Otto von Bismarck, a 19th-century German chancellor, is credited with the following reflection: “Only the fool learns from his own mistakes. The wise learn from the mistakes of others.
Rishi Sunak has not been in office long enough to be called foolish by Bismarck’s definition. But he did know that he could have learned from Bismarck’s modern successors. The UK and Germany have vastly different economic problems. Germany had become dependent on old industries and old technology. Brexit has exacerbated Britain’s pre-existing economic ailments, such as low productivity and its financial sector’s reliance on the eurozone. What both countries share is that their economic models are unsustainable and their political leaders have screwed up.
Angela Merkel’s politics over the past decade is a cautionary tale, with lessons for Rishi Sunak. For all her analytical rigor, Merkel suffered from a chronic disinterest in solving problems. She accepted global emissions caps or NATO-related military spending targets that she had no intention of meeting, nor the means to do so. The austerity policies of the successive coalitions led by Merkel led to a public investment deficit of half a trillion pounds sterling (about 564.5 billion euros). The dire consequences of it have been revealed very recently. The mobile phone network is malfunctioning in many parts of Germany, to the point that visitors to the country think their mobile phone has broken. A motorway connecting northern and southern Germany has been permanently closed because there was no money to repair a bridge with safety problems. A general in the Armed Forces has warned that there is such a lack of funding for the Army that they would not be able to fight in a war that lasted several weeks. Here is a clear pattern.
As far as short-termism is concerned, there is nothing comparable to Merkel’s decision to accelerate the abandonment of nuclear energy. Outwardly, Germany was a successful economy during her time in office. Growth rates were good and public finances were very strong. Some somewhat naive foreign observers were so impressed that she was awarded the leader of the West award. They did not see what was cooking under the surface.
Germany has been left out of the digital revolution in many sectors. It was still clinging to 20th-century industries that relied on cheap Russian gas to stay competitive. Still today, German politicians, no matter whether they are conservative or green, continue without questioning the industrial model of Germany.
Merkel must be recognized as never reaching the heights of cynicism of Sunak, whose list of five things to do presented on the 4th consisted mainly of self-fulfilling promises. The Bank of England is already predicting that inflation will plummet from the middle of this year. Economic growth, of course, will return at some point. Has there ever been a recession that didn’t go away?
The main economic problem in the UK that needs to be addressed is that of low productivity growth. Stagnant productivity has many ripple effects: lower profits for companies, lower wages for employees, less tax revenue for the Treasury, and less spending on public services.
The National Institute for Economic and Social Research compared the average growth of the UK economy of 2.3% in the period 1974-2008 with productivity growth of just 0.5% between 2008 and 2020.
Brexit is not the cause of the UK’s productivity decline. As the data cited in the previous paragraph shows, the decline began around the time of the global financial crisis. That’s when the UK economic model of trickling down wealth stopped trickling.
One way to raise productivity growth is through increased public investment. President Joe Biden’s Inflation Reduction Act, despite its misleading name, shows how it can be done. The US law aims to attract foreign companies through subsidies in qualified sectors such as clean energy and low-cost pharmaceuticals. Freed from the shackles of European competition policy, the UK could have offered similar incentives to European manufacturers. This might even have been the beginning of a post-war economic strategy. Brexit.
Infrastructure investments and subsidies could be financed through an off-budget instrument. These investments, unlike the Liz Truss tax cuts, would have some chance of raising productivity growth. Even a small increase in productivity would have a disproportionately large effect on the government’s ability to borrow. The problem is not the debt, but what is done with the money that is borrowed.
Unfortunately, none of the three prime ministers since Brexit took place seemed interested. Boris Johnson’s desire to make Brexit work was never matched by his drive to see it through. Truss made the tragic mistake of starting his program with tax cuts. Sunak has no plan at all. Nor does the Labor Party pay attention to productivity. Sir Keir Starmer’s big idea is a combination of fiscal discipline and administrative devolution. This is all very well, but it is not the answer to a crisis of investment and productivity. If the UK economy in its current state is subjected to a handover, all that will happen is that underfunded state services will become underfunded local services.
Dodging problems can work politically. It served Merkel, who was in office for four consecutive legislatures. But it is a logical fallacy to think that the reverse is also true in general. Stop solving problems does not serve to win elections, especially when that refusal explodes in your face while you are still in office.
I don’t think Sunak will be as lucky as Merkel. The UK productivity crisis has been around for 15 years now. The combination of Brexit and the serial economic crises of this decade indicate that the best time to address the productivity crisis is now.
What we have learned from speeches by Sunak and Labor leader Starmer in recent days is that this is not going to happen. As the German philosopher Georg Wilhelm Friedrich Hegel wrote: “History teaches us that no one learns from history.”