Monday 22 January 2018

Hamish McRae: You reap what you sow ... how German fiscal virtue has been rewarded as economy lifts off

German Chancellor Angela Merkel. Photo: Reuters
German Chancellor Angela Merkel. Photo: Reuters

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.

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