Whither the rest of us?cg gulker

Whither the “rest of us”?cg gulker . Despite all the bad news on the US economy over the past year or so, it has still contrived to do better than some of its major competitors. Last week, Germany announced that its growth rate had been only 0.6 per cent in 2001 (or 0.8 per cent on the calendar-adjusted basis used by most economists). That compares with a likely growth rate of 1.0 per cent for the US.The odd thing about this comparison is that, while the US suffered from an earlier period of excess – which might go some way to explaining the subsequent hangover – Germany only managed to plod along before falling over the edge of last year’s recessionary cliff. Germany appears to have the worst of all worlds – no decent expansion in the late 1990s but a rotten recession to follow. It doesn’t know how to party but it still ends up with terrible hangovers.
Germany’s weakness is a peculiar affair not just in relation to the US but also relative to other countries within the eurozone. France, Italy and others have all had better growth rates last year relative to Germany’s less-than-satisfactory achievement.

Something, therefore, has gone wrong that is specifically related to the performance of the Germany economy alone.In this column a few weeks ago, I suggested Germany’s problems partly stemmed from difficulties associated with reunification. In particular, the boom in construction spending at the beginning of the 1990s was still in the process of unwinding, leaving the domestic economy very poorly supported relative to the likes of France. Earlier excess was thus being paid for by persistent economic under-performance.This, however, may prove to be only one part of the underlying story. Germany’s present-day experience is also an interesting test case for the euro. Could it be that the euro is leading to the emergence of winners and losers within the eurozone? Could it be that, contrary to received wisdom, Germany is proving to be the biggest loser from the euro’s formation? And could it be that the fiscal Stability Pact – a key plank supporting the euro – is likely to be sorely tested from that most unlikely of sources, the hitherto fiscally respectable Germans?Consider the evidence. There’s a good chance that Germany has suffered from an “inappropriate” entry level for its exchange rate into the euro, reflected in a poor competitive position against its near neighbours.

One way to show this is to look at relative unit labour costs, shown in the first chart. These numbers, produced by the IMF, track exchange rate movements adjusted for movements in wages and productivity. They show that, for Germany, the “real exchange rate” has remained very high relative to those in other European countries. Ultimately, this story is bad news for profits and capital spending. Given these figures, it is no wonder Germany has found it very difficult to attract capital inflows from abroad.Then there’s the issue of interest rates.