What we can learn from Germany

„Germany is reaping the rewards for a decade of cold turkey. We can now see that it joined the euro at the wrong rate: the deutschmark was overvalued and wages and other costs had to be clamped down to allow inflation in the rest of the Eurozone to equalise costs elsewhere. After this decade Germany now has lower unit labour costs than most of the rest of Europe: it is hugely competitive. This has however been achieved at a price, which is very little rise in living standards for a decade. This has inculcated a culture of thrift, so that even when people have higher incomes they tend to save these rather than spend them.

Germany has come in for some criticism for this. If Europe's largest economy does not consume more, where will demand in Europe come from? The north/south divide in the Eurozone has become ever wider, with the Club Med countries allowing costs to rise and now unable to devalue their currency to get their competitiveness back. Slower growth (or even no growth) compounded their debt problems. Germany, by contrast, has its debts under control.

That leads to the second lesson. There is no need to run huge fiscal deficits to nurse an economy through recession. Germany went into the downturn with a relatively large national debt of more than 60 per cent of GDP, a contrast to the UK, which had less debt than 40 per cent. Germany's debts were in part a legacy of the costs of reunification, in part lax fiscal policies in earlier years. But just before the downturn the country had pulled itself back to fiscal balance, and this year it will have a deficit of 5.7 per cent of GDP, little more than half that of the UK. Bottom line: they have come through this crisis in better shape that we have because they have been more disciplined in their fiscal management.”