Tue, Sep 20, 2005 - Page 9 News List

Germany and UK on separate economic paths

In the 13 years since the UK dropped out of the European exchange-rate mechanism, its economy has charged ahead, in marked contrast with Germany, which has been plodding along under the double burden of euro rules and the costs of reunification

By Ashley Seager and Charlotte Moore  /  THE GUARDIAN , LONGON

ILLUSTRAION: YU SHA

What a difference 13 years make. On Sept. 16, 1992, the UK crashed ignominiously out of the European exchange-rate mechanism (ERM), leaving the country's latest attempt to emulate Germany's low-inflation, high growth economy in tatters.

Or so it seemed. The British Conservatives instantly lost their reputation for economic competence and have struggled ever since to regain the mantle. But it is now clear that Black Wednesday (as the day the UK dropped out of the ERM was dubbed) the sharp fall in the UK pound and the new monetary policy arrangements that followed it, set up by the then chancellor of the exchequer (finance minister) Norman Lamont, heralded a golden period of economic achievement for the UK that continues to this day.

There are now, however, signs that the UK economy could be slowing. A leak from the IMF on Sept. 15 showed that it had slashed its growth forecast for the UK to just 1.9 percent next year from the 2.6 percent it had previously pencilled in. Germany's voters, by contrast, were voting this past weekend between parties which have either started to reform the German economy or are promising to do so in a bid to rediscover long-lost growth and jobs.

The performance of the German economy over the same 13 years has been woeful, with growth coming in at about one-third of the British rate and with unemployment rising close to 5 million, while in the UK it has halved, to 1.4 million, over the same period. Figures out this week showed that the UK has more people in work than ever before.

At current growth rates British GDP could overtake Germany's in the next 10 to 15 years, even though the German population is one-third larger. The German Wirtschaftswunder (economic miracle) of the post-war decades is a distant memory.

Sir Alan Budd, former chief economic adviser to the UK Treasury, who experienced first-hand the UK's entry and exit from the ERM, as well as helping set up the Bank of England's monetary policy committee in 1997, describes the ERM exit as a key moment.

"That gave us a great start and allowed us strong growth with low inflation," he said, referring to the 15 percent fall in sterling that followed the ERM debacle, an event that gave manufacturing exporters a big boost, although the rise in the pound's value after 1996 has hindered manufacturers since.

"But the ERM experience taught us the importance of good policy. And Norman Lamont deserves great credit for very quickly putting in place a brilliant monetary policy system involving regular meetings between the chancellor and the governor of the Bank of England," he said.

He says that now the fundamental differences between the UK and Germany are that the UK has a flexible labor market and is more open to allowing in foreign firms and investors, something which Germany tends to deny itself.

Being in the euro meant Germany was forced to tighten fiscal policy in recent years at a time when the UK was able to run an expansionary fiscal policy as government spending was increased.

Lamont, never a fan of ERM membership, agrees: "Britain has benefited from having a different monetary policy framework, being outside the euro and having a more flexible labor market. The results speak for themselves."

Indeed, the president of the Bundesbank, Axel Weber, said in an interview with the London-based Guardian newspaper last week that Germany had a lot to learn from the UK in that the UK has reformed its labor market extensively over the past two decades and has created a strong and vibrant services sector which has replaced the jobs being lost in the manufacturing sector. Can anyone have imagined a Bundesbank chief saying that 13 years ago?

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