Germany’s Banking Crash Was Worse Than Britain’s

15 january 2013

We’re not really encouraged to think of things like this, but it would seem that Germany’s banking crash was worse than that in the UK. Or at least that Germany spent more as a percentage of GDP in trying to sort out German banks than the UK did trying to sort out UK banks.

And we’re really not encouraged to think about it like this at all. The conversation over on this, European, side of the Pond is always about how the UK is over-reliant up0on financial services and Germany is safe and stable because it relies more on manufacturing. More than that, German banking is superior because it didn’t have to get bailed out in the same way that the UK’s financial sector did.

The proof is in this chart:

Just to remind of what is being shown, this is what factors led to what amount of extra borrowing (and thus increase in the stock of debt) in recent years.

As you can see, the German financial sector support was substantially larger than that in the UK: and that’s as a fraction of the much larger German GDP as well. So it’s hugely greater in actual cash terms.

 

I should also point out that this chart comes from the Trades Union Congress (TUC) so it is most certainly not the product of some neo-liberal black ops statistics team.

We can also see quite clearly that the Italian situation is being driven almost entirely by the interest rate dynamics. It’s the higher interest rates as they try to roll over old debt that is doing it for them (the grey area).

 

What also interests is that the UK’s major problem has been a falling away of tax revenue. Some might think, in fact some do say, that this shows that it wasn’t the last, Labour, government’s fault therefore. We’ve a recession, this bites into tax revenues and there’s your explanation.

However, this really isn’t quite true. What it’s really saying is that some part of the UK economy pre-crash was simply froth, destined to be blown away the moment the economy stumbled. As indeed it turned out to be. What should have been happening, what good Keynesian economics demands in fact, is that when we’re at the top of a boom, when we do have that froth in the economy, then we most certainly don’t use the revenue to build new permanent areas of government spending. Rather, we’re supposed to be running a nice great big budget surplus, actually paying down the debt, so as to provide us with the flexibility and firepower to borrow in the obviously looming recession.

And that was the real economic crime of the last government. If they had been doing what good Keynesian policy demanded of them then, paying down the debt, running a budget surplus instead of the 3-4% deficit they were running, then we could be good Keynesians now and could borrow our way out of the current slump and do some fiscal stimulus.

But they didn’t so we can’t.

But the real point of this chart is to compare Germany and the UK. Yes, we’ve more finance in our economy than they do. But they still had to pay more, much more, to stabilise their banking system than we did.