These are testing times at the heart of Europe. Excluding construction, Germany’s industrial output is less than 90 per cent of its 2018 level, six years ago. The economy isn’t doing much better in France, where an unstable government is overseeing an unsustainable budget deficit.
A consequence of weak economic output is weak public finances and fragile politics. As I’ve outlined before, since 2018 to last year, tax revenues grew in France by 13 per cent and in Germany by 19 per cent. In Ireland they grew by 53 per cent.
In Germany, there are several distinct causes of its economic difficulties. The most striking problem — because it is the result of a relatively recent decision that constitutes a clear turning point — is rising energy costs.
This factor results from Angela Merkel’s decision that Germany would shut down its nuclear power plants following the Fukushima nuclear accident in 2011. It has taken some time to implement that decision and for its effects to percolate. But its negative effects — higher energy costs and a more difficult energy transition as key baseload capacity is removed — are now being felt. In the past three years, German electricity costs have nearly doubled. This is economic poison for a country built on a heavy manufacturing industry.
Another factor blighting Germany is lack of innovation. This is a wider problem afflicting Europe as a whole. Even though Ireland might be considered one of the more innovation-friendly corners of the continent, when the Collison brothers built Stripe, their fintech giant, they did so in America.
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Europe talks a good talk about promoting innovation but where are the results? Pretty much all the big new companies of recent decades — Apple, Meta, Tesla, etc — are American, not European. We only have four global European tech players among the top 50 worldwide. The European Union’s share of the global ICT market has fallen from 21.8 per cent in 2013 to 11.3 per cent in 2022.
Writing in The Economist recently, Christine Lagarde, president of the European Central Bank, noted that Europe produces almost as many patents as America. The problem is translating that innovation into enterprise. Europeans, like the vast majority of Irish savers, tend to hold their savings in cash. She noted that there are 295 trading venues, 14 central counterparties and 32 central securities depositories (CSDs). In America, there are two clearing houses and one CSD. Europe is structurally incapable of competing.
High energy costs and lack of innovation are combining in Germany to undermine its car industry. Volkswagen is closing its entire domestic base. Imagine if Guinness closed all its Irish operations. This hollowing out of the German car sector has been gravely aggravated by another factor: China’s sharp rise in the sector. In recent years, China has been regarded in the West rather like how Japan was regarded in the 1980s and 1990s: as a somewhat substandard copycat hitching a ride on the West’s intrinsic superiority.
There are at least two problems with that line of thought. First, Chinese engineering, as it was in Japan, is as good as anything in the West. Second, Chinese costs are considerably lower than in the West and will be kept low by slowly deflating property bubbles that suppress domestic costs. The results, for the German car sector, are falling market share and, more alarmingly, a minuscule share of the burgeoning electric car market. That electric car you will drive in the future is far more likely to have been manufactured in China than Germany.
An additional problem, particularly for Germany, is an ageing population. An older population is less friendly to innovation — and a greater burden on the public finances. Germany’s pension system, like ours, relies on contributions made by active workers to support retired ones. However, since the 1960s, the ratio of working to retired people has plummeted from six to one to only two to one.
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We can import people through immigration to sustain growth in the workforce even as the working population of natives declines. But here we face the problem that, in a social democratic tax and welfare system that is highly distributive, people need to be earning a considerable amount before they make a net fiscal contribution to society. Europe is generally importing low-level workers, who are likely to be net burden on the state throughout their lives, and asylum seekers, who are unable to work at all.
There are several logical answers to this challenge. Do not import workers who will be a fiscal burden on the state. If employers are so keen on importing them, let them bear the resulting cost. If markets react by driving up wages, so be it — markets are a mechanism to facilitate better economic decisions, not to suppress worker interests.
We should also make far greater use of automation, robots and artificial intelligence. And push the retirement age out to 70 — it’s illogical that, as life expectancy has grown longer, government policy has made working lives shorter. Social democracy, the prevailing political philosophy across Europe, has become a shorthand for societal self-indulgence and for dumping problems on others.
In James Marriott’s review of Intermezzo, Sally Rooney’s latest novel, he wrote: “The reader is never quite able to shake the suspicion that Rooney’s characters have all been made to sign contracts holding them to high standards of personal conduct before they are permitted to appear on the page.” It sounds very like life in the Social Democrats.
That party’s defenestration of Eoin Hayes for the Dublin Bay South TD’s lack of candour about the sale of his Palintir shares illustrates the problem. Hayes acquired his shares working for Palantir, exactly the sort of high-tech, high-productivity job Ireland needs. But then the data analysis firm entered into a strategic partnership with the horrid Israeli military and breached the Sally Rooney rule of always maintaining standards of personal conduct that any Dublin dinner party would consider above criticism.
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Hayes’s imprecision with the facts caused the Social Democrats to suspend him from their parliamentary party. Yet Ireland is able to sustain a social democratic state only thanks to tax revenues derived from tooth-and-claw capitalist US multinationals. Introspective self-absorption concerning high standards of personal conduct seems to matter more than substantial policy questions. Concern for how this political edifice is to be financed is grubby work, unworthy of a Rooney novel and best left to the accountants.
The citizens of eastern Europe couldn’t wait to get into the EU. What followed was decades of sensational economic growth accompanied by huge growth in their life expectancy. Over the years 2000-23, real consumption per head in Poland relative to that in Germany has grown from 33 to 69 per cent. The equivalent Irish figures show growth from 71 to 83 per cent.
Markets work, if only we let them function.
PS:
In public life those who set laws and regulations may have interests that are different from those of the population. For example, if I am charged with preventing society coming to harm from a pandemic, I may favour overly harsh restrictions that limit the danger that I am being measured against. I am likely to give insufficient weight to those public policy factors pointing in the direction of less restrictive measures.
We saw this tension play out during the 2019 Covid pandemic. The dangers of virus transmission would have been minimised if we had all been forced to stay in our bedrooms. But life would have been very dull, economic output would have collapsed, and health problems triggered by loneliness would have skyrocketed.
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The official guidelines in Ireland today are that, over a week, we should drink no more than 17 standard alcoholic drinks (men) or 11 standard drinks (women). Here a standard drink means one with the same alcohol content as a bottle (330 ml) of lager. The guidelines indicate furthermore that we spread alcohol consumption over the week, with at least two alcohol-free days.
One could make a theoretical argument for moderate alcohol consumption if, getting lonely people to socialise more actively, it produced positive side-effects. It could be counter-argued that you can socialise just as well drinking mineral water as pints of beer or G&Ts. In considering the alcohol recommendation, the key question is: what does empirical evidence suggest?
It turns out that the graph between alcohol consumption and mortality is J-shaped. As one moves from zero consumption to very moderate consumption of alcohol, your risk of death drops. Beyond a certain level of consumption, risk rises. Interestingly, the risk of death does not reach the level of a teetotaller until you drink between 35 and 50 units a week, well over twice the current guidelines. That’s something to bear in mind as the festive season begins.