directly to the industrial heartland of Germany – theRuhrValley – and then onto the financial capital, Frankfurt, and towards the innovation hub – Bavaria.
When you drive through Germany you can actually see the economy.
By this I mean you can see the power of Germany in the constant flow of trucks transporting Germany’s exports out of the country.
This is the single biggest difference between driving across Britain from Holyhead to Harwich (which I did last Monday) and driving in Germany.
There is a different type of traffic in England. It is leisurely, mainly cars and coaches, and the motorways are relatively uncongested.
In Germany, the traffic is industrial, almost purposeful.
Trucks, if not quite outnumbering cars, are everywhere and you get the sense that this is a place that makes things, whereas in England there is precious little evidence of any industry on the roads.
This is an economy that doesn’t make much any more and what it does, isn’t transported in the back of lorries.
You can feel the German current account surplus on the A3 autobahn which takes you from north to south through the world’s second-biggest exporter, after China.
In the Ruhr, you are driving through an area that shouldn’t, according to most simple economic analysis, exist. After all, how could German heavy industry compete at the high-cost level in Germany with the likes of China? But it does, and not only does it compete, it wipes the floor with its cheaper competitors.
Years ago, when I was studying the German economy, a German lecturer of mine told me that if you wanted to understand the German way of doing things you had to understand the primacy of the white blue-collar, male worker in policy-making.
She explained that keeping the industrial worker productive, in work and on a good wage was a legacy of the rise of Hitler.
The post-war government had to ensure that the source of fanatical politics – mass unemployment among young working-class men – was avoided at all costs. She argued that once you got this, lots of things in modern Germany fell into place.
Yet while this might explain policy from the top down, it doesn’t ensure success, and the fact that large parts of the Ruhr are still producing despite the high costs has to be thanks to brilliant management at the firm level.
To generate the sort of productivity required to keep factories open, there needs to be enormous investment in people, in upgrading skills and making sure that the systems are constantly evolving and adapting.
Contrast this with England, where concerns for the white working-class male revolve largely around policing, law and order, and the Burberry brand.
It is hard to explain how the country that at one stage invented almost everything could have let its industrial might wane so dramatically in one or two generations. But that is what has happened.
As a result England is dependent on foreign capital to pay its way.
Germany, on the other hand, generates so much surplus capital from its exports that it doesn’t know what to do with the money.
This makes it reckless. Contrast the long-term thinking of Germany’s industry with the short-termism of some of its banks.
As you continue ontheA3 past Cologne and move on towards Frankfurt, the financial centre of the country, you approach the centre where the decisions are taken on where the money goes.
The companies make so much money and then put the cash on deposit in Frankfurt, but this money then has to be lent out somewhere.
A country with so much cash can finance almost everything, but here’s where Germany’s dilemma becomes apparent.
The German government is obsessed with austerity and wants to cut back on expenditure.
This means that the German banks need to find another productive home for all the cash.
This is why they recycle it in other European countries.
So German banks lend the cash to the likes of Greece, Spain and us.
They simply can’t do anything else. In a sense, Germany is in a cul-de-sac of its own making.
The heavy machinery of the Ruhr gets exported and the cash comes back to Frankfurt and is then lent out to the rest of Europe, in order that the rest of Europe can buy the products made further south on theA3 autobahn, the car-building and electronics hub of Bavaria.
If the rest of Europe hasn’t got the money to buy Germany’s consumer goods, Germany has to lend us the money to do so.
That is what is happening.
Today Irish banks owe German banks €127 billion and this pattern is repeated all over the EU. So the Germans are caught by their own success.
By being such a brilliant exporter, Germany has ensured that industry in other EU countries struggles, so the other EU countries fail to generate the surpluses they need to finance themselves.
They then must borrow the cash to preserve their living standards and they borrow the German cash that the Germans have to lend because the German government doesn’t want to spend the money at home.
This cycle pretty much ensures that the booms and busts we have seen on the periphery of Europe are a permanent feature of the euro.
The implication of this is that Germany will have to accept the increased risk of periodically being defaulted as the downside for the rest of the EU buying its goods.
I am not saying this is fair, I’m just saying that’s the way it goes. And this is where English history comes in, because when England was the workshop of the world, its capital was invested by the City in all sorts of foreign places and it too suffered periodic defaults.
Are the Germans prepared to pay this price? As I sat with the locals in Passau in Bavaria watching the second half of Holland against Uruguay, I got the distinct impression that they hadn’t figured out the question yet, let alone the answer.
When they do, I wonder what Germany will decide?
Interesting article, David, particularly the reflections on traffic in England and in Germany. One thing that perhaps is worth pointing out, though, is that we shouldn’t fall into the “because I can’t see it, it’s not worth anything” trap. I remember meeting a prominent TD when working in the competitiveness area and he was convinced Ireland couldn’t just make services, it had to make something he could see and see being shipped off on to export markets. Ireland now gets half its export revenues from services. In a way, that TD had it backwards. Everything is a service. Manufacturing is… Read more »
I was in Rolls Royce last week. They have an impressive set up there and in fairness are world class at producing engines for all types of aircraft, as well as addressing the sustainable energy market. Two UK companies, CSR and ARM, are found in virtually every mobile phone on the market. Brit bashing always has a welcome audience here, and I’ll cheerfully grant that Germany are ahead of the UK (and not just in the football stakes), but attending to motes vs beams springs to mind.
Hi Ronan and Triftcrim’. Points taken about services and about Rolls Royce, the article wasn’t meant to be Brit bashing just a few observations on a long drive. The crux was more about the German’s dilemma and the fact that as an exporter of capital you are bound to be in someway affected by the quality of those you lend to. In the German case, it can lead to far too much credit going to the wrong people within the Eurozone. As for the Brits they are ahead in the services game, Best David
Thriftcriminal, its interesting that you picked CSR and ARM in particular. Both of these are specifically Cambridge companies, somewhere David would have driven past if he took the A14 to Harwich. The area in and around Cambridge City is an island of innovation and entrepreneurship, and a start-up hot bed, particularly in technology. Its a stunning example of precisely the consequences of that sort of smart economy stuff that the Govt here waffles on about. Rolls Royce is a British brand but it would be hard to describe it as an exclusively British company. It is (was) a traditional British… Read more »
It’s easy to call it Brit bashing. I think that article is spot on and something I personally have observed myself in the past 10 years travelling in the UK. The UK was a phenonmenally well diversified economy with a very healthy investment ethos, which backed real ideas and real entrepreneurs. My own view is that they have turned into a bunch of bankers and management consultants and while the bankers invest, it’s not locally with the local inventor or entrepreneur and all they are doing is playing with the money, not really making it productive. There country is suffering… Read more »
David You mention Cologne. Towards the end of Sebald’s masterpiece ‘Austerlitz’ the main character passes through the city in a striking hallucinatory scene and is struck by the material abundance. (I think the same thing occurred to Bill Bryson now that I think about it.) Now, my German teacher is good value, ultra reliable and top-class time-keeper. She has never heard of Sebald, however when we discussed the Greek situation a few weeks ago she followed the Bild line and was adamant that Germany should not be bailing out a corrupt state. Unless you know about these things or have… Read more »
You are correct, the Germans (and others like Japan, Korea, Taiwan) have resolved to keep their industrial base. Meanwhile other countries, especially in the English speaking countries, decided from the mid-1980s onwards to move towards more sophisticated ways of making wealth. This is what is described in “itulip.com” as the FIRE economic [ Finance, Insurance, Real Estate). We in Ireland are also facing the challenge of trying to keep our industrial base. The GP Finance spokesperson, Dan Boil, responds to this challenge with his dictum “saving the banks is more important than saving the factories”. Ridiculous in the extreme, considering… Read more »
Germany’s main lead is in material science and chemicals. Most esoteric alloys, plastics, optics you name it – they lead the world in it. Quality comes not only from management, but from getting first principles right and deploying it as a standard across their entire industry. This requires coordination at industry and government level. It also explains why they are the world’s toolmakers. When you start an operation in Germany, you are 90% of the way to a quality product or service. And before we start saying Germany is a heavy manufacturing country – SAP (leading software for enterprises accounts,… Read more »
This is Davids old default mantra, now he is saying that Germany will carry the can for the rest of us. Yes we are in a bad state we will owe 140 billion including NAMA by the end of 2010, then 160 billion by the end of 2011, then 180 billion by the end of 2012 and on it goes on and on. By this stage our borrowing rates will be that of Greece and the bond markets will be closed to us. We need to stop the borrowing now , we need to cut the deficit now before its… Read more »
We used to focus on creating stuff and real value once. But since we got sophisticated, we moved above all of that….We discovered the virtul value of virtual concepts….like our gigantuan pride….
Just look at Seanie, the man you could get money for nothing. And he is proud too.
Kunstler made commentary that the “something for nothing” society/economy would collapse and would only re-emerge if it became much simpler and much more humbler. But, Ireland, deviantly is fighting that Kunstlerian promise. We are too sophisticated for a disaster to happen to us. Our self concept comes first.
Think I have read it all, blaming the unemployed ‘working classes’ for the rise of Adolf Hitler when every serious study done on the period CLEARLY indicates it was the bankers (at home and aborad), German industrialists/arms manufacturers, the German senior military officer class (seeking to have the honour of the armed forces restored) and most of all the middle classes (who actually voted him in) who brought Hitler to power. Unemployment (during the Great Depression) went across all social strata but particularly hit the middle classes/petit bourgeois who saw their savings wiped out (the working classes were too poor… Read more »
I was in Germany on holiday recently visiting relatives of my wife. We travelled by Eurostar from London. I was shocked by the number of factories along the train line as we travelled to Cologne and on to Hannover. I began to fully understand what David had being saying about how Germany was the powerhouse of Europe. I was genuinely surprised by how much I enjoyed my time there. We stayed in a B&B for less than 40 Euro a night. Food and drink prices were reasonable. A bottle of Chianti for 2 Euro! etc. I really enjoyed the company… Read more »
1. “A country with so much cash can finance almost everything, but here’s where Germany’s dilemma becomes apparent. The German government is obsessed with austerity and wants to cut back on expenditure.” 2. “They then must borrow the cash to preserve their living standards and they borrow the German cash that the Germans have to lend because the German government doesn’t want to spend the money at home.” Using these two quotes from David’s article above, I have a question that may seem irrelvant and stupid but nevertheless here is is; If the Germans decided that they would instead spend… Read more »
With all due respect Deco or not, whatever, I am basing my analysis on first hand evidence and can back it up with real world examples a couple of which I have already given you, it’s called primary data. Please do enlighten us to your own experience. I suspect you are widely read amongst the English speaking media…. which might just have a certain perspective. I don’t know of any society or economy that has it all right, none, that place would be called a utopia if it existed, but it doesn’t and France certainly is no Utopia, hence I… Read more »
Hi, These articles just get stranger. The need to constantly recycle the what’s and whys of what went wrong in this recent recession is truly astounding. If every word written in these articles and that of all news and blog sites were turned into euro coins then for sure they’d be no shortage of money in the world. These articles lead you so far from reality that I believe most of use are in a parallel universe. I’m sorry to be so blunt and I really don’t want to offend, but people unless you want yourselves and each generation to… Read more »
The Eurozone – stephanieflanders
http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/07/the_eurozone_crisis_whats_it_a.html
Spotted link which I think is interesting
http://www.lobster-magazine.co.uk/articles/rrtalk.htm
Also Reading Peter Hitchens columist for Mail on Sunday, his book Abolition of Britian at the moment. Think his blog is worth a read. He recently won a George Orwell award
This blows everything out of the water. http://reprap.org/wiki/Main_Page
Hello All, I find this article very interesting. I know I am going to split hairs but I would like to point out a few observations and try and confine my response to the context of the original article. First of all David says “Germany, on the other hand, generates so much surplus capital from its exports that it doesn’t know what to do with the money. This makes it reckless.” I would suggest that it makes the German banks reckless as opposed to Germany itself reckless. The total number of bankers who landed us in the shit would fit… Read more »
One could argue the possibility of default on the periphery is worth the security of knowing competition against the hub centre is lessened with competitors enfeebled by the boa constrictor of debt to the centre. German banks 1 : Peripheral banks 0 US Stimulus 1 : European Stimulus 0 China Stimulus 1 : European Stimulus 0 Instead of a stimulus package in Germany, that would help consumers across the Eurozone, Germany is going for austerity and preaching austerity to Eurozone banks. This shows a lack of trust that stimulus packages will be spent wisely by PIIGS; or maybe a lack… Read more »
The difference between a British and a German Industrialists is that the MD of the former will have the financial times on his/her desk, share price is very important, where the latter will have a sample or a model of his/her product and quality is the primary concern. The British are more imaginative and inventive, but they find mass production boring and the decline in their manufacturing was triggered by the rise of Japan and it’s quality awareness. In small volume high value, high skill niche areas, like aero engines they excel, but in high volume, low value areas they… Read more »
The Germans can choose where to allocate their surplus money. If they decide that Europe is not the most productive place to invest it, they can invest elsewhere. They can cut off the supply to us, what then? Rather, it is us who haven’t figured out what is the fundamental question. Such as … why can’t we trade and export like the Germans? Are we too thick, too lazy, too corrupt, too naive? What is wrong with us? Soccer analogy. When you get whipped 7 goals to nil, you can do a number of things. Blame each other, blame the… Read more »
Hi David, I noticed in my 4 days in Germany a few years ago that the cities (Frankfurt and Kaiserslautern in my case) are free from traffic congestion. It was quite remarkable how pleasant the streetscapes of the cities were to stroll around and take in the sights and sounds, plenty of green areas, little noise apart from the tinkling of trams, nobody in a mad panic to get from A to B, no chuggers, no intimidating undesireables and a low key police presence. I came to the conclusion that Suburbia must not exist there, that people are happy to… Read more »
paddythepig is too easy on the Germans (and the French, lets not forget them). David McWilliams has tried time and time again to draw attention to the irresponsibilty involved in Germany’s lending 120 Billion to our banks, but it seems to me that most people skip over his argument as if it were a clever debating point. Hard as it is for Celtic Cubs to swallow, but the truth is that Ireland (and in particular its useless ruling class) is same infantilised society of their parents and grandparents, and is easily taken advantage of when it tries to play with… Read more »
hi toh I don’t follow your reasoning with regard the German banks. A number of banks, including German and French ones, made a very poor bet, and since it’s gone bad, will lose a lot of money. What’s the problem? I wouldn’t quote the Economist myself; since it’s decision in the mid 90s to ‘broaden it’s appeal’ (much acclaimed at the time – accessibility etc) it’s articles are generally shallow, poorly thought out, and as a publication, are vague. They did have an article in 2005 talking about a possible US housing bubble, but given the staggering scale of the… Read more »
Quote from the Teutonic Paradox by David McWilliams: “By being such a brilliant exporter, Germany has ensured that industry in other EU countries struggles, so the other EU countries fail to generate the surpluses they need to finance themselves. They then must borrow the cash to preserve their living standards and they borrow the German cash that the Germans have to lend because the German government doesn’t want to spend the money at home.” Stan P. wrote: [rant ON] please read it carefully. The problem is that the German …. GOVERNMENT does not want to spent money at home. Let… Read more »
The problem with this idea that the Germans are responsible for their trade surpluses, is that it fails to recognize the abdication of other countries regarding their trade deficits. Spain and Britain have had considerable trade deficits for over a decade. However, the domestic politicians told the populace that this was never a problem. In the US Dick Cheney even commented “deficits don’t matter”. The countries who are indebted are also responsible for their own voodoo economics mindset, and for taking their own politicians seriously. Media organizations are being soft on the ‘consumeriatat’ telling them that it is somebody else’s… Read more »
In a normal economic union ie, one which is also a political union, there is nothing particularly disturbing in having a concentration of production and financial (or other) services in particular areas and having people throughout the union borrow in order to purchase products or services. Such a system works when there is overall regulation of credit and there are compensating flows of funds from richer to less richer areas through central government taxing and spending power. This happens to some degree in all states and is the basis of the prosperity of very large countries such as the US,… Read more »
[…] the above highlights is systematic flaws within the Euro-zone. As Irish economist David McWilliams argues, the Euro is geared towards having economic melt-downs over regular […]