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.

So this is less a story of powerful German recovery than of relentless frittering away of British advantage. The overall conclusions – however provocative to eurosceptic ears – are strongly argued and pose searching questions for those who wish to see Britain continue to enjoy its own fiscal and monetary sovereignty. How can this be shown to be the superior option with a high regulation, high tax and spending government in charge?

“If there is a villain,” conclude Smith and Mihaita, “it must be Gordon Brown, who – having inherited a healthy mid-Atlantic economy with tax and spending burdens low by Continental standards and a deregulated labour market – has spent the past decade inexorably forcing the British economy into the high spending and regulatory straight jacket that has so crippled the performance of ‘old Europe’ while dissembling about prudence, fiscal responsibility and the need for a globally competitive economy.” The lower tax advantage Britain enjoyed, its relatively straightforward tax and benefit system, have all been corroded.

The paper examines four areas – monetary policy, labour market reform, industrial commitment and government (Proper Federal System versus Devolution Hotch Potch). The British regime is over-dependent on one contentious inflation measure but concerns over Bundesbank inflexibility leave some unanswered questions in this section. Those on labour market reform and industrial commitment are well observed and powerfully stated. Arguably the most stimulating section is on the constitutional comparison. The critique of devolution and the advocacy of federalism is awkwardly compressed here and surely deserves a paper on its own.

The overall conclusion is that Britain can learn from Germany’s mistakes “and from the successful, albeit surreptitious way in which Germany has improved its competitiveness through labour market deregulation, aggressive management of wage costs and some limited rolling back of the share of national output absorbed by the state”. It may not be a full paean of praise for the German model. But what an indictment of Britain and the Labour government that it has come to this.