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February 18, 2012

As 2012 begins, it appears we are in store for another year of headlines dominated by economic doom, gloom and disparity. With the debt crisis turning two this spring and another recession either already here or at the gates, two recently published articles effectively summed up the current economic environment.

The first was entitled “Economic Reports Surprise in Britain and Germany” and highlighted how deeply the two nations are diverging, with Germany showing solid improvements as Britain sinks deeper into recession than earlier predicted. The second article, entitled “Germany’s Economic Engine Chugs Along While France Falters” focused on the more fundamental differences existing between Germany and France today, viewed by a journalist taking the 10-hour trip between Paris and Berlin by rail.

Through the oftentimes-overwhelming haze of bad economic news from the past several years, stories out of Europe’s largest economy have been, are, and look to continue to be rather bright. The start of 2012 saw unemployment at historic lows (labor shortages are still wide spread) and growth, while slowing, is still expected to occur.

After expanding by 3.6% in 2010 and 3.0% in 2011, the German economy is roughly 200 billion euros larger than it was in 2009 when it exited recession. Consumer spending is continuing its solid rise and investors appear to be as optimistic as ever, with sentiment posting several consecutive increases, even as the economy posted a slight quarterly contraction.

Contrasted with Britain, Germany seems to be merely suffering from the gentle ripple effect of the debt crisis, with ramifications that seem to be already behind it. The UK as a whole will probably reenter recession this winter, after several years of slow and disappointing growth. Amidst this dull outlook, London is still planning to go ahead with austerity measures that will eliminate nearly three quarters of a million public sector jobs, something that will no doubt only further depress economic output and raise unemployment.

German divergence with France is also stark. While France had a sturdier recovery than Britain did from the recession in 2009, it too is heavily indebted and has yet to display the robust growth and consolidation of its industrious neighbor. Austerity in France was too little too late, and exposure to the PIIGS for many of Frances largest financial institutions was too deep.

On his trip through both nations the journalist cites numerous examples of how France and Germany seem so inherently different. French cities are grey and decaying, construction is largely absent and investment in innovation and basic industry nowhere to be seen. Decades of excessive spending has left the government with a mountain of debt, and no money to bankroll important public works and investments now when they are most needed. German cities are by comparison a mess of cranes and advertisements for new apartment blocks and office districts…the highways and trains are immaculate and investment in public infrastructure is ubiquitous. The 80 billion euro austerity package that Berlin adopted in 2009 as the recession took hold left no visible scars and is seemingly forgotten.

There was a time fairly recently when the economic question of the day was whether it was more prudent to slash budgets under the banner of austerity or spend liberally to stabilize the economy and promote future growth. In 2009 Germany stood alone for austerity, a position that it was greatly criticized for at the time. Fast-forward to 2012 and one can say its terribly apparent what appears to have been more successful. The nations that chose to spend on stimulus did so at the expense of their prized credit ratings, and have precious little to show for it.

As mentioned earlier, the large first round of budget consolidation in Germany is hardly remembered now and has been followed by similar, well-placed spending cuts. To add insult to injury, these free spending nations are now politically weaker than ever, particularly in comparison to Germany, and are now forced to adopt the most austere of budgets after years of disappointing growth while they stand on the precipice of yet another recession.

Opposition to austerity, be it in London, Paris, Rome or Washington has largely been silenced, and the question of our day is not if we should pull back, but rather how far and what are we willing to sacrifice. While often bemoaning the burdens they must shoulder, many in Berlin can quietly celebrate not only their strong economic footing, but also how effectively the rest of the continent has fallen into lock step.