McKinsey says Germany in terminal decline

 

According to a McKinsey study, Germany’s middle classes are headed for terminal decline, unless there is a fundamental change in economic policy. The reason is that too many middle class Germans make a living in old and decaying industry. To arrest this trend, the consultancy recommends a set of policies to assure 3% growth. For this happen, 30,000 new companies need to be created every year, the female work participation rate will have to rise, and expenditure will have to be shifted towards training. Special sectors should receive state aid, such as health care, financial sector, and environment (would this be legal under EU law?) McKinsey calculates that on present growth trends, about 10m Germans would no longer receive middle class incomes. For a summary see this report in Frankfurter Allgemeine.

 

The FT, which has also a report on this story, quotes the Berlin-base DIW institute as saying that Germany’s strategy has been to raise productivity growth, and that “this concept has now reached its limits” (this is a very strange idea. How can Germany achieve growth averging 3% per annum without higher productivity growth?). McKinsey blamed four factors for Germany’s decline: falling productivity growth, falling employment rates, an ageing population, and a lousy education system.

 

 

Larry Summers on globalisation

Fitting with the same theme, Larry Summers writes the second instalment of his mini-series on globalisation. Last week he argued that the present globalisation formula no longer works. Quoting Robert Reich, the former Clinton administration labour secretary, Summers argues that globalisation benefits workers and companies disproportionately, and this is where politics comes in. Governments must ensure to end harmful tax competition, and harmful regulatory competition. Obviously, in Europe we have had this debate for some time, but it is interesting that this “race to the bottom” argument is now being endorsed by the US economic establishment.

 

 

 

Risk and optimism are back

The dominant theme in the international financial press is whether the crisis is over. The FT says an increasing number of people think so, despite the fact that the US has entered what is likely to be a long downturn. The article has a summary of all the pocket of the financial markets where optimism has now returned, and is quoting some analysts to make the case that everything is hunky-dory. Gold is falling, so is the euro, so are bonds, and the credit market is once again booming. However, the FT’s cheery description is very much the exception. Almost all financial blogs are extremely gloomy. See here for a selection of some of what has been said.

 

 

Krugman on optimism

Paul Krugman said in his New York Times column that the optimists may be right. The worst of this crisis may indeed be over. He says what a shame. He would have preferred a much longer crisis because that would enabled us to fix the financial system. Now that the crisis is over, the need for such a fix is becoming less apparent, which will have the effect that the next crisis is going to be even worse than this one.

 

 

Willem Buiter on the Bank of England

In another memorable blog post, Willem Buiter describes the Bank of England’s recent optimistic analysis as “complete bollocks”. He says the report greatly underestimates what happened in the financial sector so far, and is woefully negligent in its estimates on subprime delinquency rates. He says it is impossible at this point to make any estimates.

 

 

 

Daniela Schwarzer on the European Commission

Writing in Eurozone Watch Daniela Schwarzer launches a damning criticism of the European Commission ahead of Wednesday’s scheduled report on the future of EMU. She says the document will stay silent on issues such as how to manage cyclical divergences. It might just about say something about the external representation of the euro area, but will almost surely not make any proposals about euro area governance. She said there are several reasons’ for the Commission’s apathy. One is that the Commission has been able to agree on an adequate response to some of the recent issues. Another is more fundamental. The Commission has failed to give any political leadership on the future of the euro, contenting itself with the role of guardian of the treaty. And finally, the Commission does not want to get involved in a Franco-German dispute.

 

 

 

Sarkozy’s first year

It is tribute time again. The IHT had a long tribute to Sarko’s first year, and in the good tradition of American journalism did manage to find some people in France, who actually had something nice to say about the man. Much of the focus of the article is on whether Sarko’s mini-reforms will have any impact, with some saying that the only thing he did to the 35-hour week is not to abolish it, but to compensate people, while are these believe there will be real long-term change. Elie Cohen was quoted as saying that Sarko’s future reform will depend on whether he is going for legacy, or for a second term. (We think we know the answer, but then we are cynics anyway).

 

 

Munchau on Italy

No, this is not about how long Italy can stay in the euro, but about what Italy needs to do improve economic growth. Wolfgang Munchau makes the point in his FT column that there exists an inverse relationship between the length of an economic reform programme and its ultimate success, which is one of the deeper reasons why the Prodi government failed to introduce good reforms. The number one priority for Italy are measures to raise productivity growth. Munchau suggests two: reform the public administration, by reducing its staff and simplify procedures. And second to ensure that every Italian school child has a reasonable command for conversational English, to ensure participation in the internet. Large parts of the country are not participating in the 21^st century, and this is one of the reason for low productivity growth.

 

 

Why Hillary is a bigger gamble

We have stayed out of from US election politics, as most newspaper commentaries on the subject are well worth avoiding (remember how many columnists have written Hillary Clinton off too early). This comment by Clive Crook, who is an Obama supporter, is worth reading, as he makes the case now why Hillary would be a bad candidate – in contrast to a rapidly emerging view that she would stand a better chance to defeat McCain. The essential point is that McCain will be able to draw many Republicans and centrists Democrats into his fold (an assertion we do not necessarily accept), while a Clinton candidacy will definitely lead to a disillusionment of the new Obama Democrats. Crook also warns against trying to extrapolate the past into the future, as the rules of American politics have changed.

 

 

Hegel on the future of the EU

Le Figaro has a thoughtful article by Alexandre Adler about the future of Europe. He starts with a quote by Hegel about the death of a nation, which says effectively (though far more elegantly) that countries don’t explode, they fall into habitual boredom, devoid esprit and new ideas. Hegel was talking about Europe after the 30-year war, but Adler feels there are some parallels with today’s EU, which is also going about its business, but without much political spirit. In the end, he concludes it will be up to France and Germany to change this.

 

 

 

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