UKIP does not represent the majority of the British population. John Major

Berlin's Success is London's Failure

Neither Great Britain nor Germany can take full credit for their economic recovery.

Moving around Europe for the last three years has proven to be the best way to develop bipolar disorder. Berlin reminds me of what the twenties might have been like: a buzzing and bustling city, with artists, start-up entrepreneurs (sometimes one person can fill both roles), flooded with people from all over the world despite the grammatical torture inflicted on foreigners by the German language. By comparison, Italy and Spain look like the sinking Titanics of the European flotilla – with the added difficulty that there’s not even money to pay the band to keep playing as people drown in the economic quagmire.

The talk of the town in Germany has been: “We must now ‘lead’ Europe.” In London, meanwhile, the government feels so successful and sovereign that it is considering leaving Europe. The British journalist William Ward recently published an op-ed in Italy arguing that London’s “political and economic approach works, so much that we have been able more than any other country to attract people from the other 26 member states.” He continues: “We respect your (now fleeting) faith in the ‘European ideal,’ but – with all due respect – this has never been how we conceived of Europe. […] For us [British], the EU should be more like an English Gentlemen’s Club.” But the question is: Could the German and British models have succeeded without the failure of the other countries?

In suggesting this question, I reminisce about the father of contemporary capitalism: Gordon Gekko from the movie “Wall Street,” the god of any Anglo-Saxon MBA program. He says: “Money isn’t made or lost, it is simply transferred from one perception to another.” In London’s case, this is a legitimate and straightforward concern: How much money have the City of London’s financial institutions actually generated? I’m not talking about the salaries that buy you a 50-pound plate of pasta in the lousy Italian restaurants in Canary Wharf. I’m talking about “real” money, about “economic wealth,” not just about money that was “transferred” through a mathematical formula in cell C32 of a random Excel spreadsheet.

Britain’s industrial sector has been erased and has been replaced by a booming financial sector. The government itself admitted that the British economy was overly reliant on financial services, and specifically on the City of London. Yet it remains to be proven that contemporary finance actually generates “wealth.” There’s a reason why Gordon Gekko relocates his business from New York to London at the end of “Money Never Sleeps” (the sequel to “Wall Street”): lax regulations, also called “London’s light touch” by some.

In addition, London offers multiple ways of escaping continental European taxation – people can relocate to the City of London, and companies can set up holdings on the other side of the English Channel – and in turn triangulates domestic tax advantages with the many off-shore tax exemptions fed by London. The ghost of Marxism is haunting Europe again: The continent pays the salaries, and London cashes in on the profit. No wonder that Italians, Greeks, and Spaniards leave the flames of that tax hell in their respective countries and relocate to London as well (it can’t be because of the weather).

Claiming that “London is a success story” and that Europe is failing is equivalent to saying that Victorian England was a great model and colonial India was a mess. It’s okay that the British are better off – but there’s no need to brag about it. Without Europe’s failure, London would not be as successful. To make up for state revenue that migrated across the English channel, and to compensate for the effects of hyper-finance, continental taxes had to be increased, especially on salaries. Most Europeans did not benefit from the elusive British tax environment.

The German story is more complex. Germany is a great country – next year I will be eligible for a German passport, and I will take up the offer. Germany used to be called “the sick man of Europe,” but the country was wise enough to institute reforms before the crisis hit. In 2004, the Social Democratic government introduced bills that established low-wage employment options (for as little as 400 Euro a month, which translates into just 18 US dollars per day) and that gave a green light to unions to renegotiate contracts with medium and large companies. Germans were also the first to set foot into Asia and understand the local markets there.

Yes, Germany is great. But I am not convinced that all of Germany’s success can be explained with German merit. The Euro has been a force multiplier; it has polarized the gap between booming and busting economies. At the onset of the crisis, Germany was the only major European economy with decreasing rates of unemployment. In the industrial areas of Bavaria and Baden-Württemberg, unemployment is below 4 percent. The Chinese like German BMWs, and exports are booming.

The German advantage relies more on advantageous exchange rates than on low labor costs and high flexibility. Some say that Germany’s exports are high-cost and high-quality products, and that the crisis-induced lower exchange rate (which made German cars more affordable overseas) exerted a limited impact. I am not convinced by that argument, either. I recognize that German products are good (I drive a BMW, not a Fiat, to the chagrin of my Italian dad), but it’s impossible to ignore the effects of a twenty to thirty percent discount because of cheaper Euro currency exchange rates.

And there is more. Traditionally, Germany has always done well after a crisis – and the rest of Europe followed suit. This has not been the case after 2008. Germany recovered but the rest of Europe did not. Before the introduction of austerity measures, this was due to the famed German “Mittelstand,” the sector of small and medium-sized businesses, which quickly switched from traditional European suppliers to Asian or Eastern European partners. You cannot blame the excellent German entrepreneurs, they simply took advantage of the new rules of the “Euro-nomic” game. But Euronomics is flawed and unsustainable.

Again: There would be no German success without Europe’s failure. Currency pegging has provided new opportunities for German exports, and the German advantage has been further cemented through the ill-conceived and cynically planned imposition of “austerity” on cash-strapped countries. Germany knows too well that austerity does not work: Reforming its own economy in the early 2000s, the country constantly violated Maastricht budget deficit limits. How could Germany ever expect Italy, Spain, and Greece to reform their own economies without deficit spending?

Great Britain considers an exit from the EU. British morale and jokes aside, the basic idea behind the proposal is that it would allow for even more freedom in terms of financial regulation and central bank authority. This is understandable: The UK is a group of islands, and insular behavior can be expected. Viscount Castlereagh, the main British negotiator at the 19th-century Congress of Vienna, would be happy. His strategy was to sit back as Europe tried to deal with internal conflicts. He would be even happier today: Germany is no island, and as soon as it starts to believe in the autonomy of the German economic model, the country’s good fortunes will soon end.

Developing a troubled relationship with other European countries is Germany’s first step in that direction. The name of the troubles: austerity! It’s not all Germany’s fault – resistance to “German-style” reform is deeply rooted in parts of Southern Europe, as anyone who has ever tried to negotiate with Italian unions can tell. But the only way to get out of this crisis is a combination of reforms, German agreement to give up parts of its wealth, and the recalibration of the economic equilibrium of the Eurozone. That will avoid continental bipolar disorder. If these steps are not taken, a sudden and deeper crash awaits – and simply selling more cars to China won’t save the day for Germany.

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