What Britain can learn from Germany’s economic reforms

How political economy can change. For the past 15 years Britain has enjoyed an evident edge over Germany in labour flexibility, productivity and control of the public finances. On a whole raft of measures – employment, labour costs, deregulation and fiscal ratios – Britain could claim a healthier, more adaptive model and significantly better outcomes in macroeconomic performance.

The result is an admonition from a eurosceptic think tank – inconceivable just a few years ago – lauding the recent German experience and suggesting there are now lessons Britain can learn from an economic model dismissed until now as a sclerotic basket case. What Britain Can Learn from Germany by David B Smith (formerly chief economist at Williams de Broë) and Eugen Mihaita of the University of Derby is published this week by Global Vision.

The paper marshals impressive numbers. OECD figures show that in 1997 general government outlays in Britain accounted for 41.2% of gross domestic product (GDP) compared with 48.3% in Germany, 49.4% in what was to become the eurozone and 35.4% in the US. In the same year, total tax and other receipts such as interest, rents and profits from public enterprises amounted to 39.1% of GDP in Britain, against 45.7% in Germany, 46.7% in the eurozone and 34.6% in America.

All four had cyclically-adjusted general government deficits in that year, ranging from 0.4% of GDP in the US to 1.7% in the UK, 1.9% in Germany and 2.1% in the eurozone.

Ten years later and this picture has changed radically. Continental European economies have sought to improve their fiscal positions while Britain has gone the other way. The share of government outlays in British GDP has risen by 3.4 percentage points to 44.6%, while Germany has cut its by 4% to 44.3% and the eurozone has retrenched by 3% to 46.4%.

Figures for government receipts also show Britain going against much of the developed world. The ratio of official receipts to GDP in Britain rose by 2.6 percentage points between 1997 and 2007 to 41.7%, while the corresponding ratio in Germany fell by 1.4 % to 44.3% and the eurozone eased by 1% to 45.7%. As for the government deficit, the OECD anticipates this will have represented 3.1% of national output in Britain in 2007, against 0.1% in Germany, 0.6% in the eurozone and 3% in America.

The thesis of reform through structural improvement in the continent’s largest economy is not without its flaws. The reform programme put in place by the coalition led by Chancellor Angela Merkel has been less than wholehearted. Its pace, if not direction, has recently been faltering. Indeed, the most significant reforms – the Agenda 2010 or Hartz laws – were introduced in 2003 by former Social Democrat Chancellor Gerhard Schroder, “the slightly surprising quasi-hero” as the paper describes him. Merkel, by contrast, has shown every sign of sticking to Big Government conservatism that cannot be confused with the dynamics of the Margaret Thatcher premiership.