There’s no such thing as a free lunch. Economist Milton Friedman was fond of the phrase, but in economics it is deeply misleading. Economic growth is basically a free lunch — the same amount of labour produces more goods and services. That’s a banquet for developing countries, and more than a snack for already-rich Germany. The 0.5 per cent increase in first quarter gross domestic product (GDP) is the latest sign. Experts were surprised by the good German number, but they frequently underestimate the productive power of good policies and strong economic institutions.
Germany is benefiting from years of patient labour reform; its unemployment rate has fallen from 11.5 to 5.6 per cent since 2005. It gains from generations of investment in technical education and a tradition of manufacturing excellence that dates back to the 19th century. Combine those with a stable political system and prosperity is almost sure to increase. It hardly matters whether the Germans’ currency is strong or weak or whether the rest of the world is doing well or poorly.
The rest of the world does not lose out when Germany wins. The whole euro zone, which reported flat GDP in the first quarter, is helped by the presence of strong German-based companies and the spread of German expertise. Germany’s trade surplus — euro 157 billion in 2011 — increases the wealth of trade partners, both inside and outside the euro zone. They get high quality goods on credit.
For Germany, though, the trade surplus has some disadvantages. Financially, credit losses on what amounts to vendor financing are almost inevitable — that’s the easiest way for countries running trade deficits with Germany to square their accounts. Politically, Germany is blamed for not sharing its success by spending, lending and investing more for the benefit of weaker trading partners. Monetarily, the country is under pressure to tolerate higher inflation, so that real wage cuts for the euro zone’s laggards require lesser reductions in nominal salaries.
But even if the German lunch isn’t quite free, it’s a great deal. The country’s disgruntled voters would do well to recognise that.