Is German Football like the German Economy?

In teaching economics I try and relate as much as I an to the interests of the students. I have found that sport is one way of engaging a class especially in the macro indicators of a country – growth, unemployment, inflation, trade, inequality etc. The German economy has been the backbone of the EU for a number of years but has this corresponded to the success/failure of the national football team? The performance at the 2004 Euros were the catalyst to an overhaul of the German coaching system – outlined brilliantly in Raphael Honigstein’s book – Das Reboot. This came to fruition in the 2014 World Cup final when German beat Argentina 1-0 in extra time.

However a year earlier in 2013 there was an all German final in the European Champions League with Bayern Munich defeating Borussia Dortmund 2-1 at Wembley Stadium in London. In order to get to the final both teams beat Spanish counterparts – Real Madrid and Barcelona. What is fitting is that in economic terms German is the powerhouse of the European economy whilst in contrast Spain has suffered greatly from the euro crisis and austerity measures that have been imposed on it. If you look at post-war Germany you can see some correlation between the success of the national side and state of the economy.

The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley in 2013, 17 were from outside Germany.

Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.

2014 onwards

The 2014 World Cup victory, almost 25 years since they last won it, was achieved largely through the restructuring of German coaching system. The style of play was transformed from a defensive minded ‘park the bus’ attitude to one of free flowing counter attacking style. However the economy was not as buoyant as in previous years with unemployment 6.6% and the spectre of deflation rising its head. Roll on the 2018 World Cup and the defending champions had a disastrous campaign with not even getting out of pool play. This coincided with weakest growth in Germany for five years. The Euro 2020 (played in 2021 because of covid) saw Germany going out to England in the last 16. With regard to the club scene Bayern Munich did win the Champions League in 2020 but no German team made it to the semi-finals in 2021 as both Bayern Munich and Borussia Dortmund were knocked out in the quarter finals.

As with most countries the German economy failed to return to its pre-covid growth rate as shortages of manufacturing inputs have hampered any recovery. However, there are plenty of orders on the books for German companies for a potential rebound when supply constraints ease. On the football side of things under new manager Hansi Flick, ex Bayern Munich, the national side breezed through qualifying for Qatar 2022 in what was a weak group, but are still ranked only 12th in the world which is an improvement on 16th in 2018.

Inflation – causes and examples from the global economy.

Here is an excellent video from CNBC which includes news clips from the 1970’s and beyond. Below are some of the main points:

  • 1960 – pint of milk in the UK 3p. Today 50p
  • Cost Push Inflation – today: supply-chain bottlenecks, shipping costs rising, labour shortages
  • Demand Pull Inflation – usually associated with an economy operating near full capacity
  • Milton Friedman – inflation a monetary phenomenon and the domain central banks.
  • With the expansion of money why has there been little inflation recently? Velocity of circulation is not evident – i.e. number transactions.
  • CPI – Headline Inflation but Core Inflation is more valuables it takes out volatile components of the CPI which have no reflection on the strength of their economy – e.g. oil. Gives you a better idea of the inflation trend.
  • A little bit of inflation is good – ‘Goldilocks’ not too hot but not too cold.
  • Hyperinflation – Brazil – 1980-1995. Weimar Republic – issues 100 Trillion D Mark note.
  • !970’s – Stagflation – wage price spiral – higher interest rates 20% – trade-off was the higher unemployment rate.
  • Central Banks – focus on inflation but also avoid a deflationary environment.

Will China’s dominance be more regional than global?

Below is a very good video with FT’s global China editor James Kynge and FT economics commentator Martin Sandbu. They discuss whether China will dominate global commerce or whether the world economy could split along regional lines. They also give a good account of the growth of China since the 1970’s. The main points from the video follow.:

  • China – major player in the global economy forever more but not the centre of a global economy, partly because other parts of the world will not be keen to let it and global economy starting to become more regionalised rather than globalised.
  • China growth – 1979 to 2018, GDP growth averaged 9.5 per cent a year.
  • Global centre of gravity – last 40 years has moved towards China
  • How did China grow? – late ‘70s market reforms and attracting foreign direct investment. Significant reason was in mid ‘90s, when the sons and daughters of farmers were allowed to migrate from the village to big factory towns. Western countries were pursuing globalisation at the time so China’s cheap production costs were a popular option
  • China still a poor country – ranks 61st and the world in terms of countries by their average per-capita incomes. China is still very much a developing nation. But it’s a very different type of economy, from the type of developed country that we can see elsewhere in the world. China’s middle class – 400m people. But there are a billion Chinese that are much less well-off.
  • China and the middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
  • Chinese consumers last year spent about $7.3tn – greater than the entire GDP of the Japanese economy. But now I think we’re entering a very different phase. And that one is characterised by China’s emergence as a technological power.
  • China leads the world in many technologies. – wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, ultra-high-voltage power transmission.
  • Within the world trading system there are three hubs – Germany – China – USA. However trade relationships seem to be more regional within these hubs and it is suggested that China will become more dominant on a regional basis rather than global.

Financial Crisis and Political Upheaval in Nazi Germany

A recent paper by Sebastian Doerr, Stefan Gissler, José-Luis Peydró and Hans-Joachim Voth investigates the role that a financial crisis in Germany played in the Nazis coming to power. They show how financial distress can lead to radical voting when accompanied by a convergence of cultural and economic factors. In less than four years, the Nazis went from capturing 2.6% to 37.3% of the popular vote. The authors identified the failure of one bank as being significant in growing the support of the nazis – Danatbank.

Danatbank and Dresdner Bank
Danatbank (the second largest bank in Germany) was widely seen as responsible for causing the financial crisis, and it was headed by the well-known Jewish manager Jakob Goldschmidt, a favourite target of Nazi propaganda. Its collapse in 1931 saw a surge of support for Hitler. Dresdner Bank, Germany’s third-largest lender, failed as well. Exposure to Dresdner Bank had a similar negative effect on city incomes as exposure to Danat, but had almost no effect on support for the Nazis. By contrast, Dresdner Bank was not the key target for Nazi propaganda – even if it had numerous Jews occupying leading positions like most German banks. While the economic impact of the two bank failures was almost identical, only exposure to Danat had a significant effect on Nazi voting. By 1932 Danatbank and Dresdner Bank merged.

Note: The shaded area indicates the period of the 1931 banking crisis, from the beginning of troubles at Austrian Creditanstalt to the merger between Danatbank and Dresdner Bank. Blue vertical lines show: (A) beginning troubles at Austrian Creditanstalt (May 1931), (B) Nordwolle accounting irregularities discovered and Hoover Moratorium established (June 1931), (C) failure of Danatbank and ensuing bank holidays (July 1931), and (D) forced merger of Danatbank and Dresdner Bank. 

The Depression enabled the Nazis’ rise to power, but the financial collapse of 1931 thus lent seeming plausibility to a key Nazi hate narrative, helping to bring a large part of the German middle class round to the party’s world view.

Socialism and Lying

BE cap socThe Economist wrote a piece about a group of behavioural economists, including Dan Ariely, that recently ran an experiment to test Germans’ willingness to lie for personal gain. 250 Berliners were randomly selected to take part in a game where they could win up to US$8. The game rules were as follows:

Each person to throw a die 40 times and record each roll – a higher total = bigger payoff
Before each roll the person had to write down the number on either the top or the bottom side of the die.

However, they did not have to tell anyone which side they had chosen, which made it easy to cheat by rolling the die first and then pretending that they had selected the side with the highest number. If they picked the top and then rolled a two, for example, they would have an incentive to claim—falsely—that they had chosen the bottom, which would be a five.

Honest participants would be expected to roll ones, twos and threes as often as fours, fives and sixes. But that did not happen: the sheets handed in had a suspiciously large share of high numbers, suggesting many players had cheated.

After finishing the game, the players had to fill in a form that asked their age and the part of Germany where they had lived in different decades. The authors found that, on average, those who had East German roots cheated twice as much as those who had grown up in West Germany under capitalism. They also looked at how much time people had spent in East Germany before the fall of the Berlin Wall. The longer the participants had been exposed to socialism, the greater the likelihood that they would claim improbable numbers of high rolls.

Economic Systems: France v Germany

Here is a useful video on economic systems from the BBC – CIE AS course Unit 1. France’s economy has struggled in recent years and President Hollande has plans to reduce the levels of bureaucracy and the size of the state sector – moving to less government intervention.

Critics say France has too centralised and big a state sector. By contrast, in Germany much of the decision making is at local level.

So how do the two systems compare?

Youth Unemployment in Europe

Here is a very good video graphic from The Economist. It looks at youth unemployment rates in the main economies of Europe and discusses the reasons why some countries have had much higher rates. Notice German’s low rate which was falling during the GFC which was mainly due to labour reforms which allowed small businesses to fire employees more easily and liberalised work for part-time and temporary work.

Global Minotaur or Merkeltaur – Germans Kick Greece out of Euro

Ben Cahill of Senior College put a cartoon on the Tutor2u blog about the role Angela Merkel has in determining the destiny of Greece. The cartoon below has Merkel showing the Greeks to their only option ie. the labyrinth to be consumed by the minotaur. What she basically saying to the Greeks is that you have no choice but to stick to the reform measures and strict austerity measures. Furthermore one could say that after the soccer quarter-final on Friday “One gone, one to go”.

This cartoon also reminded me of book that I recently read called the Global Minotaur by Yanis Varoufakis. The Minotaur is a tragic mythological figure. Its story is packed with greed, divine retribution, revenge and much suffering. It is also a symbol of a particular form of political and economic equilibrium straddling vastly different, faraway lands: a precarious geopolitical balance that collapsed with the beast’s slaughter, thus giving rise to a new era.
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According to the myth’s main variant, King Minos of Crete, the most powerful ruler of his time, asked Poseidon for a fine bull as a sign of divine endorsement, pledging to sacrifice it in god’s honour. After Poseidon obliged him , Minos recklessly decided to spare the animal, captivated as he was by its beauty and poise. The gods, never allowing a good excuse for horrible retribution to go begging, chose an interesting punishment for Minos: using Aphrodite’s special skills, they had Minos’s wife, Queen Pasiphae, fall in lust with the bull. Using various props constructed by Daedalus, the lengendary engineer, she managed to impregnate herself, the result of that brief encounter being the Minotaur: a creature half-human, half-bull (Minotaur translates as ‘Minos’s Bull’, from the greek taurus, ‘bull’).

When the Minotaur grew larger and increasingly unruly, King Minos instructed Daedalus to build a labyrinth, an immense underground maze where the Minotaur was kept. Unable to nourish itself with normal food, the beast had to feast on human flesh. This proved an excellent opportunity for Minos to take revenge on the Athenians whose King Aegus, a lousy loser, had had Minos’s son killed after the young man won all races and contests in the Pan-Athenian Games. After a brief war with Athens, Aegus was forced to send seven young boys and seven unwed girls to be devoured by the minotaur every year (or every nine years according to another version). Thus, so the myth has it, a Pax Cretana was established across the know lands and seas on the basis of regular foreign tribute that kept the Minotaur alive.

Beyond myth, historians suggest that Minoan Crete was the economic and political hegemon of the Aegan region. Weaker-city states, like Athens, had to pay tribute to Crete regularly as a sign of subjugation. This may well have included the shipment of teenagers to be sacrificed by priests wearing bull masks.
Returning to the realm of the myth, the eventual slaughter of the Minotaur by Thesus, son of King of Aegeus of Athens, marked the emancipation of Athens from Cretan Hegemony and the dawn of a new era.

Aegeus only grudgingly allowed his son to set off to Crete on that dangerous mission. He asked Theseus to make sure that, before sailing back to Piraeus, he replaced the original mournful black sails with white ones, as a signal to his waiting father that the mission had been successful and that Theseus was returning from Crete victorious. Alas, consumed by the joy at having slaughtered the Minotaur, Theseus forgot to raise the white sails. On spotting the ship’s black sails from afar, and thinking that his son had died in the clutches of the Minotaur, Aegus plunged to his death in the sea below, thus giving his name to the Aegean sea.
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This suggests a tale of a hegemonic power projecting its authority across the seas, and acting as custodian of far-reaching peace and international trade, in return for regular tributes that keep nourishing the beast from within. The role of the beast was America’s twin deficits, and the tribute took the form of incoming goods and capital. Its end came from the collapse of the banking system. The book is well worth the read and not too long either.

Euro Crisis – is it the Ultimatum Game all over again?

Jame Surowiecki in the recent edition of The New Yorker likened the euro zone crisis to the fairness trap. With Greek politicians looking at renegotiating its aid package and austerity measures, the German government has indicated that they are running out of patience and money to lend to Greece. Policymakers have talked about a Greek exit from the Euro – Grexit – which would mean they would default on their debts and no longer be part of the Euro currency.

As many economists have pointed out when economies go through a recessionary or contractionary phase their exchange rate starts to depreciate. This makes exports more competitive and imports cheaper which ultimately helps growth. However for Greece to leave the Euro it would destroy vast amounts of capital as well as costly for the rest of Europe. Greece owes almost half a trillion euros and containing the damage would mean the recapitalisation of banks, continent-wde deposit insurance and more aid to Portugal, Spain, and Italy. However it seems that this would be a much more expensive option than Greece staying in the euro zone.

Rationally there should be some sort of compromise with maybe a relaxing of austerity measures and giving Greece a bit more time to bring about some serious structural reforms especially to its tax system. However according to Surowiecki Europe isn’t arguing just about what the most sensible economic policy is but what is fair.

The Germans see it as unfair that they have to bailout Greece especially as the Greeks have continued to live beyond their means – how did they afford to host the Olympic games in 2004? Borrow more money? Why should the Germans be obliging when there is no meaningful reform in Greece?

From a Greek perspective it is equally unfair that for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbours.

This fous on fairnes could prove disastrous – remember the Ultimatum Game.

The Ultimatum Game by Werner Goth 1982
In this game somebody offers John £100 under the condition that he shares it with Sarah. The two of them cannot ex- change information and John can make a single offer of how to split the sum. Sarah, who is aware of the amount at stake, can say yes or no. If her answer is yes, the deal goes ahead. If her answer is no, neither John or Sarah gets anything. In both cases, the game is over and will not be repeated. You may not be surprised to learn that two thirds of offers are between 40 and 50 percent.

From research carried out (Karl Sigmund et al.), only four in 100 people offer less than 20 percent. Proposing such a small amount is risky, because it might be rejected. More than half of all responders reject offers that are less than 20 percent.

However, why should anyone reject an offer as “too small”? The only rational option for a selfish individual is to accept any offer, as £1 is better than nothing. A selfish proposer who is sure that the responder is also selfish will therefore make the smallest possible offer and keep the rest.

This game-theory analysis, which assumes that people are selfish and rational, tells you that the proposer should offer the smallest possible share and the responder should accept it. But this is not how most people play the game.

The fairness problem is exacerbated by the fact that our definition of what counts as fair typically reflects what the economists Linda Babcock and George Loewenstein call a “self-serving bias”. This is even more pronounced when both parties feel they are not part of the same community – known as “Social Distance”. For instance:

1. The Greeks’ resentment of austerity might be attenuated by the recognition of how much money Germany has already paid and how much damage was done by rampant Greek tax dodging.

2. The Germans might acknowledge that their devotion to low inflation makes it much harder for struggling economies like Greece to start growing again.

The pervasive rhetoric that frames the conflict in terms of national stereotypes is the following:

Hardworking, frugal Germans v frivolous, corrupt Greeks
Tightfisted, imperialistic Germans v freewheeling, independent Greeks

This makes it all the more difficult to reach a reasonable compromise.

The Greeks do work long hours but less productive.

A hat tip to colleague David Parr for this piece from the BBC. According to the OECD the Greeks put in the hours at the coal face but when it comes to productivity they do lag behind the power house of Germany. The average Greek worker is at the workplace for 2,017 hours per year which is more than any other European country. This compares to the German worker who is there for 1,408 hours per year. However, according to the OECD, there are two reasons for this:

1. The Greek labour market is composed mainly of people who are self-employed who tend to work longer hours.
2. There are different numbers of part-time workers in each country. In Germany one in four are in part-time employment. As all workers are included in the calculation this brings down the average in Germany. Fewer people work part-time in Greece.

But if you look at productivity you see that Germany ranks 8 in productivity per worker out of the OECD countries – while Greece comes in at 24th.

The German economy – it’s not all over!

“They think it’s all over” is a well known quotation from Kenneth Wolstenholme’s BBC TV commentary in the closing moments of the 1966 FIFA World Cup Final, where England beat West Germany 4–2 after extra time. But it’s not all over for the German economy. Some interesting facts from The Economist on the economy as compared with its G7 colleagues.

* Highest growth of GDP/Capita among the G7 countries
* 6.6% unemployment – second-lowest
* Smallest budget deficit and least government debt relative to GDP
* Current account surplus which is 5% of GDP
* Household debt 99% of disposable income. UK – 170% USA – 128%

Although there are major budgetary issues in EU countries this has impacted on the value of the euro. With a falling euro this makes euro country exports more competitive and Germany has definitely benefitted from this. However, to rely on exports as the engine room of your economy is risky as recessions overseas can quickly revoke any growth. Last year domestic demand did increase and unemployment was the lowest rate for nearly 20 years. This could could put pressure on wages which may mean greater domestic spending.