Why are the BRICs all crumbling? Welcome to the permanent revolution

PAUL MASON in The Independent

Friday 21 June 2013

In most of the Bric countries economic rise has involved increased inequality, exacerbated corruption and failing public services - and that's just half the story

Tear gas cannot stop it. Not even when fired point blank into the faces of protesters. State censorship is powerless against it. The bloodless prose of the official media cannot encompass it. But what is it? What is the force that put a million people on the streets of Brazil on Thursday, turned Turkey’s major cities into battlefields and – even now – bubbles under from Sofia to Sarajevo?

The answer is in the detail: the self-shot videos, the jokes scrawled on handwritten signs, the ever-morphing hashtags on Twitter and the Guy Fawkes masks. Brazil’s protests may have started over the equivalent of a 5p rise in bus fares, but the chants and placards in Rio speak to something different: “We’ve come from Facebook”, “We are the social network”, and in English: “Sorry for the inconvenience, we are changing Brazil”.

The bus-fare protest in Sao Paulo involved, at first, maybe a few thousand young activists. There was CS gas, burning barricades, some Molotovs and riot shields, but never enough to stop the traffic, which flowed, surreally, past it all. When police arrested 60 people, including a prominent journalist, for possessing vinegar (to dull the sting of tear gas), it became the “Salad Revolution”. Then, last weekend, tens of thousands turned into hundreds of thousands, and the protests spread to every major town.

It’s clear, now, what it’s about. Brazil’s economic rise has been spectacular – but as in most of the so-called Bric countries it has involved increased inequality, exacerbated corruption and the prioritisation of infrastructure over public services. “Less stadiums, more hospitals,” reads one plaintive placard. The fact that the whole process was fronted by the relatively liberal and pro-poor Workers’ Party led, for a time, to acquiescence. The government sold the idea that hosting the World Cup, clearing some of the slums and pacifying the rest with heavy policing, together with a new transport system in the major cities, would complete Brazil’s emergence as a developed country.

But the World Cup is draining money from public services; the cost of the urban transport system is squeezing the lower middle class. And blatant corruption enrages a generation of people who can see it all reported on social media, even if the mainstream TV ignores it.

If this were just one explosion it would be signal enough that the economic model for the so-called emerging markets – rapid development at the cost of rising inequality – is running out of democratic headroom. But the same social forces were on the streets of Istanbul. The same grievances forced the Bulgarian government to sack its recently appointed and seemingly professionally unqualified state security chief on Wednesday.

In Turkey’s Taksim Square, as the tear gas drifted, roaming around with a microphone was a bit like being at a graduate careers fair. What do you do, I would ask. They would be always young, often female, and in perfect English reel off their professions from beneath their balaclavas: doctor, lawyer, marketing exec, shipping, architect, designer.

This too is one of the fastest developing countries on earth. And here too there was a mixture of economic grievance and concern about freedom. Some complained that, despite the growth, all the wealth was being creamed off by a corrupt elite. At the same time, the ruling AK Party, with its religious base, was seen as encouraging what the Turkish fashion writer Idil Tabanca has called “a growing unspoken air of animosity toward the modern”.

And everywhere there is protest – from Taksim and the Maracana Stadium to the Greek riots and Spanish indignados of two years ago – there is “non-lethal” policing that seems designed to turn passive bank clerks into bandanna-wearing radicals. It is striking that in both Brazil and Turkey, excessive force against peaceful demonstrators was the moment that turned a local protest into a globally significant revolt.

But the grievances, in the end, tell only half the story. It is the demographics, the technology and the zeitgeist that make the wave of current protests seem historic. Look first at the symbolism: the V for Vendetta mask is everywhere now – but it originated as the signifier of the Anonymous hacker movement. The hand-scrawled placard signifies a revolt not just against the state but against the old forms of hierarchical protest, where everybody chanted the same thing and followed leaders. In every tent camp protest I have ever been in, it is clear that the unspoken intention is to create a miniature utopia.

Velocity of information matters as much as action itself. It is striking how badly the incumbent elites in each case totally lose the information war. Whether it’s Greece, Turkey, Egypt or Brazil the unspoken truth is it is hard to gain a voice in the official media unless you are part of the in-group. This creates the mindset that drove Egyptian TV to ignore Tahrir, and Turkish TV to replace 24-hour news with cookery programmes as the fighting raged outside their studios. But it doesn’t work. People have instant access not just to the words, stills and videos coming from the streets, but to publish it themselves. As a result, when crisis hits, the volume of “peer to peer” communication – your iPhone to my Android, my tweet to your uploaded video – overwhelms any volume of information a state TV channel can put out. And when it comes to the content of the “memes” through which this generation communicates, the protesters and their allies find suddenly that everything they are saying to each other makes sense, and that everything the elite tries to say becomes risible nonsense.

In each case – from Egypt, through Greece, Spain and the Russian election protests – the revolt was already there, simmering in cyberspace. And in each case, the ultimate grievance was the difference between how life could be for the educated young, and how it actually is. They want a liberal, more equal capitalism, with more livable cities, and more personal freedom. But who will provide it?

Each time the movement subsides, the old generation’s commentators declare it dead, overhyped, romanticised in the heat of the moment. But the protests keep coming back. In 1989, we learned that people prefer individual freedom to communism. Today, in many countries, it is capitalism that is associated with cronyism, repressive force and elite politics, and until that changes, this Human Spring looks likely to continue.

Don’t think you have to shout loudest to find happiness in life

TERENCE BLACKER in The Independent

 

Monday 3 June 2013

The role models here are ruthless figures like Sir Alan Sugar or the sneering bosses on Dragon's Den. There is, boys and girls, another way - one that shuns the limelight

In pursuit of the great god Growth, the Culture Secretary, Maria Miller, has been urging a new spirit of thrust and entrepreneurial hunger upon girls and young women.

Following the publication of a report by the Women’s Business Council, which estimated that if a million more women become entrepreneurs, the nation’s productivity would increase by 10 per cent in 17 years, the Government is to take action. An advice pack for girls is to be sent to all primary schools.

“A vital part of future career success is the aspirations that girls have early in their lives,” Ms Miller has said, and that sounds sensible enough. Who, after all, would not want members of the next generation to live up to their potential?

If only it were not for the niggling suspicion that the Government has a particular and limited view of what constitutes aspiration. Career success is increasingly perceived in the way it is presented on television – as a matter of power, money and visibility. The aspirational models for schoolchildren are ruthless, kickass bosses like Alan Sugar or Mary Portas or the panel of smug, sneering bullies on Dragons’ Den.

There is, girls and boys, another way. Politicians and other public figures may find it hard to believe, but the greatest achievements are not necessarily those reflected by fame, visibility and power over the lives of others. Some people, women and men, not only derive more satisfaction working away from the limelight but often accomplish more than those who are centre stage.

I’ve been reminded recently of how much can be achieved by a subtle, indirect, collaborative kind of power when reading a newly published memoir, Fiz: and some Theatre Giants, by Eleanor Fazan, a director and choreographer who is something of a legendary figure in the theatre but is relatively – and contentedly – unknown in the wider world. Now in her eighties, “Fiz”, as she is known, has had an extraordinary career working at a high level with an impressive, varied list of brilliantly talented, often difficult men, from the music-hall star George Robey to Herbert von Karajan and including, among others, Lindsay Anderson, Alan Bennett, John Schlesinger , Barry Humphries and Laurence Olivier.

It was Fiz who, in 1961, directed Beyond the Fringe, turning a 55-minute student revue at the Edinburgh Fringe into a full-length show which triumphed in the West End and Broadway. I first met her when I was writing the biography of Willie Donaldson, who produced Beyond the Fringe, and discovered that she had written unpublished essays, now included in Fiz, about working with Jonathan Miller, Peter Cook, Alan Bennett and Dudley Moore, and a portrait of Willie himself.

What was striking about her insights into these complicated men was that they were utterly individual, and often at odds with the accepted view, but always perceptive and interesting.

The extraordinary career described in Eleanor Fazan’s book – a fascinating theatrical memoir in its own right, incidentally – has relevance to Maria Miller’s campaign to raise the aspirations of girls at primary school. Without headlines or shows of aggression and ego, Fiz has clearly contributed more to theatre, dance, opera and cinema than many of the show-boating stars who are now household names. “I have always been drawn towards those who needed to kick up, those who just couldn’t toe the party line,” she writes, and that strength and bloody-mindedness has served her as well as the stars with whom she has worked.

Not everyone finds professional fulfilment being a boss, and pretending that they do, or even that their role is less important than those who get the attention and publicity is misleading and unkind. There is certainly a case for getting primary school-children to aim high when thinking of their futures, but presenting success solely in terms of winning with sharp elbows and competitiveness, as if everyone should aim to be like the deluded, over-ambitious idiots on The Apprentice, is unhelpful.

Girls and boys could learn a more nuanced lesson in career fulfilment: that it is not necessarily those with the loudest voices and on the biggest salaries who achieve most, both for themselves and for the big world beyond.

Britain: a nation in decay

The UK's problems go far deeper than the cuts agenda. It simply can't produce enough to revive its ailing economy

• 
• • Ha-Joon Chang
  • The Guardian, Friday 8 March 2013 21.00 GMT

‘Despite the huge incentive to export created by a devalued pound, Britain is still running trade deficits because it has lost the productive capacity to respond.’ Photograph: Alamy

David Cameron's speech on the economy this week, and the reactions to it, have again confirmed that the British debate on economic policy is getting nowhere. The coalition government keeps repeating that it has to cut spending in order to cut deficits, no matter what. The opposition has been at pains to explain – as a teacher may do to a particularly slow or obstinate child – that trying to cut deficits by cutting spending in a stagnant economy is a largely self-defeating exercise, as it reduces growth and thus tax revenue. And Friday's astonishing letter from Robert Chote, chairman of the non-partisan Office for Budget Responsibility, contradicting the prime minister and reminding him of the ambiguous impact of spending cuts on deficits, has lent further weight to the opposition argument.

In reality, though, the coalition government isn't as stupid or stubborn as it appears. It is sticking to its plan A because spending cuts are not about deficits but about rolling back the welfare state. So no amount of evidence is going to change its position on cuts.

Lost in this cross-wired debate is the issue of the long-term future of the economy. Britain has been finding it difficult to recover from the financial crisis not just because of its austerity policy but also because of its eroding ability to engage in high-productivity activities. This problem is most tellingly manifested in the country's inability to generate a trade surplus despite the huge devaluation of sterling since 2008.

Compared with its height in 2007, the pound has been devalued about 30% against the dollar, 50% against the yen, and 20% against the struggling euro. Yet despite the huge incentive to export created by such devaluation, Britain is still running trade deficits because it has lost the productive capacity to respond.

Despite the devaluation, Britain's service exports have fallen – average annual service exports for 2008-11 were 8% lower than for 2005-07. This may be understandable, given the poor state of its financial sector – rocked by one scandal after another and hemmed in by a slow tightening of global financial regulation.

However, manufacturing exports, which were supposed to make up the shortfall created by the services sector, also fell by 8% after the devaluation. This is highly unusual. For example, back when South Korea had a devaluation of similar scale after its 1997 financial crisis (the won, its currency, was devalued by 35% against the dollar), the country's manufacturing exports were 15% higher (comparing the 1998-2001 average to 1995-97).

The only reason the British balance of payments situation has not been worse is the large increase in primary commodity exports – oil, minerals and food. These were on average 22% higher in 2008-11 than in 2005-07. In other words, since the crisis the British economy has been moving backwards in terms of its sophistication as a producer.

All of this means that, without addressing the underlying decay in productive capabilities, Britain cannot fix its ailing economy. To deal with this problem, it urgently needs to develop a long-term productive strategy through a broad-based public consultation involving not just the government and private sector firms, but trade unions, educational institutions and research institutes.

The strategy should first carefully identify the industries, and the underlying technologies, that will be the future motor of the economy and then provide them with the necessary support. This could be in the form of subsidies for R&D, loan guarantees for small firms, or preferences in government procurement, and should be targeted at "strategic" industries, although they could also be in the form of policies that are apparently not industry-specific.

For example, infrastructural investment needs to be co-ordinated with the broader industrial strategy. Infrastructure is by definition location-specific, so depending on the industries you want to promote, you will have to build different types of it in different places. Similarly with education and skills. Without there being some national strategy, it is difficult for educators to know what kinds of engineers or technicians to produce, and for potential students to know what professions to study for.

John Maynard Keynes once famously said that in the long run we are all dead. But a lot of us have to live for a while yet. A series of short-run policies, whether based on the coalition policy of spending cuts and loose monetary policy or on the opposition policy of increased government spending, isn't going to address the challenges facing the British economy. It is time to think for the long term.

No one really understands what’s going on in our economy

Does anyone properly understand what’s happening in the UK economy anymore? (Editor's comment: If you don't understand then why are you still in your job?)

Can it really be true that an economy which has created more than a million private sector jobs over the past two and a half years is showing no growth at all?  Photo: Reuters

By Jeremy Warner in The Telegraph

7:44PM GMT 11 Feb 2013

I’m sure I don’t, though I spend longer than most attempting to read the tea leaves, and I’m ever more convinced the policy makers don’t either.

There are two related problems here. One is with the data, which are ever more contradictory. Some of them point to a flatlining, or even still declining, economy, with badly impaired levels of productivity, but there are also quite a lot of alternative data to suggest something better – most notably in near record levels of private sector job creation. The other problem is with what fiscal and monetary policy are trying to achieve, which seems to grow more confused by the day.

Both intellectually and practically, monetary policy has become something of a mess. Before the crisis, the Bank of England was guided by a simple and absolute inflation target, which it was relatively successful at meeting and was easy to understand. But since the credit crunch, it has taken on another purpose – that of bringing about a return to sustainable growth. This has brought the Bank into conflict with its primary objective. Since the crisis began, inflation has consistently been well above target, but for a brief dip in 2009, and it has twice been above 5pc.

This week’s quarterly inflation report will bring further discomfort, with the Bank forced to concede both that growth is failing to respond as hoped and that inflation is now likely to remain elevated for the next two years.

Unfortunately, there appears to have been no trade-off between inflation and growth. Inflation has stayed high but growth has been non-existent. The Bank excuses its evident failure on inflation by stressing the apparently higher purpose of preventing a collapse in output, and with justification, it further insists that domestically generated wage inflation has remained tame. This is all very well but, with wages lagging prices by some distance, disposable incomes have been quite severely squeezed and this is plainly bad for domestic demand and growth.

With the Bank’s admission that inflation may remain above target for the next two years, the squeeze on disposable incomes is likely to persist. So, in this regard, the Bank’s policy of tolerating elevated inflation in pursuit of higher growth has been quite harmful to both objectives.

Sticking to the inflation remit has become something of a charade but, ridiculously, the Bank still pretends that this is what it is trying to do. It is to be hoped that the new Governor, Mark Carney, can bring more clarity and openness to the Bank’s endeavours. Don’t expect miracles.

Fiscal policy has been equally badly wrong-footed. Lack of growth has derailed the Government’s deficit reduction plan, threatening certain fiscal crisis down the line in the absence of evasive action.
What’s more, the unwritten compact between Government and Bank of England, under which the Bank is supposed to compensate for tight fiscal policy with monetary activism, seems to be breaking down. At last week’s meeting, the Monetary Policy Committee decided to do nothing even though it judges risks still to be on the downside. To the chagrin of George Osborne, the Chancellor, Sir Mervyn seems to be saying there is little more that monetary policy can throw at the problem.
Mind you, the data as they stand would be enough to paralyse even the most sure-footed of policymakers into inaction. Can it really be true that an economy which has created more than a million private sector jobs over the past two and a half years is showing no growth at all?

Equally hard to understand is why the UK’s export performance continues to look so lamentable. The eurozone crisis provides only part of the explanation, since even Spain and Greece have done better on exports than Britain, and that’s without the “benefit” of a sharp devaluation in the currency.
Britain’s exceptionally large services sector, and its fast-growing digital economy, may provide partial answers to all these puzzles. Once you strip out disruptions to, and structural decline in, North Sea oil revenues, then there has been some underlying GDP growth.

Moreover, if you think of much of the growth that took place in the pre-crisis bubble years as essentially just the “candyfloss” of an out of control financial and property sector, then today’s stagnation looks much easier to understand. Service industries in general, and financial services in particular, are notoriously difficult to measure, both in terms of their output and contribution to exports.

Part of Britain’s problem with the European Union is that there is still no properly functioning internal market across key service sectors. The EU exploits the UK’s weaknesses in traded goods while denying it the opportunity to play to its strengths in services. Until these deficiencies are rectified, the EU will struggle to be a net positive to the UK economy.

But that’s by the by. Looking at business investment, it was on a declining trend from long before the crisis and, to the extent that it was happening at all, there was a disproportionate emphasis on commercial property, great swathes of which now lie empty. Bulldozing this unwanted surplus would perhaps be the best solution, or at least converting it into housing.

So there’s another big chunk of past growth that has turned out to be of little or no long-term value. Strip these things out and it is by no means clear that the rest of the economy is suffering the crippling decline in productivity widely assumed. To the contrary, much of the anecdotal evidence points to significant advances, especially in the digital economy, which is growing faster in Britain than almost anywhere else.

According to a report by the Boston Consulting Group, the UK is now home to the largest per capita ecommerce market and the second largest online advertising market anywhere in the world.

Much of the growth in these markets, the productivity gains they drive, and the intangible benefits they deliver, are not caught by official GDP figures, which only attempt to measure the market value of the economy. In a paper just published, Jonathan Haskel of Imperial College Business School and others find that measured real value added has been understated by 1.1pc since the end of 2010 because of failure to capture intangible investment. Take this into account and there has in fact been no fall in productivity since then.

These musings lead to three conclusions. First and foremost, the Chancellor needs to act swiftly to recalibrate fiscal consolidation so as to give growth a supply-side, tax-cutting shot in the arm. Second, he should answer calls from both Sir Mervyn King and Mark Carney for a review of the Bank’s monetary remit. Finally, something has to be done about the GDP data, which beyond their capacity for political knock-about, have become about as useful as a chocolate teapot. (Editor's comments - The analysis is fine but the problem is with the conclusions - This maybe a ruse to cut taxes for the rich! Secondly the author now admits the problems with using GDP data as an apt indicator of economic performance - wheras all this while the UK and the USA have been telling the whole world that GDP performance is the best measure of economic performance. Alas! - the naysayers were saying it all along!)

The market can’t deliver growth without government help

By Michael Heseltine

8:31PM GMT 30 Oct 2012

172 Comments

 

Like so many of The Daily Telegraph’s readers, I am an entrepreneur. And when I first left the small business I had created to join government in the 1970s, I was convinced that the best thing government could do was get off our backs – cut red tape, deregulate, lower taxes. These things are still important. My time in business still shapes my outlook. I believe there are many areas where government should stand aside completely. But I have learnt that there are some things that only government can do to drive growth.

In March, the Prime Minister asked me to report to the Chancellor and Business Secretary on how we might more effectively create wealth in the UK. My report has been shaped by my belief that in the vast majority of cases, we will only get the very best results if government, business and local leaders work together in partnership.

When producing recommendations, I have always asked: “Does this make us more competitive?” There are no easy ways to do this. Competition from an ever more educated, motivated and capable world is facing us every day. We do, however, have much to celebrate – from the very smallest of businesses striving on the street to the large multinationals headquartered here, from inspiring local leaders to a government that encourages enterprise. We have many strengths and should be proud of talking them up. But how do we go that extra mile and make sure we can beat our global competitors for generations to come?

There is no easy answer – we must face the reality that we can’t be complacent and rest on our laurels as a country. I have not selected a handful of popular suggestions. I make 89 recommendations – each one important. Taken together, they provide a blueprint for the future.

What does that future look like? Above all, it is a world with stronger local leadership. We must continue to reverse the trend of the past century by unleashing the dynamic potential of our local economies. Key to this are Local Enterprise Partnerships, which should be given a much greater role in supporting their business communities. Much more of the inspiration for our economy should be based on the strength, initiative and ambition of our cities and their communities.

There are those who hanker for the old rules of free trade, for the market to look after itself, who want to shut the Business Department and for government to have a minimal role. This is a clear and simple message. To some it is attractive. But it has one major weakness. No other leading country or emerging nation believes it can work. The US, our European cousins, the BRICs – they certainly don’t practise it. Why should we be out of sync with the rest of the world? You can close your eyes to the threat of an ever more competitive world, but that threat will not go away.

We need a number of significant changes to provide a stable yet flexible architecture for the future. These include: creating a National Growth Council chaired by the Prime Minister, to ensure all parts of government play their part; inviting local business partnerships to bid for significant funding from central government on a competitive basis every five years to build local economic growth; an enhanced role for chambers of commerce in helping develop the capabilities of businesses; devolving funding for the skills system to improve its alignment with the needs of local economies; injecting greater urgency into the planning system; improving public procurement by employing an experienced chief procurement officer in every department; allowing all county councils to move to unitary status; and incorporating business engagement far deeper into the school curriculum.

The location of Birmingham Town Hall could not be more fitting to announce my report. It is a city with a proud tradition of civic leadership, going back to the days of Joseph Chamberlain. It is vibrant, entrepreneurial and prosperous: it saw tough economic problems in the past and faces challenges in the present. In this, it is a microcosm of Britain as a whole.

The drivers of our economy – business, central government and local leaders – should be organised and structured for success. I have therefore reassessed the way that we, as a country, conduct business. I’ve re-evaluated each of their roles with the single overall aim of embedding a culture of wealth creation. As the saying goes, we are all in it together.

It has been a privilege to produce this review for George Osborne and Vince Cable. The Government has shown strength and confidence by commissioning and facilitating this exercise. The Coalition is fundamentally on the right track, and in many areas I praise its work: Vince Cable for announcing the recent industrial strategy plans; Greg Clark for pioneering city devolution; Michael Gove and Iain Duncan Smith for their revolution in education and tackling unemployment. These initiatives need to be built on.

What I suggest is challenging – but it is not just a challenge to central government. It’s a challenge to the public and private sector, boardroom and business leaders, and to us as individuals. The end goal has to be wealth creation. There are debates as to how wealth should be divided, but ultimately these are sterile until it is created in the first place.

I am positive that if we work together, we can build a strong, sustainable future for the British economy – one we can be proud to pass on to our children and grandchildren.
 
Lord Heseltine is a former deputy prime minister

Euro exit and depreciation would bring economic gains

In an exclusive extract from his updated book, Roger Bootle explains why allowing a country such as Greece to leave the euro is not as hard as critics think.

Austerity has provoked protests in Greece Photo: AP

By Roger Bootle

10:00PM BST 21 Jul 2012

'Many of the issues bedevilling the world economy have coalesced into a new and extremely serious problem – the crisis of the euro. This threatens to shake the world to its foundations.

How it pans out will be the critical determinant of whether the world manages to stage a reasonable economic recovery or plays out an extended rerun of the Great Depression.

The eurozone’s predicament is both financial and economic. The financial element centres on debt. Several countries have public debt burdens that are unsustainable. In some cases, private debt is also overwhelming. Meanwhile, this excessive debt in the public and/or private sectors, which can barely be serviced never mind repaid, threatens the stability of the banking system, which owns large amounts of it.

The economic problem concerns cost and prices. Monetary union was supposed to bring convergence between member countries with regard to costs, prices and, indeed, just about everything else. In fact, after the monetary union was formed, in the now troubled peripheral countries of the eurozone – Portugal, Italy, Ireland, Greece and Spain – costs and prices continued to rise rapidly relative to other members of the union. This caused a loss of competitiveness vis-à-vis the German-led core of between 20pc and 40pc, resulting in large current account deficits (i.e. an excess of imports over exports) and the build-up of substantial net international indebtedness.

To return to prosperity, these countries clearly need a depreciation of what economists call the real exchange rate; that is, the level of their prices and costs compared to other countries’, as translated through the exchange rate ruling between their currencies. Clearly, the financial and economic aspects of the crisis are closely intertwined.

For countries afflicted by the twin problems of excessive debt and uncompetitiveness, leaving the euro and letting their new currency fall potentially offers not just a feasible but even an attractive way out. If successful, it would help support an economic recovery through increased net exports, while not increasing the burden of debt as a share of GDP through domestic deflation.

Indeed, the higher inflation unleashed by devaluation would reduce real interest rates and thereby tend to boost spending. Moreover, outside the euro there would be some scope to operate a policy of quantitative easing. This might also help to boost domestic demand. If the troubled peripheral eurozone economies were able successfully to deploy this adjustment mechanism, then they would not only improve their own GDP outlook, but also help to allay concerns about the long-term sustainability of their debt situation and, thus, bolster the long-term stability of the “core” countries, too.

From a purely economic standpoint, the optimal reconfiguration of the eurozone would probably be the retention of a core northern eurozone centred on Germany, in which it seems clear that Austria, the Netherlands, and Luxembourg could remain. Finland and Belgium could also fit in tolerably well.

Perhaps the most intriguing issue is the potential position of France. It has been Germany’s close economic ally and partner, but France’s recent economic and fiscal performance has in some ways more closely resembled that of the peripheral economies. It has a current account deficit as opposed to Germany’s surplus and its primary budget deficit is close to that of Greece. It also has strong banking and financial links to Greece and the other peripheral economies.

Given these points, there would be a strong economic case for France to stay out of a northern euro. Indeed, there would be attractions for it in joining – and indeed leading – a southern euro, if one existed, or, more informally, a grouping of former euro members. A French-led bloc of former euro members would split the eurozone into two roughly equal parts, with the southern bloc slightly larger. Yet this would amount to a complete overturning of post-war French economic and political strategy. I suspect the French establishment would choose to stick with Germany without even thinking about it. If so, France could end up paying a heavy price.

The question is, could a break- up of the euro be achieved? There does not appear to be any insurmountable legal barrier to a country leaving the euro and remaining within the EU, even without the prior agreement of other member states.

A bigger issue is the legal status of any new currency and its impact on contracts specified in euros. While this threatens to be a legal nightmare, there is a way forward. In what follows, to keep matters simple, I assume that Greece is the first to leave, and that its new currency is called the drachma. But when I refer to Greece this should be taken as shorthand for any, or all, of the peripheral countries.

The principle of “Lex Monetae” states that everything that governs the currency of a country can legally be determined by the national government concerned. Major legal problems arise, however, because the euro is both the national currency of Greece, for now at least, and the common international currency of the EU as a whole. Hence, there may be uncertainty whether any reference to the euro in a contract should be interpreted as the national currency of Greece at the time payment is due, and hence the new drachma, or the common international currency of the EU as a whole, in which case it would remain the euro.

As it happens, most sovereign debt is issued under local laws. In this case, an exiting government could simply redenominate its debt into the new currency at the official conversion rate, applying Lex Monetae.

At the point of departure, the Greek government would need to declare a conversion rate from euros into drachmas. What should it be? I suggest the new currency should be introduced at parity with the euro. Where an item used to sell at €1.35, it would now simply sell at 1.35 drachmas. This would promote acceptance and understanding throughout the economy.

In the run-up to exit, controls would be required to prevent capital flight and a banking collapse in Greece – this is not some hypothetical problem. Greece and Ireland are already seeing huge contractions in their money supply as a result of deposit withdrawals. Accordingly – and in particular, from the announcement of the redenomination until banks were able to distinguish between euro and drachma withdrawals – banks and cash machines would need to be shut down.

Because euro exit and depreciation would bring considerable economic gains, which would both reduce deficits (and therefore the rate of growth of debt) and increase GDP, the scale of any implicit and explicit default following a euro exit is likely to be smaller than if the country had stayed in the euro.

After leaving the eurozone, it is inevitable, and necessary, that the new currency fall sharply to restore the competitiveness that has been lost over the past decade or more. Greece and Portugal require a depreciation of their real exchange rate of about 40pc, Italy and Spain about 30pc and Ireland about 15pc.

It is likely that the exchange rate depreciation would raise the price level by about 15pc in Portugal, 13pc in Greece, and 10pc in Italy, Spain, and Ireland.

Assuming that this adjustment takes place over a two-year period, the effect would be to raise the annual inflation rate by about 7pc per year in Greece, about 6pc in Portugal, and 5pc in Italy, Spain, and Ireland. The historical experience from Argentina in 2002 and Iceland in 2008 is that inflation is then likely to fall back sharply. Of course it needs to, if any real depreciation is to be secured from the large nominal depreciations.

A key determinant of the degree of impact of a eurozone exit on those countries remaining within the currency union would be the extent of “contagion effects”. These might result from the direct adverse economic and financial effects of an exit, but also from the increased perception that other countries might leave the euro. Accordingly, decisive measures to limit such effects would be vital.

The first and most immediate would probably be substantial measures to support the banks of the remaining members, to prevent bank runs in the potentially exiting countries. This would probably involve large injections of liquidity by the ECB. There would also need to be a substantial increase in the firepower of the bail-out funds, probably supplemented by additional support from international organisations such as the IMF.

It seems likely that the remainder of the eurozone would need to take much more decisive steps toward some form of economic and political union. This might involve the implementation of commonly issued eurozone-wide bonds – “eurobonds” – which would effectively allow the troubled peripheral economies to borrow at something close to the eurozone’s average interest rate. However, more direct forms of fiscal transfers from the core economies to the periphery might also be needed.

Suppose that Greece made a success of its euro exit, with growth surging and unemployment falling. It would then surely be impossible for politicians in the peripheral countries to argue that there was no alternative to never-ending austerity within the euro. Parties advocating euro exit would gain in popularity and the market would react by pushing up peripheral countries’ bond yields. At that point, contagion from Greece’s exit could well prompt the departure of other countries.

If any country leaves the euro there are bound to be winners and losers. For Greece, devaluation and default would produce two sorts of loser: those whose capital is reduced by redenomination or default, and those whose real incomes are reduced by the higher inflation unleashed by the devaluation. The most important beneficiaries of all would be currently unemployed Greek workers. Their gains consist of the prospect of future income, in contrast to a presumed near-zero income if the present path continues.

The break-up of the euro would be an event of such political and economic import that everyone, including financial markets, should be awed by it. And the immediate results could be truly awful, involving banking collapses and heaven knows what. However, I suspect that both businesses and the authorities are much better prepared for the euro’s demise than they were for the Lehmans crisis. Indeed, future historians may come to regard the latter as a lucky break, because it alerted people to the dangers of financial instability and encouraged them to put in place arrangements to deal with the really big crisis that was yet to come.

Moreover, the resolution of the euro crisis promises relief from some of our acute economic pressures. I have highlighted the contrast between deficit and surplus countries. The attitude of the latter seems to have been: “Thank goodness the leak isn’t in our part of the boat.” Yet getting out of the current depression will require the surplus countries to spend more.

The euro has enabled Germany to continue its oversaving, in a way that could never have happened with the deutschmark, which would have risen strongly on the exchanges and thereby counteracted the effects of Germany’s slow growth of costs. The demise of the euro would release us from this straitjacket. The peripheral countries – whose economies are collectively slightly larger than Germany’s – would be able to grow again, and in Germany and the other northern core countries the pressure would be on to boost domestic demand to offset loss of demand caused by lower net exports. In short, the demise of the euro is part of the solution.

The crisis happened as a result of the phenomenal arrogance and incompetence of the European political elites. It is more a failure of government than of markets. However, the mechanism that brought the system to its nemesis was fully in line with the market defects that I analyse in my book. What undermined Spain and Ireland was a purely speculative boom centred on real estate that came straight out of the textbook of financial bubbles; bubbles that modern markets, central banks, regulators, and economists confidently believed no longer existed.

It is the expression of the belief that sheer political will can overcome market forces – and the living proof that it cannot.

So the euro crisis is really another expression of the forces that brought us so close to financial and economic disaster in 2008-09. It is the second shoe to drop. Having played a major role in getting us into this mess, once exchange rates are unshackled and are allowed to do their work, markets can also play a major role in getting us out of it.”

Austerity has never worked

It's not just about the current economic environment. History shows that slashing budgets always leads to recession

• 
• • Ha-Joon Chang
  • guardian.co.uk, Monday 4 June 2012 22.14 BST

David Cameron and EC president, José Manuel Barroso, at a meeting of EU leaders in Brussels. Photograph: Lionel Bonaventure/AFP/Getty Images

Last week saw a string of bad economic news reports. The eurozone leaders seem unwilling or unable to change from their austerity policies, even as Greece and Spain fall apart and the core eurozone economies contract. Britain watches on as its economy is heading for the third consecutive quarter of contraction, with an unexpectedly sharp fall in manufacturing. Last week's jobs figures confirmed that the US recovery is stuttering. The largest developing economies that have so far provided some support for world demand levels – especially India and Brazil but even China – are slowing down too. Four years after the financial crisis began, many rich capitalist economies have not recovered their pre-crisis output levels.

Even more serious is the unemployment problem. The International Labour Organisation estimates there are 60 million fewer people employed worldwide than if the pre-crisis trend had continued. In countries like Spain and Greece, overall jobless rates are approaching 25%, with youth unemployment over 50%. Even in countries experiencing "milder" unemployment problems, like the US and the UK, between 8% and 10% are out of work. If we include those who have given up looking for jobs or those who are forced to work part-time for want of fulltime opportunities, "real" unemployment could be easily over 15% even in these countries.

The remedies on offer are well known. Reduce budget deficits by cutting spending – especially "unproductive" social welfare spending that reduces growth by making poor people less willing to work. Cut taxes at the top and deregulate business (euphemistically called "cutting red tape") so that the "wealth creators" have greater incentives to invest and generate growth; and make hiring and firing easier.

It is increasingly accepted that these policies are not working in the current environment. But less widespread is the recognition that there is also plenty of historical evidence showing that they have never worked. The same happened during the 1982 developing world debt crisis, the 1994 Mexican crisis, the 1997 Asian crisis, the Brazilian and the Russian crises in 1998, and the Argentinian crisis of 2002. All the crisis-stricken countries were forced (usually by the IMF) to cut spending and run budget surpluses, only to see their economies sink deeper into recession. Going back a bit further, the Great Depression also showed that cutting budget deficits too far and too quickly in the middle of a recession only makes things worse.

As for the need to cut social spending to revive growth, there is no historical evidence to support it either. From 1945 to 1990, per capita income in Europe grew considerably faster than in the US, despite its countries having welfare states on average a third larger than that of the US. Even after 1990, when European growth slowed down, countries like Sweden and Finland, with much larger welfare spending, grew faster than the US.

As for the belief that making life easier for the rich through tax cuts and deregulation is good for investment and growth, we need to remind ourselves that this was tried in many countries after 1980, with very poor results. Compared to the previous three decades of higher taxes and stronger regulation, investment (as a proportion of GDP) and economic growth fell in those countries. Also, the world economy in the 19th century grew much more slowly than in the high-tax, high-regulation era of 1945-80, despite the fact that taxes were much lower (most countries didn't even have income tax) and regulation thinner on the ground.

The argument on hiring and firing is also not grounded in historical evidence. Unemployment rates in the major capitalist economies were between 0% (some years in Switzerland) and 4% from 1945-80, despite increasing labour market regulation. There were more jobless people during the 19th century, when there was effectively no regulation on hiring and firing.

So, if the whole history of capitalism, and not just the experiences of the last few years, shows that the supposed remedies for today's economic crisis are not going to work, what are our political and economic leaders doing? Perhaps they are insane – if we follow Albert Einstein's definition of insanity as "doing the same thing over and over again and expecting different results". But the more likely explanation is that, by pushing these policies against all evidence, our leaders are really telling us that they want to preserve – or even intensify, in areas like welfare policy – the economic system that has served them so well in the past three decades.

For the rest of us, the time has come to choose whether we go along with that agenda or make these leaders change course.

Do we want a society where 50% of young people are kept out of work in order to bring the deficit down from 9% of GDP to 3% in three years? A society in which the rich have to be made richer to work harder (at their supposed jobs of investing and creating wealth) while the poor have to be made poorer in order to work harder? Where a tiny minority (often called the 1% but more like the 0.1% or even 0.01%) control a disproportionate, and increasing, share of everything – not just income and wealth but also political power and influence (through control of the media, thinktanks, and even academia)?

Maybe we do, but these choices need to be made consciously, rather than by default. The time has come to choose the kind of society we want to live in.

Britain can’t afford to fall for the charms of the false economics Messiah Paul Krugman Superstar economist Paul Krugman wants us to change course, but his solutions are simplistic.

Jeremy Warner in the Telegraph

What does the future hold as Europe slides, ever more hopelessly, towards the abyss? As David Cameron has pointed out, there have been 18 EU summits since he became Prime Minister little more than two years ago, and none of them has produced anything remotely resembling a solution.

The stand-off got a whole lot worse this week. France and Germany are now in open conflict over the way forward, if indeed there is one. For the UK, already bleeding badly from the after-effects of the financial crisis, the situation could scarcely look more threatening.

The fiscal consolidation chosen by the Coalition was always likely to have a negative impact on output, at least in the short term. To make it work, the Government needed the following wind of decent growth elsewhere in the world economy. Instead, it’s facing a hurricane. We look set to be broken by the storm.

But fear not – salvation is at hand. Next week, there comes to these shores a Messiah, a prophet of great wisdom and understanding whose teachings promise to vanquish despair and “end this depression”. He is Prof Paul Krugman, a superstar polemicist who has been described by The Economist as “the most celebrated economist of his generation”. Actually, “celebrated” is not exactly the right word, for Krugman divides opinion like no other. To his followers, he’s a saint; to his detractors, he’s a false prophet with satanic intent.

I’ve been a little misleading here. He’s not really coming to Britain to save us, but rather to promote his latest book, End This Depression Now! Krugman is an economist with attitude, and he thinks Britain is in the midst of a “massive blunder” in economic policy. The UK is the very worst example of austerity economics, he believes, for unlike the poor beleaguered nations of the eurozone periphery, we’ve not had this misery forced on us by the ghastly euro, but have opted for it as an unnecessary penance for the sins of the boom. If only we could be persuaded to forsake “Osbornomics” and tread the path originally set out by our dearly beloved former leader, Gordon Brown – that of spending our way back to growth – then all would be well again.

Put like that, of course, it sounds ridiculous, but the fact that Krugman is a Nobel prize-winning economist gives Labour’s calls for a U-turn on the economy an intellectual credibility they would otherwise struggle to attain.

All the great economists – from Adam Smith to John Maynard Keynes – were as much moral philosophers as dispassionate analysts of events, and Krugman is no exception, preaching his message with all the passion of the religious zealot. He feels our pain and begs us to let him help. “The road out of depression and back to full employment is still wide open,” he insists. “We don’t have to suffer like this.”

Krugman may appear loud and radical, but he follows a fairly standard Keynesian text. By his own admission, the social cost of the present downturn doesn’t come anywhere close to the Great Depression of the interwar years, or not yet. None the less, there are parallels, and we already meet Keynes’s classic definition of a depression as a “chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse”.

In such circumstances, monetary policy can help, but only up to a point. In a depression, even those with the balance sheet strength to spend and invest won’t do so, whatever the encouragement offered through ultra-low interest rates. It follows that governments should step into the breach and do the job instead, as a kind of spender of last resort. They can worry about the accumulated debt later, once output has picked up again.

To Krugman, it’s understandable that policymakers screwed up so monumentally in the Great Depression; they didn’t understand what was going on and there was no template for the circumstances they found themselves in. To his mind, there is no excuse this time around; it’s textbook stuff, which is being wilfully ignored.

But haven’t we already tried borrowing to stimulate? And what did it deliver other than fiscal ruin, which in the eurozone periphery is so serious that markets have stopped lending altogether? Krugman has an answer for these questions, too. It’s not the policy that was wrong, merely that the stimulus wasn’t big and sustained enough. As for the eurozone, again, it wasn’t the policy, but the euro. Countries with their own currencies and central banks won’t run into this kind of problem. In extremis, they can always print the money.

Easy peasy, then. What’s not to like? Well, I’m sorry, but I just don’t buy it. It may or may not be possible for a vast, largely internalised economy such as the US, with its reserve currency status, to run double-digit deficits into the indefinite future without adverse consequences, but for the UK it is a much more questionable policy.

True, Britain has lived with much higher debts relative to GDP in the past, but this has nearly always coincided with major wars. With demilitarisation, much of this borrowing to spend falls away and domestic consumption comes roaring back. No such get-out-of-jail-free card exists this time around. Further, the demographic is completely different from that of the post-war baby boom generation, where growth and therefore debt erosion were more or less guaranteed. Today, the unfunded liabilities of an ageing population stretch menacingly into the long-term future.

As it is, government spending in the UK is already approaching 50 per cent of GDP. Just how high does Prof Krugman propose it should go? It’s all very well to say “jobs first” and worry about the deficit later, but once government spending becomes entrenched, it’s very difficult to get rid of it. Even Reagan and Thatcher struggled to make significant inroads.

In any case, the picture Krugman presents of wrong-headed British austerity is a caricature of the reality, though one admittedly encouraged by the Coalition’s rhetoric. Yesterday’s revised GDP figures, showing that the country is even deeper in recession than we thought, would appear to support the mocking tone in which Krugman condemns the idea of “expansionary austerity”. But where is this austerity? In fact, one of the few positive contributors to output in the last quarter was government spending, which grew by 1.6 per cent. Krugman seems to have forgotten the automatic stabilisers, which because of our welfare state are considerably bigger than in the US. In America, much current UK spending would count as a discretionary fiscal stimulus of the sort End This Depression Now! advocates.

As Raghuram Rajan, a former IMF chief economist, has argued, today’s troubles are not simply the result of inadequate demand, but of major changes in the world economy brought about by globalisation. The old monopoly of knowledge and expertise once enjoyed by advanced economies has been swept away. For decades, we compensated for the jobs and income lost to technology and cheaper foreign competition with unaffordable government spending and easy credit. Much of the growth enjoyed in these pre-crisis years was simply unsustainable.

Paul Krugman’s message is seductive, but it’s also unrealistic. If only the solutions to our plight were as simple as he thinks.

The Crisis of European Democracy

by Amartya Sen

IF proof were needed of the maxim that the road to hell is paved with good intentions, the economic crisis in Europe provides it. The worthy but narrow intentions of the European Union’s policy makers have been inadequate for a sound European economy and have produced instead a world of misery, chaos and confusion. 

There are two reasons for this.

First, intentions can be respectable without being clearheaded, and the foundations of the current austerity policy, combined with the rigidities of Europe’s monetary union (in the absence of fiscal union), have hardly been a model of cogency and sagacity. Second, an intention that is fine on its own can conflict with a more urgent priority — in this case, the preservation of a democratic Europe that is concerned about societal well-being. These are values for which Europe has fought, over many decades.

Certainly, some European countries have long needed better economic accountability and more responsible economic management. However, timing is crucial; reform on a well-thought-out timetable must be distinguished from reform done in extreme haste. Greece, for all of its accountability problems, was not in an economic crisis before the global recession in 2008. (In fact, its economy grew by 4.6 percent in 2006 and 3 percent in 2007 before beginning its continuing shrinkage.)

The cause of reform, no matter how urgent, is not well served by the unilateral imposition of sudden and savage cuts in public services. Such indiscriminate cutting slashes demand — a counterproductive strategy, given huge unemployment and idle productive enterprises that have been decimated by the lack of market demand. In Greece, one of the countries left behind by productivity increases elsewhere, economic stimulation through monetary policy (currency devaluation) has been precluded by the existence of the European monetary union, while the fiscal package demanded by the Continent’s leaders is severely anti-growth. Economic output in the euro zone continued to decline in the fourth quarter of last year, and the outlook has been so grim that a recent report finding zero growth in the first quarter of this year was widely greeted as good news.

There is, in fact, plenty of historical evidence that the most effective way to cut deficits is to combine deficit reduction with rapid economic growth, which generates more revenue. The huge deficits after World War II largely disappeared with fast economic growth, and something similar happened during Bill Clinton’s presidency. The much praised reduction of the Swedish budget deficit from 1994 to 1998 occurred alongside fairly rapid growth. In contrast, European countries today are being asked to cut their deficits while remaining trapped in zero or negative economic growth.

There are surely lessons here from John Maynard Keynes, who understood that the state and the market are interdependent. But Keynes had little to say about social justice, including the political commitments with which Europe emerged after World War II. These led to the birth of the modern welfare state and national health services — not to support a market economy but to protect human well-being.

Though these social issues did not engage Keynes deeply, there is an old tradition in economics of combining efficient markets with the provision of public services that the market may not be able to deliver. As Adam Smith (often seen simplistically as the first guru of free-market economics) wrote in “The Wealth of Nations,” there are “two distinct objects” of an economy: “first, to provide a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.”

Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates — from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound. 

 

Participatory public discussion — the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot — could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum.

Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views — or good intentions — of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.

Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation — a value in itself — but also the possibility of arriving at a sensible, and sensibly timed, solution.

This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.

Amartya Sen, a Nobel laureate and a professor of economics and philosophy at Harvard, is the author, most recently, of “The Idea of Justice.”

It will be Smarter to learn from the Germans

Easy to blame the Germans. Smarter to learn from them

Other leaders are being hypocritical when they shove all the responsibility for the euro crisis on to Angela Merkel

• 
• • Andrew Rawnsley
  • The Observer, Sunday 20 May 2012

Chancellor Angela Merkel with David Cameron. Photograph: Michel Euler/AP

 

As Noël Coward didn't quite sing, do let's be beastly to the Germans. This bitter tune is heard not just in Greece, but also in the corridors of Number 10, the Elysée Palace and the White House. Casting around for someone to blame for the crisis, the fingers of accusation point at Germany and its chancellor, Angela Merkel.

The jabbing fingers are furiously angry ones on the streets of Athens where German flags are burnt and the newspapers dress Ms Merkel in Nazi uniform. The jabbing continues in editorials in the American press, which charges Berlin with being single-handedly responsible for taking the world economy to the brink of the abyss. The jabbing is dressed in the language of diplomacy at this weekend's G8 summit where Barack Obama, François Hollande and David Cameron have ganged up on the German chancellor.

The American Democrat, British Conservative and French Socialist may not agree on much else, but on this, at least, they are together. It is one second to midnight in the eurozone because a recalcitrant and miserly Germany has refused to step up to its historic responsibility to do what is necessary to save the single currency. If the eurozone implodes, and carries away the global economy with it, the buck will stop in Berlin.

Let us begin by acknowledging that Germany does deserve a big helping of blame for the very scary state of the eurozone. Berlin shares, principally with Paris, responsibility for the original sin. That was to construct a badly designed and over-stretched single currency area containing contradictions that would explode under stress. In the pursuit of a European ideal, Germany forgot its usual prudence when Berlin nodded and winked at the admission of countries – Greece being the most extreme example – for whom euro membership was not only inappropriate but very dangerous.

It is fair enough also to observe that Germany has repeatedly failed to offer leadership that rises to the scale of the present crisis. When Germany has led, it has not always been in a well-judged direction. The austerity programme imposed on the Greeks as the price for continued membership of the euro was too draconian to be implemented in a democracy. The voters would surely revolt and they duly have.

The European Central Bank has been denied the necessary firepower to get ahead of events because the Germans wouldn't allow it. Ms Merkel has never been a very easy partner for her peer group. One of Gordon Brown's officials who had a ringside seat during the negotiations at the London G20 describes her thus: "Incredibly stubborn. Immovable. She simply digs in." One of David Cameron's team says dealing with the German chancellor is "like trying to squeeze blood from the proverbial stone".

I expect she will concede just enough to the growth agenda being pushed by other G8 leaders for them to cobble together an end-of-summit communiqué that pretends they are all agreed. There will be a further attempt to reconcile the German insistence on fiscal discipline with the French call for measures to promote growth when the EU heads of government meet in Brussels on Wednesday. One proposal would see the European Investment Bank receive an additional €10bn in funding. The leaders are also likely to back a European Commission plan to issue "project bonds" – debt backed by all 17 eurozone countries to raise funds for infrastructure programmes in depressed regions. All of which will give them something to justify meeting and none of which is anything like sufficient to ease an immediate crisis of such magnitude that €10bn is peanuts.

Germany must take her portion of the blame for the calamities in the eurozone and the cataclysm that now threatens to unfold. But the more I hear people being beastly about the Germans, the more I see all the responsibility being shoved in their direction, the more my sympathies begin to lean towards Angela Merkel's dilemmas and her people's concerns. When Barack Obama calls for "decisive action" to save the eurozone, Germans hear him saying that they should write yet more large cheques to bail it out. When François Hollande demands a growth package, Germans ask who but they will pay for it when everyone else in Europe is broke. When David Cameron tells the eurozone to "put its house in order", Germans perceive a peremptory request for them to throw more good money after bad. Germany will probably end up picking up most of the bill for this disaster, but you can see why they are tired of being told to do so.

The demand has to be particularly galling when it comes from David Cameron, the prime minister of a country that is not a member of the euro and who leads a party that wills it to fail. Angela Merkel is entitled to feel that being told to relax on fiscal discipline is particularly cheeky – a kinder word than hypocritical – coming from Mr Cameron. In speeches to home audiences, the prime minister insists that he must defy "dangerous voices calling on us to retreat" and stick with his government's austerity programme on the grounds that: "You can't borrow your way out of a debt crisis." Yet when lecturing the Germans, Mr Cameron recommends that they should turn on the spending taps to get the eurozone out of its debt crisis.

His aides say that the prime minister wants to make common cause with Monsieur Hollande in pressing Chancellor Merkel for a more growth-orientated strategy in Europe. That would be the same Monsieur Hollande whom the prime minister would not deign to meet before he was elected to the Elysée, the same Monsieur Hollande who was badmouthed by Tories as a crazy leftie who would lead his country to ruin – Ed Balls in a beret.

The reason why Germany has found herself in this isolated position boils down to this: she has money and everyone else does not. Her economy is growing, her unemployment rate is much lower and her debts are under control. She is a rich country among paupers because Germany has been much better governed than her peer group. Some reckless German financiers laid stupid bets, but her banks were not allowed to hazard the rest of the economy in quite such a shocking way as banks were in Britain and America.

Germany took care of her finances much more prudently than her European neighbours. She has a welfare state, public services and infrastructure that provoke jealousy in any visitor from Britain. But she did not make the mistake of trying to buy them on the never-never. Germany did not build up the mountains of debt, both private and public, which bear down on Britain and others. As a result, German households and firms can borrow without being punished by the bond market vigilantes.

It is true that the Germans have had a fantastic deal out of the euro; a much better one than either they or anyone else anticipated when they thought they were sacrificing their beloved deutchsmark in the cause of European unity. The theory at the time was that the euro would help the less impressive economies to catch up and create, in Helmut Kohl's phrase, "a strong Germany in a strong Europe".

The actual result has turned out to be a strong Germany in a weak Europe. The euro has certainly boosted their exports-driven economy, which is one reason why Germans should be very fearful of its implosion. But it was not the euro that made them a great exporting nation in the first place. They were extremely accomplished at selling things when they were priced in the powerful deutchsmark because postwar Germany has been brilliant at manufacturing goods that others want to buy.

It was announced last week that Vauxhall will be building its new model of Astra at Ellesmere Port in Cheshire rather than in a German factory. This news was regarded as so remarkable that two cabinet ministers were sent north to mark it. While Vince Cable paid a celebratory visit to the plant, David Cameron made a speech in Manchester applauding a renaissance in the car industry. It is very good news for British manufacturing – so long as you don't linger too long over the caveat that Vauxhall is owned by General Motors of America. But such a fuss over one announcement draws attention to the rarity of Britain beating Germany at car-making since 1945.

The usual mode of British politicians is to be envious of what Germany has achieved. Ed Miliband commends the German model of industrial relations, in which workers are represented on company boards, as a restraint on the corporate excesses we have seen in Britain. With its record of investment in high-value industries and emphasis on making quality goods that the world wants to own, German strength is based on the solid prosperity that coalition ministers aspire to create when they talk about "rebalancing" the British economy.

Germany has its flaws. Angela Merkel has made her fair share of mistakes. But this is no time for contempt, especially not from Britain, for a country that is enviably competitive, rich, stable, free and socially and environmentally progressive. If there is a long-term solution to the miseries of the rest of Europe, it doesn't lie in being beastly to the Germans. It would be a better idea to try to learn from them.