Can Britain Surpass Germany Economically?

The prediction by a leading London research firm that the British economy could overtake Germany’s within 20 years falls into the category of fantasy forecasting.

Indeed, what needs to happen is that the UK must redouble its efforts to make sure the gap with Europe’s economic powerhouse does not widen further. To do that, it needs to ditch the short-term thinking that grips both the UK government and the City of London.

The Centre for Economics and Business Research (CEBR) grabbed headlines with a report over Christmas that Britain will soon leapfrog France and stands a good chance of surpassing Germany to become Europe’s largest economy by 2030.

As a German who has lived in the UK for the past 40 years, I have learned to love national competition. My hesitation to embrace this analysis is certainly not a matter of national pride. The reason I do not find the CEBR’s outlook credible is simply a matter of numbers.

Germany’s output in 2013 was worth $3.65 trillion, followed by France on $2.65 trillion and the UK with $2.45 trillion.

To catch up with France within the next four years, Britain would need around $50 billion in additional output a year. That would translate into a growth rate roughly two percentage points higher than France’s. Given the woes of the French economy, that is not out of the question.

The Germany-UK gap

But narrowing the gap with Germany looks tougher. German GDP is currently 45% per cent greater than Britain’s. Its workforce of 40 million is 10 million bigger than Britain’s and is currently over 10% more productive.

The Centre for Economics and Business Research argues that a weak euro will make it harder for Germany to stay ahead. Consequently, as sheer currency conversion would give the UK an edge, assuming sterling remains strong. But this prediction certainly challenges the long-held UK consensus that Germany’s exports are strong on the back of a weak currency.

Even a chronically low birth rate is unlikely to have much of an impact. Germany has relied in the past on an influx of Gastarbeiter, or guest workers from abroad, to bolster the labor force. It is doing so now, with migrants arriving in increasing numbers from eastern and southern Europe.

The suggestion that Britain can catch up with Germany may be intended as a tool of self-motivation. But it makes more sense to examine how to stop the gap from widening. The danger with selling illusions about the future is that it can breed complacency among businessmen and politicians alike.

Britain can do better

Britain could easily do better — and should do so. But it has to be realistic. The UK needs a huge effort to turn around its balance of payments deficit, to increase business investment and to make sure its youngsters have the right education and skills.

Britain must also improve its infrastructure, raise productivity and cease relying on rising house prices to fuel another consumption-led boom.

All these issues need to be addressed at a time when the government is still trying to get the deficit down. Germany, by contrast, will have a balanced budget this year.

Can the UK pull it off? I believe it can, but it needs a shift towards long-term strategies in business and government. Selling off British businesses and assets to create short-term value for shareholders and calling that transfer in ownership “inward investment” is not the answer. It certainly does not make for a viable economic strategy.

Getting outside the City

Mergers and acquisitions are no match for organic growth. Paying out more in dividends as a percentage of profits than any other developed economy is not a long-term strategy for success either.

The UK has an abundance of entrepreneurs, but it cannot turn them into lasting businesses. All too often starved of adequate bank finance, those British companies that make it over the first hurdle are soon driven into the arms of private equity or the stock market. Too many are swallowed up and disappear.

Lord Bamford, who chairs the construction machinery manufacturer JCB, his family firm, which is not listed on the stock exchange, told me not long ago: “If my dad or I had gone to the stock market for money, we would not be here any more.”

His words should haunt British politicians. To succeed in international competition, the UK needs to reduce its dependence on the City. It’s the real economy, stupid!

Editor’s note: This essay was based on an earlier version which appeared in OMFIF.