Angela Merkel Visit: Lessons From Germany for David Cameron

Angela Merkel

German chancellor Angela Merkel is being treated like political royalty, a consequence of her country’s economic power as well as prime minister David Cameron’s desperate need for friends in Europe. Few would argue about the position of Germany as the economic powerhouse of the European Union but what can Britain learn from the German economic model? Does Germany’s economy suggest that the idealisation of competition and flexibility, touted by chancellor George Osborne and his elite friends, is the route to success?

We have a lot to learn from the German model, particularly in terms of the way the government frames the two important sources of economic dynamism: energy and money.

Germany’s Energiewende or energy transition is one of the most dramatic and underreported developments taking place in Europe today. It has hugely ambitious targets for the reduction of carbon dioxide emissions, which are to fall by a minimum of 80% by 2050 with a staging-post of 55% reductions by 2030, as well as pledging to phase out nuclear energy by the end of 2022. The rejection of nuclear after the Fukushima accident was famously an example of Merkel’s ability to listen, learn and change her mind, which we might also welcome being shared with our own government.

Not only has Germany turned its back on Europe’s dirty fossil and nuclear past, it has also questioned ownership of energy and responded in a way that would be anathema to Britain’s Conservative politicians. The energy revolution is being driven by communities and by local politicians; it would be quite impossible without a muscular role being played by the state, the same state that in Britain is being devastated by austerity cuts. As a result, local communities and local governments across Germany are benefiting from the energy transition: the 928 inhabitants of the village of Grossbardorf, in Bavaria, have united to develop photovoltaic roof systems, solar power plants, a biogas plant with a combined heat and power (ChP) unit and a district heating network; Jühnde in Göttingen began its journey to becoming a ‘bio-energy village’ in 2001 and by 2004 70% of the population of the village were members of the co-operative and use locally generated bio-heat, relying on the methane produced by fermenting agricultural waste products.

These sorts of developments would be impossible without a wholly different approach to finance exemplified by the state-owned development bank – the KfW (Kreditanstalt für Wiederaufbau or Reconstruction Credit Institute). Established under the Marshall Plan and originally focused on the reconstruction of a war-torn economy, the KfW has been able to provide the finance to enable Germany’s development as political priorites have changed, through Reunification and now the Energiewende. The contrast with the situation in the UK is made clear through evidence given to the Environmental Audit Committee’s Inquiry into Green Finance, which will report shortly. It will demonstrate a tussle over power and profits that has held back the energy transition in Britain, where high-risk activities are always more attractive to private finance than investment in vital sustainable and resilient infrastructure. Continue reading

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The Finance Curse

occupation Jersey 2007 by Pat Lucas

patlucasoccupationjersey

How over sized financial centres attack democracy and corrupt economies

By Nicholas Shaxson and John Christensen

It is now well known that many countries which depend on earnings from natural resources like oil have failed to harness them for national development. In many cases it seems even worse than that: for all the hundreds of billions of dollars sloshing into countries like oil rich Nigeria, for instance,

such places seem to suffer more conflict, lower economic growth, greater corruption, higher inequality, less political freedom and often more absolute poverty than their resource poor peers.

This paradox of poverty from plenty has been extensively studied and is known as the Resource Curse.

This book asks whether some countries with over sized domestic financial centres may be suffering from a similar, and related, phenomenon.

We find strong evidence that the answer is yes and not just for reasons related to the Global financial crisis that erupted in 2007/8.

Perhaps, more surprisingly, this phenomenon that we are calling the Finance Curse is similar in many ways to the Resource Curse, there are big overlaps in both their causes and their effects.

The Finance Curse has been evident for decades and if untreated it may well endure for years or even decades after the latest crisis has blown over.

Every economy needs its financial plumbing and for decades academic studies suggested that bigger is generally better when it comes to financial sector growth.

The crisis has called all that research into question. New evidence is starting to emerge from the IMF, the Bank for International Settlements and others, revealing that above a certain size finance turns bad.

Our book, drawing on our many years of hands on experience of both resource dependent countries and finance dependent ones, goes far beyond the boundaries of their research to create an unprecedented comprehensive body of evidence about the perils of over sized finance.

Despite the trillions flowing into and through the City of London, for instance, Britain performs worse on major human development indicators – inequality, infant mortality, poverty, and more – than Germany, Sweden, Canada and most of its other rich country peers. Each ailment has many explanations, but over sized finance appears to be a major contributor.

The Finance Curse is a story about “Country capture” where an over sized financial sector comes to control the politics of a finance dependent country and to dominate and hollow out its economy. Some elements of this ‘capture’ are already well understood but our book introduces a wide range of new ideas and analysis.

In large finance dependent countries such as Britain or the United States, the Finance Curse’s causes and effects are masked by background noise in large, raucous democracies.

But in the small finance sectors and tax havens such as the Cayman Islands or Cyprus, these complexities are stripped away and the phenomenon is laid bare in purer, more crystalised forms which are easier to see and understand.

The tax havens, which we have studied extensively, carry important lessons – and warnings for larger finance dependent countries.

The Finance Curse is published by Tax Justice Network, you can download it here