Why-does-Germany-today-have-a-larger-economy-than-the-United-Kingdom – Marty Karaffa – 2022

> Macro, GDP, UK, Germany, Trade, Saving, Debt, Balances

source: https://www.quora.com/Why-does-Germany-today-have-a-larger-economy-than-the-United-Kingdom

Marty Karaffa an American/Australian who has lived in Munich since 2007

Updated Why does Germany today have a larger economy than the United Kingdom?

There are lots of reasons. The first is the most obvious. But all are significant.

  1. Germany has more people. 83 million vs 67 million.

    This, alone should account for the difference in the size of the economies. GDP per head is not vastly dissimilar in the two countries.

    But I would point out two events which increased head-count, which should have affected that figure.

    Germany absorbed 15 million people from the former East in 1990, and a million refugees in 2015. Both should have depressed GDP per head, but instead, Germany still remains roughly at par with the UK.

    The following might explain why.
  2. The majority of growth in the UK economy in the preceding decades has come from the finance sector. Arguably, the British financial sector still hasn’t recovered fully from the crisis of 2008. Some of the financial sector was nationalised; that affects whether the institutions involved are counted as a net contributor to GDP, or a net drain on GDP.
  3. UK has a national debt about 10% larger, proportionately, than Germany. That interest comes off the top of GDP figures.
  4. Germany exports 3 x more than the UK. That means German companies are profiting from activity in other economies, and adding it to the German national GDP. Without the robust financial sector, the UK exports relatively less.
  5. The UK sells 3 x more assets to overseas investors than Germany. Though foreign investment can be a good source of capital and stimulate the economy, those investors ship profits out of the UK, depressing GDP.
  6. That’s why Germany has a positive current account balance, and the UK a negative one. If you have a negative current account balance, that means you’re growing other countries’ economies at your expense. In 2019, Germany had a current account (trade) surplus twice the size of China as a % of GDP. Over some quarters, it was even higher than China in absolute terms.
  7. Germans save three times as much, per capita, as Britons. In fact the word for debt and the word for guilt is the same: Schuld. This gives German companies a ready source of cost-effective capital. UK banks and companies often need to seek capital or investment abroad, and that means the interest or dividends paid are a net loss to GDP. (This also relates to point #5.)
  8. The UK has dramatically more income inequality. The UK ranks second in the difference between richest 20% of the population and the poorest. Germany ranks 18th, with the difference 2/3rds less. The Gini Coefficient is 28% less for Germany than the UK. If one distributes too much of national wealth upward, it escapes from the real economy, where people spend to keep economic activity alive. Wealthy people investing in financial instruments drains the economy compared to people of modest means spending it with each other.

In the near future, I expect Germany to increase its advantage. What prompted the question, Alex Zhang?

Sources from Nationmaster and CountryEconomy

Edited in response to comments 10.05.2020:

I value the points of view expressed in the comments, and welcome the debate. Many suggest Britain’s economic relative economic performance is the result of factors relating to WWII. It’s prudent for me to reply.

Many assume that Germany benefited from the Marshall Plan and the UK didn’t, but that’s not quite true. In fact, the UK was the largest single recipient of Marshall Plan funds.

According to the linked document from the Marshall Foundation, we see that 24% of the Marshall plan funds went to the UK, and Wikipedia puts the figure as high as 27%. 84% were grants, and the remainder loans. The UK got around USD $2.8 billion in grants. (All figures are contemporaneous 1950s US dollars, except where otherwise stated.)

Examples of Marshall Plan Aid

Marshall Plan – Wikipedia

By contrast, Germany received 10–12% of Marshall Plan funds. 87% were grants, and the remainder loans, according to the Marshall Foundation figures.

Many cite the fact that Britain had heavy debts for waging war from 1939–1945 as a dampener on current economic performance.

I suspect they refer to the lend-lease programme of 1941, which amounted to around USD $5.5 billion in debt to the USA and Canada, discharged in 2006.

UK settles WWII debts to allies

With benign creditors like Canada and the USA, Britain did as most of us do with our home mortgages, and let inflation pay for the debt. At only 2% interest, it was in Britain’s favour to delay repaying the debt as long as possible while inflation ran higher.

The figure totalled USD $9.5 bn over 60 years—that would have been USD $61 bn in 2006 dollars.

And Britain defaulted on occasion over the intervening years.

I wouldn’t characterise Britain’s late payment as a sign of the onerousness of the debt; rather, perhaps a fairly routine strategy which many of us practice in our own household finances.

Germany, too, had debts outside of the Marshall Plan. Germany assumed that they would need to pay back all Marshall Plan aid, banked the funds, and used the interest for reconstruction.

Eventually, the terms were normalised and Germany paid back Marshall funds of about $1 bn, including (I assume) 400 m that had been earmarked as loans from the beginning.

(Some of the online information about the exact level of German repayments to The Plan is contradictory, but suffice to say that Germany met its obligations like any Plan participant.)

Germany continued to pay its Marshall debt out of general revenues, rather than touching Marshall Plan capital. I recall that the Marshall Plan debt was repaid in 1971.

The KFW bank, which administers the investment of those original funds, still issues development loans to business today.

70 years of Marshall Plan

It was trickier to deal with Germany’s other myriad of debts to private and public institutions abroad. That included WWI reparations on which Germany had defaulted.

World War II reparations – Wikipedia

Eventually, the cash reparations of some $30 bn which Germany owed were halved by agreement of its creditors in the London Agreement of 1953. One can speculate that the halving of the sum recognised that the WWI reparations negotiated at Versailles were counterproductive.

London Agreement on German External Debts – Wikipedia

But to my understanding, the $15 bn in reparations includes reparations in kind, which were often more valuable.

In an attempt to ensure that Germany didn’t industrialise again, Germany conceded territory to France, the Netherlands and Poland. As well, they surrendered about $2.5 bn in industrial assets (plant, machinery, factories, rail), and about $10 bn in patents and intellectual property.

For example, Konrad Adenauer observed that the IG Farben firm had a ten year lead in chemical technology which was of enormous value to allies.

THE BUSINESS WORLD; I.G. Farben: A Lingering Relic of the Nazi Years

When allied businesses didn’t want the assets—Ford famously refused an offer to take over Volkswagen, for example—they were sold on the open market. IG Farben assets formed the foundation for Bayer, Hoechst and BASF.

The German government also paid the costs of its own occupation.

In addition, after unification in 1990, Germany assumed responsibility for external debts from the former East. In so doing, the German government finally cleared the slate of WWI/WWII debt in 2010, for both halves of the formerly divided nation.

Personally, I think the reparation/debt arrangements were fair for both the UK and Germany. IMHO, the German reparations were harsh but appropriate, and didn’t pass the line into pointless vengeance. And dwarfed any assistance the Marshall Plan provided.

There are many reasons for the difference in economic performance between Germany and the UK. But WWII is no longer one of them.