The predictions for a strong Europe have been proved wrong

Leading German Greens Party member Robert Habeck, who is also Germany's Economic Affairs Minister. Germany will hold elections on February 23 following the collapse of the three-party federal coalition. Picture: Getty Images

I have been sorting through my books with the aim of giving away as many as I can. Nobody wants books these days.

It’s a slow process as I end up flipping through the pages of the more interesting books or wondering why I purchased some of them in the first place.

I came across a copy of Lester Thurow’s 1992 book, Head to Head: The Coming Battle Among Japan, Europe and America.

It went straight to the discard box. Thurow was a left-leaning economist working at the Massachusetts Institute of Technology – he was an old-fashioned social democrat. He wrote a number of books and was a prolific columnist.

As a fervent believer in government intervention and a strong social welfare system, he had his money on Europe to draw away from the US. According to Thurow, “major investment decisions have become too important to be left to the private sector”.

He was also attracted to the Japanese economy in which the ministry of international trade and industry played a dominant role. Thurow is no longer with us but the fact remains that he couldn’t have been more wrong. At the time, the economies of the US and the EU were about the same size. Today, the EU economy is less than three-quarters the size of the US economy.

The median disposable income in the US is 25 per cent higher than in Germany and 60 per cent higher than in Italy. The US continues to power ahead in terms of productivity growth while the largest economies in the EU – Germany and France – are both in the doldrums. The German economy is barely bigger than it was pre-Covid; it is currently in recession.

Even at the time Thurow was being extremely optimistic in his predictions. The EU was in the process of adopting a common currency even though the underlying economic and fiscal situations of the member countries were extremely disparate.

The value of the euro was too high for the low-productivity countries, particularly Greece, Italy and Spain, but too low for Germany, in particular.

For some time, this suited Germany, which was able to develop strong export markets in automotive and engineering-related products, in particular. China became an important trading partner with high-end German cars making their way to China.

Germany was able to access cheap piped gas from Russia that was used by the large manufacturing sector. But what suited Germany didn’t suit the poorer EU countries, including Greece, Portugal, Spain and Italy, as they struggled to deal with the common currency. As a result, there was a need for fiscal compensation to these lower-income countries that was largely met by Germany and, to a lesser extent, France.

Thurow was, of course, not the only true believer in the European model and in Germany, in particular. In 2015, well-known international commen­tator Thomas Friedman wrote that Germany was about to become Europe’s first green solar-based superpower.

“There is an impressive weight to Germany today – derived from the quality of its governing institutions, its rule of law and the sheer power of its economy,” he wrote. He even favourably quoted the president of the Green Party’s political foundation, who claimed “the greatest success of the German energy transition was giving a boost to the Chinese solar panel industry”. He was referring to Energie­wende, the German government’s decarbonisation strategy initiated in 2010.

Wind turbines at a wind farm in northern Germany. Picture: AFP

The aim was to shift electricity generation away from coal, gas and nuclear to renewables.

In 2019, Germany’s Federal Court of Auditors estimated that the program had cost €160bn over the previous five years, claiming the costs were “in extreme disproportion to the results”.

That said, the energy system in Germany continued to be underpinned by affordable gas from Russia, an arrangement that effectively ceased in 2022 when Russia invaded Ukraine.

Today, the German economy is on its knees, with the rate of unemployment above 6 per cent. It is much higher for recently arrived migrants. There is a massive rationalisation of heavy industry going on as industrial companies reduce the size of factories or close them altogether. There are some big names here, including Volkswagen, ThyssenKrupp and BASF. BASF is investing billions of euros in a new plant in China.

This is not entirely surprising given that the price of electricity in Germany is twice as high as in the US and three times higher than in China. To be sure, Germany has so many wind and solar installations, including offshore wind, that there are times when renewable energy generates around 70 per cent of all the electricity demanded. The trouble is that there are times when that percentage falls dramatically – to below 5 per cent.

At that point, Germany is reliant on the electricity produced in other nearby countries and transported using the interconnectors. Ironically, much of this electricity is generated by nuclear plants. The effect of this arrangement is to drive up electricity prices in those other countries.

In November last year, Germany recorded the highest electricity prices since the Ukraine War began. There are now palpable tensions between Germany and a number of countries that supply Germany with electricity when needed. Note here that installed battery capacity in Germany can currently generate less than an hour of the country’s daily demand for electricity.

In the meantime, the German government is restricted in its spending by the constitutionally enshrined debt ceiling. The attempt by the left-leaning Olaf Scholz coalition government to use Covid moneys to pay for energy and climate measures, thereby circumventing the fiscal rules, was disallowed by the Constitutional Court.

There is a widespread acknowledgment that more government spending is required for both defence and infrastructure.

In the meantime, the second largest economy in the EU, France, is in a world of pain with an inoperative government in charge. Unemployment is approaching 8 per cent and the budget position is dire, with the deficit now above 6 per cent of GDP, in clear breach of the EU’s fiscal rules. The attempts by the Macron government to trim the generous entitlements that drive a great deal of government spending have largely failed. The European Commission continues to impose costly and productivity-sapping regulations that must be met by the member countries. These include a number of climate-related measures, including the mandating of the purchase of electric vehicles.

The US is now powering ahead, with very strong gains in productivity and employment. The most recent data on employment saw the numbers in new jobs greatly exceed expectations. The rate of unemployment in the US is now a fraction over 4 per cent. Business investment is strong and the application of new technologies, particularly AI, has huge potential.

So, Lester and Tom, you were wrong about Europe and Germany, in particular. Affordable and reliable energy is the bedrock of economic prosperity as well as government arrangements that allow some companies to thrive and others to fail. Governments simply don’t pick winners well. There are lessons here for ­Australia.