Sunday, May 19, 2013

Britain Highly Unlikely To Become Europe's Biggest Economy

Matthew Lynn at Marketwatch claims that his country, Britain, will become Europe's biggest economy. But that is just nationalist wishful thinking from his part. First, let's review the current situation, here was the 2012 GDP in local currency for the three biggest:

Germany € 2,644 Billion
France € 2,028.5 Billion
Britain £ 1,540.5 Billion

(Source, the respective national statistics bureaus)

If you "translate" Britain's number using the current exchange rate of about €1.18/£, this is the result:

Germany € 2,644 Billion
France € 2,028.5 Billion
Britain € 1818 Billion

In other words, the French economy is roughly 11% bigger and the German economy is roughly 45% bigger than the U.K. economy.

Lynn claims that Britain, while doing poorly in absolute terms, is doing much better in relative terms:

Well, economic performance is always relative. It is not that the U.K. is doing particularly well. The economy is struggling to grow at more than 1% a year and may do so for years to come. There is certainly no sign of a sudden acceleration of growth.

But the rest of Europe is doing much, much worse. The euro crisis has locked the continent into a permanent depression. Once you take that point on board, the math becomes relatively simple. If the rest of Europe is stagnant, or getting smaller, then the U.K. makes relative progress just by staying where it is. 
Lynn's assertions, has however no connection to reality. Here is the cumulative growth (or contraction in Britain's case) during the latest 5-year period, 2008-2012

Germany +3.7%
France    +0.4%
Britain     -2.0%

(Source Eurostat)

While it is true that the mistake by the French people in electing crazed Socialist Francois Hollande President will hurt the French economy during the 4 years that remains in his term, the damage will probably not be greater than to prevent Britain from continuing its relative decline, and it will certainly not be great enough to allow Britain to grow 11% in relative terms in 4 years.

And as for Germany, it is far more competitive than both Britain and France and will outperform both, as it has done in recent years. While the too low birth rate in Germany is a problem, that can largely be compensated by immigration of workers. And contrary to Lynn's wishful thinking based assertions, Germany is the country that is seeing a large inflow of workers, attracted by Germany's much lower unemployment rate and better pay (compared to Britain), while net immigration to Britain is declining.


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