Tag Archive: EU-28

The Return of the Greek Drachma … err Drama!

© Ricardo Pinto, 2015, AngloDeutsch™ Blog, www.AngloDeutsch.EU

Greece is widely considered to be the cradle of democracy. The theatre of ancient Greece is also considered to be the fountainhead of the Western dramatic tradition, and it shows. The earliest Greek dramas emerged during the 6th Century BC and the term “drama” is derived from the Greek word for action (to do or to act). Indeed, the three main dramatic genres, namely tragedy, comedy and satire (tragicomedy or burlesque), emerged from Athens.

It is just as well that drama is a Greek invention because in the last five months, a mixture of “comedy” and “satyr” is exactly what the Syriza-led government has been serving-up on the European Union (EU) stage. For the final act, it is quite possible that “tragedy” will complete the fascinating yet frightening performance that is unfolding before our eyes. The end product of the Greek drama could well be a return to the Greek drachma.

Greek Drama: paving the way for the drachma?

Dramatic structure refers to the framework of a dramatic work such as a play or a film.  According to Gustav Freytag, dramas can divided into five parts or acts (also called Freytag’s pyramid), as illustrated below.

Freytag's Pyramid and the Greek Drama

I would like to take the liberty of applying Freytag’s pyramid to modern-day Greece, as far as the Eurozone crisis and its future in the EU are concerned. Bear with me.

Act 1. Exposition

This introduces important background information to the audience such as the setting before the main plot in the form of flashbacks, characters’ thoughts, background details, etc.

The first Act of the latest instalment of the Greek drama started during the General Election of January 2015. The Syriza party, indeed almost all Greek parties, told more or less the same narrative and provided the same broad analysis of the background to the plight of Greece and the Greeks. The plot can be summarised as follows: the Greek troubles are the result of the Euro and EU, the Troika (ECB, IMF and EC) has imposed unbearable burdens on the Greek people, resulting in a collapse of GDP, reduction in income and pensions (internal devaluation), very high levels of unemployment, etc. This has all been done in the name of austerity, which has principally served to rescue German and French banks, as well as the Eurozone as a whole but Greece itself. The Greek people have suffered enough. Austerity must end and Greece must regain its self-respect.

Interestingly, the above exposition concentrated almost entirely on the period post-2009, when Greece was rescued from bankruptcy by the EU. The first Act makes clear that the protagonist (Greece) has been treated very badly by the main antagonist in the drama, the Troika / EU / Eurozone / Banks but that enough is enough. The protagonist´s exposition somehow leaves out the decades of corruption, mismanagement, clientelism and sheer incompetence of generation upon generation of Greek leaders that necessitated a rescue by the rest of the Eurozone in 2009 in the first place. But such is the nature of dramatic plots. It is not convenient to set out the background in painful detail, including the fact that Greece had the chance to exit the EU but chose instead to remain and be part of the euro while taking the painful internal devaluation that it implied and which countries in a similar position have also gone through. The previous government signed-up to the bailout conditionality but clearly the mood has changed after five years of painful austerity.

A key aspect of the exposition was the election manifesto. As I have previously discussed, the Syriza programme did prioritise an end to austerity, however, any reading of its pledges would lead to the conclusion that it was both contradictory and unrealistic.

It called for Greece to remain in the EU and Eurozone yet basically roll back the commitments made by the previous government as part of the conditionality for the bailouts, while at the same time calling for an end to privatisation, restoration of lost state jobs, raising of minimum incomes and pensions, free health provision and much else beside. That is all very well during a general election, except for two minor issues: Greece is broke and the only way this can be done is if others pay for it in the short, medium and possibly long-term, yet permanent bailouts are forbidden by various EU treaties for a very good reason.

The EU rescue packages were designed to stop Greece from becoming bankrupt as a result of its own decisions made over a period of decades and did indeed manage to keep them in the Eurozone and the EU, something which the Greek people have always insisted upon. They were designed primarily to buy Greece time to regain competitiveness through reforms agreed to by the previous government. Five years later, this is all interpreted as no more or less than national humiliation, bullying and dictatorship on the part of the EU, with Germany and the Troika singled out for special attention. This was a cracking opening Act in the play.

Act 2. Rising Action

The rising action is a series of events that begin immediately after the exposition (introduction) and builds up to the climax. The entire plot depends on these events to set-up the climax and the satisfactory resolution of the story.

A series of events took place immediately after the election, which set the course for the current Greek drama.

As I have previously discussed, instead of picking a mainstream coalition partner, Syriza chose the Independent Greeks Party which was committed to revoke the agreements between Greece, EU and the Troika, prosecute those who negotiated them, repudiate part of Greece’s debt and require German war reparations for the invasion and occupation of Greece during WWII. Syriza selected this party over other moderate alternative partners. This was widely interpreted and an immediate slap in the face for Germany, by far the most important contributor to past, present and future EU bailouts. Not a good start to negotiations, but great drama.

Syriza then took it as read that being elected actually gave it a mandate to end  austerity in Greece. Under a scenario where Greece would leave the Eurozone and possibly the EU, this would have been correct. Just because they were elected on the basis of a contradictory and unrealistic manifesto, does not give a country the right to implement it unless it assumes responsibility for the costs associated with such a manifesto. Clearly, all the other Eurozone countries would need to pay for a Greek programme that they had absolutely no control over. But if they are to agree a further bail out, they naturally have to approve the basis or conditionality associated with further funds, since they have their own electorates to consider. Instead, Syriza chose to act as if the other countries owed it to Greece to agree their programme by virtue of their electoral mandate.

Furthermore, Syriza and the Independent Greeks Party made a series of important appointments based on political dues to take-on the Troika, rather than selecting experienced and diplomatic negotiators, steeped in the EU way of doing things.

A critical decision was the appointment of the unelected Yanis Varoufakis as the Finance Minister. A bike riding, fiery blogger with a penchant for game theory who describes himself as a “libertarian Marxist” was not necessarily an inspired choice for dealing with 27 other EU Finance Ministers. While he may be a highly regarded economist, he has almost no political experience, except for a period during 2004 – 2006, when he served as an economic adviser to George Papandreou.

Alexis Tsipras, the other main character in the play, can hardly be considered a mature politicians himself, having first been elected to the Greek Parliament in 2009. But initially both Alexis Tsipras and Yanis Varoufakis were widely fêted by the European media for being a contrast to the previous government – young, handsome, tieless, bike riding (Varoufakis), living in a modest neighbourhood (Tsipras), etc. The media throughout Europe loved this and the message that the Greeks were going to take on the austerity camp in the EU. But it was not only the media and the population of various countries that appreciated the rising action in the Greek drama. Many political parties, such as Podemos and other populist movements, saw the Syriza as a white knight in shining armour riding to slay the austerity dragon and reclaim its democracy from the clutches of the dreaded Troika.

Indeed, many economists and politicians in the EU were actually in tune with the message that after five tortuous years, the emphasis had to change. Instead of unrelenting austerity, collapsing GDP, falling incomes and standards, increasing poverty, deflationary pressures, the emphasis simply had to shift to investment, growth and employment. This had to be combined with flexibility in the bailout programme’s target of a surplus of 4.5% of GDP, so that it could be redeployed to achieve Syriza’s programme objectives.

Therefore, a series of events and individuals came together in the second part of the play that created the basis for the next Act in the political drama.

Act 3. Climax

The climax is the turning point. If the story is a comedy, things will have gone badly for the protagonist up to this point; now, the plot will begin to unfold in his or her favour. If a tragedy, things will go from good to bad or bad to worse for the protagonist, often revealing their weaknesses.

However, although the media, general public, economists and politicians were generally well disposed to the Syriza agenda for easing austerity and focusing on growth, the next  set of events gradually but systematically turned against the Greek government, leading to a crescendo of criticism and recrimination.

The talk of war reparations, right at the beginning of the term of government did not go down too well in Germany. Yet Tsipras and Nikos Paraskevopoulos (Justice Minister) kept banging this particular drum to the tune of € 341 billion in compensation (about the same as the overall Greek debts), knowing full well that this would goad German public opinion at a critical time in Greece’s negotiations. This was naïve to say the least and resulted in a general feeling on the part of the Germans of being blackmailed.  Just to add a bit fuel to the fire, Panos Kammenos (Defence Minister, Independent Greeks) seemed to consider it appropriate to threaten to send Islamist fundamentalists to Germany from among tens of thousands of migrants currently in Greece in revenge for the austerity measures he felt had been imposed on Greece by the Germans. That turned up the heat nicely, not least because other people had been under the impression that the Greeks had chosen to remain in the EU and Euro, sign-up to be bailout and take the bitter medicine of internal devaluation.

The choice of Varoufakis to negotiate the EU bailout was a little unfortunate. Varoufakis may well be a brilliant economist and he may well know more about the ins and outs of the financial crisis than all the other 27 EU Ministers of Finance put together. However, lecturing to them from the off was never going to be a winning strategy. From the beginning there was a fundamental personality and ideology clash between himself and Wolfgang Schäuble, the powerful, experienced and prickly German Minister of Finance, who wasted no time in making it clear to the Greek negotiators that their programme was unrealistic, their promises to their electorate had been misleading and that there would still be conditionality in negotiating EU bailouts.

The basic assumption which characterised the Greek position from day one was that they had the Eurozone countries by the balls and that they simply had to squeeze long and hard enough for their demands would be acceded to. In other words, the basis of negotiations, perhaps informed by game theory,  was that the Eurozone countries feared a Greek default and the contagion that would follow, and that this had the potential to deal a mortal blow to the Euro and the EU project.

But the EU finance ministers did not seem to be cowed by this threat, which I consider to be the worlds´s biggest game of chicken. Greece’s most natural allies in the anti-austerity movement, namely Italy and France, were quickly put off by the strident tones and lack of willingness to compromise. The Spaniards, Portuguese, Irish and Cypriots who were also following the internal devaluation route proved to be even more resistant to backing the Greek cause, no doubt fearful of similar populist movements in their own countries. And the northern group of EU countries, especially Germany, Finland, Slovakia, etc. and others were anxious of the consequences of capitulating to Greece’s insistent demands. As I previously wrote, moral hazard is the main reason why Syriza could not and will not force an EU capitulation. If the Greeks could manage to drive a coach and horses through the bailout terms and conditions, would others be tempted to follow their lead and would this be sustainable for the rest of the Eurozone?

The demand for 50% debt relief was denied, though everyone recognises that the current level of state indebtedness (180% of GDP and rising) is not sustainable and will need to be tackled at some point in the future, during calmer global economic times. There certainly was recognition of the need to allow Greece to use more of its primary budget surplus over the next few years. But Greece’s steely determination to avoid as conditionality to the extent possible in the future Eurozone rescue package, whilst simultaneously dismantling the few reforms implemented so far, such as rolling back privatisation, reemployment of former public employees and raising wages and pensions which it can ill afford, only served to harden opinion against Greece. The consequence after five months of intense negotiations and diplomacy is that remarkably little agreement exists on the overall package of reforms necessary to secure the latest tranche of the EU bailout worth Euro 7.2 billion.

It is tempting to conclude that the single most notable Greek achievement appears to have been the rebranding of the “Troika” into the “Institutions”.  This would be unfair, but everyone has noted the Greek government’s populist tendencies. Progress has been made on the reform programme, but there appear to be insurmountable sticking points, such as the primary surplus targets, VAT reform, privatization targets, minimum wage levels and pension reforms. These are all issues which impinge directly upon the country’s fiscal base and thus its debt sustainability, which is why both sides are sticking grimly to their guns.

Within a few months, the almost complete inability to make progress on these sticking points has raised tensions to critical levels. The resulting lack of confidence and trust means that several high-profile individuals no longer negotiate directly. Varoufakis has been removed from the Greek negotiating team for his abrasiveness and style. Schäuble has been side-lined because of his prickly relationship with Varoufakis and his conclusion that the way forward is a “velvet Grexit”.  Jean-Claude Juncker, the President of the European Commission and one of the key remaining Greek allies, has expressed his anger and frustration at Tsipras’ misrepresentation of the EU proposals. Many others have vented their frustration with the main protagonists of the Greek drama. The IMF has packed its bags and gone back to Washington saying it was pointless to stay while the two sides remain so far apart. Sigmar Gabriel, Germany’s vice-chancellor recently said that Europe and Germany will not let themselves be blackmailed or let the exaggerated electoral pledges of a partly communist government be paid for by German workers.

These almost unprecedented accusations and counter-accusations serve to harden positions and will make it ever more difficult to achieve compromise in the coming days. Instead of seeking common ground, the Greek Prime Minister reacted by accusing the IMF of “criminal responsibility” for the situation and that its creditors were seeking to “pillage”, “humiliate” and “asphyxiate” his country. For good measure, he added that if Greece fails, it will be the beginning of the end of the Eurozone.

As if that was not enough, others are raising the stakes. Germany’s EU Commissioner, Guenther Oettinger argues that Greece could face a “state of emergency” on 01 July 2015 and Josef Kollar, the vice chairman of Slovakia’s Finance Committee, accused the Greek prime minister of “swindling the whole world” and that “Politics should … be based on economic reality. And in reality, the drachma would be a rescue for Greece.”

The climax was reached in the third Act: there are open rifts and recriminations, the likelihood of Grexit is openly talked about, emergency measures and being discussed and a return to the Greek drachma is widely speculated upon.

Act 4. Falling action

During the falling action phase, the conflict between the protagonist and the antagonist unravels, with the protagonist winning or losing against the antagonist. The falling action may contain a moment of final suspense, in which the final outcome of the conflict is in doubt.

During mid-late June 2015, we enter the 4th and penultimate Act of the Greek drama. Nothing less than the future of Greece in the Eurozone is at stake. Unless Greece honours the € 1.5 billion repayment due to the IMF on 30 June, it is likely to default. Yannis Stournaras, the Governor of the Bank of Greece, has pitched-in to confirm that his country does not have enough funds to pay the IMF and sketch a less than reassuring scenario of the likely consequences of default.

The only solution is to resolve the critical sticking points in the little time that is left. In the past, I would have bet my bottom dollar in the EU’s ability to manage this. Today, following all the posturing and bickering, I am doubtful that the remaining issues can be resolved and a possible EU rescue package can be approved by the Eurozone governments in time for the IMF payment on 30 June 2015.  At the same time, the game theorists among the Fine Young Radicals remain convinced that the EU will shrink from pressing the euro Armageddon button and Greece will win take the prize.

Freytag’s pyramid predicts that the falling action may contain a moment of final suspense, in which the final outcome of the conflict is in doubt. There is only one politician with the stature to change the entrenched dynamics, and I certainly do not refer to either Mr Cameron or Mr Hollande, whose lack of leadership and vision is palpable. A last-minute intervention by Mrs Angela Merkel is the only hope for a compromise that satisfies all parties sufficiently to get a deal done but, as usual, she is keeping her cards close to her chest until there is no alternative but to act. But perhaps the situation is already past the point of acting.

At the moment, it is far from clear whether the protagonist or the antagonist will win the day. But in a way, it does not really matter because we have already entered uncharted territory where there will only be losers in this Greek tragedy.

Act 5. Dénouement

The comedy ends with a dénouement in which the protagonist is better off than at the story’s outset. The tragedy ends with a catastrophe, in which the protagonist is worse off than before.

And so we enter the final Act, but it is not clear whether this drama is a comedy, a tragedy or a mixture of the two.

It is still possible for the conflict to be resolved, reducing the tension and stress in Greece and Europe. If this happens, Tsipras, Varoufakis and the rest will be fêted for their high stakes brinkmanship and other countries will undoubtedly try to replicate the methodology deployed by the Greek government. But will this end happily for the Greeks and for Europe? I very much doubt it. There may be a rolling back from the reforms that the Troika/Institutions have been seeking so as to raise Greece´s own competitiveness, but this will only make it harder and take longer for Greece to regain economic traction compared with its neighbours. There may be further debt relief, but even if the level of indebtedness is scaled back to the supposedly sustainable level of 120% of GDP, the Greek economy would still need to perform well consistently for a stretch of time so as to avoid its debts mounting-up rapidly. There may also be implementation of many of the measures that the Syriza has been insisting upon and which are the source of the stalemate, but these will come at the expense of the Eurozone countries for the foreseeable future, many of which are significantly poorer than Greece and resent having to subsidise the Greeks’ minimum wages, pensions, etc. The seeds of doubt about the merits of continuing Eurozone membership have already been sown and will start germinating. If other countries such as Spain and Portugal follow the Greek model (moral hazard), several of the net EU contributors, not least Germany, may conclude that the limits of the EU and Eurozone have not only been reached but surpassed. As for the Greeks themselves, they may be in greater control of their own destiny but the reforms that have been so elusive in the past will still need to be implemented, which is not a given. Whatever happens, the Greek citizens will realise that austerity will not, in fact, have been stopped. Furthermore, unless the economy starts performing much more strongly, the latest tranche of the EU bailout will not last long. But after the extreme stress and friction of negotiating this agreement, there may not be much enthusiasm for another full bailout. The game theorists must realise that this is a consequence of their winner-takes-all and at-all-costs strategy. Grexit will remain a possibility. Or perhaps the Syriza government will begin to collect tax revenues vigorously, introduce effective reforms exceeding all expectations and pull the country back from the brink. The past is not necessarily a predictor of the future, but I doubt this will happen without strong and timely global growth to lift all boats, including the Greek one.

But it is possible, indeed likely, based on the latest statements emanating from all sides, that this Greek tragedy will end in catastrophe – yet another word of Greece origin. If Greece does not make the IMF repayment due on 01 July 2015, it is quite possible that a political rabbit will be pulled out of the bag and default will be averted. Angela Merkel is apparently fond of the saying: where there is a will, there is a way. But based on the current situation, sooner rather than later, the country will run out of money. At that point, all hell will break loose, despite all the warm and comforting reassurances from politicians that firewalls are in place to avoid contagion that would wreak havoc across Europe and possibly other parts of the world.

As I wrote in a separate blog post: Eastern Europe went through variants of shock therapy in the 1990s and the Russians, Poles and all the others will confirm that very little was predicted by economic theory, that recovery took much longer than anticipated and that they have absolutely no desire to ever experience such wanton destruction again. I would not wish this upon Greece or any other nation. I would much rather another round of muddling through in the classical European way instead of the destructive, unpredictable catharsis that is being floated. But I also know that many would disagree and not just in Greece.”

Having reflected on the last five months since the election of the Greek government, I am tending to the conclusion that the Greek drama may well end in a dénouement / catastrophe / catharsis resulting from the Fine Young Radicals’ refusal to compromise. They will take the hit, re-establish the drachma or something similar and do their best to move forward. Greece will then be fully in charge of its monetary policy, its currency, its dignity and everything else that its people, in an act of mass amnesia, believe Germany and the other Eurozone countries have taken away from them in the last five years. Of course, they cannot then expect further EU bailouts, will have to live within their own financial means and will rely on their own politicians to navigate the process of regaining international competitiveness.

Hold on! For a second I almost forgot that this is precisely the scenario that the Greek citizens have been bending over backwards and executing double somersaults to avoid. For otherwise they would surely have voted to exit the Euro/Eurozone/EU in one of their previous two general elections, rather than willingly go through the latest acts of this excruciating Greek drama.

Perhaps it really is true that we cannot have it both ways… even in the EU.


Housing Markets in Britain and Germany: Similarities and Contrasts

© Ricardo Pinto, 2015, AngloDeutsch™ Blog, www.AngloDeutsch.EU

Housing as a basic necessity

Someone asked the other day: “If you had to choose one issue that fundamentally differentiates Germany from Britain, what would it be?” This is a tough question to answer since the response depends directly on what the individual considers to be important and we all prioritise things differently.

For me, the single most important thing, regardless of country and its level of development, is the extent to which our essential human needs are fulfilled or not. The definitions vary but the three immediate “basic needs” have traditionally been food (and water), clothing and shelter, followed by sanitation, education and healthcare. In the sense of fulfilling our basic needs, the key difference between Britain and Germany for me personally, is the issue of shelter or housing. The economic, social and cultural right to adequate housing and shelter is recognised in many national constitutions, the UN’s Universal Declaration of Human Rights and the International Covenant on Economic, Social and Cultural Rights. But this right is not simply about having a roof over one´s head, it is also a matter of whether it is affordable to households with different levels of income, as well as whether people are able to enjoy security of tenure (without fear of unreasonable eviction, rent hikes, etc.), which is fundamental to our quality of life.

To my mind, Germany broadly fulfils the right to housing, as well as affordability and security of tenure. But it is far from clear that Britain does; indeed according to some indicators, the housing market may even be moving backwards.

I have previously written a blog post comparing housing in Britain and Germany and another that argued that none of the main political parties in Britain are prioritising housing policy. The post comparing the UK/German housing systems concluded where I want to pick up in this post:

“… the AngloDeutsch™ Blog will compare and contrast the housing system in Britain and Germany. There is significant potential for policy-makers in both countries to learn from each other, despite the clear specificities and uniqueness. I plan to focus on key themes such as: the differences in the housing structure in the two housing systems; the variation in the house price trends and the reasons for it; the differences in the housing finance system; the reasons why one housing system has consistently delivered high quality, affordable homes, whereas the other has consistently failed to do so over several decades.”

This blog post sets the broad nature of the housing systems in Britain and Germany, with reference to the European Union (EU) context. The analysis below covers the issue of tenure, dwelling type, size and quality, dwelling construction (supply), adult population (demand), price and affordability. It demonstrates that the housing systems in Britain and Germany are fundamentally different in some ways, yet remarkably similar in others.

Housing Tenure: owner occupation, social renting and private renting

Housing tenure basically refers to the legal rights of different forms of housing ownership and occupancy. The first distinction to note is owning and renting; whereas the owner buys a property (new or existing), the renter makes a regular payment to the owner for the right to live in a property. If the rent is paid to a private individual / institution, this is private renting. If the rent is paid to a local authority, housing association or cooperative, it is known as social renting.

Table 1 illustrates the tenure differences between Britain and Germany.

Table 1: Tenure in Britain and Germany, 2013 (%)

Tenure Type UK (2007) Germany (2001)
Owner Occupation 70 41
Social Renting 18 6
Private Renting 13 49
Other 0 5

Sources: International trends in housing tenure mortgage finance (2014); Housing Tenure (2009)

The key difference is that whereas Britain is primarily a nation of homeowners (70%), Germany is a nation of renters (55%) and has one of the lowest proportions of owner occupiers in Europe. These rather dated statistics reflect the fact that housing tenure is not collected on a like-for-like basis across countries. A notable feature of the British housing system is the recent decline of owner occupation in favour of private renting. To counteract this issue and to include the EU dimension, I Table 2 presents Eurostat data with a focus on population by tenure status.

Table 2: Population by tenure status, 2013 (%)

Tenure Type UK Germany EU-28
Tenant 35,4 47,4 30,0
Tenant — reduced price or free 18,1 8,5 11,0
Owner 64,6 52,6 70,0
Owner occupied, with mortgage or loan 37,4 27,6 27,3
Owner occupied, no outstanding mortgage or loan 25,0 27,3 42,7

Source: Eurostat Housing Statistics SILC, (online data code: ilc_lvho02)

On this basis, by 2013 Germany had also become a nation of owner occupiers (52,6%) but renting remained equally important (47,4%) in terms of population. The respective figures in the UK are 64.6% and 35.4%, highlighting the fact that the level of private renting has experienced a revival in recent years, partly as a result of government policy. In the EU-28 countries, the situation is much closer to Britain than to Germany (70% and 30% respectively). .

Housing type: flats, detached and semi-detached dwellings

Major tenure differences exist in Britain and Germany but the variance is even more pronounced when it comes to type of dwelling that people actually live in. Britain is very much a nation of house dwellers, with 84,8% living in detached or semi-detached homes. By contrast, Germany is even more a nation of flat/apartment dwellers (53,2%) than in the EU-28 (41,6%) as a whole. Britons obviously love their houses and gardens but I am not sure if the rest of the EU loves flats, even if a large proportion of the population in Europe certainly lives in one.

Table 3: Distribution of population by dwelling type, 2012 (% of population)

Dwelling Type Britain Germany EU-28
Flat 14,5 53,2 41,6
Detached house 23,9 28,6 34,0
Semi-detached house 60,9 16,7 23,7
Other 0,7 1,5 0,7

Source: Eurostat Housing Statistics YB2014 II (online data code: ilc_lvho01)

Housing Quality

An important aspect of quality of life is not only having a roof over one´s head, but the quality of the housing conditions that people live in. The overcrowding rate (% of people living in an overcrowded dwelling) in the EU-28 was a remarkably high 17.2% in 2012. The figure was much lower in UK (7%) and Germany (6,6%) according to the Housing Statistics Year Book (2014). The situation in the two countries is remarkably similar but 6-7% of people living in overcrowded dwellings is still a relatively high figure.

The severe housing deprivation rate is defined as the proportion of persons living in a dwelling which is considered as being overcrowded, while having at the same time at least one of the following housing deprivation measures: lack of a bath or a toilet, a leaking roof in the dwelling or a dwelling considered as being too dark. Across the EU-28 as a whole, 5.1 % of the population experienced severe housing deprivation in 2012. The equivalent percentage was much lower in the UK (2%) and Germany (1,9%).

Within the population at risk of poverty (households with a disposable income per person below 60% of the national median), the overcrowding rate was 29.4% in the EU-28, but the figure was much lower in the UK (13,6%) and Germany (17,6%). Poverty and poor housing conditions go together to large extent.

Dwelling Size

When it comes to dwelling size, unfortunately the UK data are not comparable with other countries. The average dwelling is almost 107 m² in size in Germany, compared with 102 m² in the EU-28.

Table 4: Size of the dwelling by tenure status, 2012 (m²)

Dwelling Type Britain Germany EU-28
Total – unreliable data 106.8 102.3
Owner
– with mortgage or loan – unreliable data 128.9 105.2
– without mortgage or loan – unreliable data 135.1 124.5
Renter
– market price – unreliable data 76.8 78.6
– reduced rent or free – unreliable data 82.4 80.7

Source: Eurostat ad-hoc module ‘Housing Conditions’ (HC020)

Space standards are significantly more generous in dwellings that are owned than those that are rented in both Germany and the EU. The private rented sector has the lowers dwelling size of all.

Broadly the same trends are likely to apply in the UK. For example, the English Housing Survey Housing stock report found that. “The average useable floor area of dwellings in England was 91 m². However some 52% of social sector bungalows, 50% of social sector flats and 35% of private rented flats had a total floor area of less than 50 m²” (2008, p.8). The indications are not only that the average dwelling size is smaller in the UK than in Germany and the EU-28. There is evidence that the average new average new home in the UK is actually getting smaller over time (76 m²). Elsewhere, the average size of new homes is increasing.

Housing Supply

House developments are influenced by many factors but a strong relationship exists between house prices and other indicators of demand and supply. Specifically in terms of supply, housing construction (i.e. building permits issued and housing units completed) is related to house price developments. If supply is out of kilter with demand, it may not matter too much in the short-term, but over a period of decades it can lead to acute housing stress and eventually crisis. The trend in terms of supply of housing in Britain and Germany is illustrated below.

Graph 1: Housing Completions in Britain and Germany (2002-2013)

Graph 1 Housing Completions

 

 

 

 

 

 

 

 

 

Source: Hypostat 2014, Table 12, Housing Completions, author additions

Graph 1 illustrates that Germany has outperformed Britain in terms of new supply of housing during the last decade or so. As demand for housing increased post-2008, there is evidence of supply responding accordingly. The German government forecasts 270,000 residential completions in 2015, the highest number of completions in over a decade, and argues that construction has reached the amount needed to keep up with future demand. By contrast, in Britain a country which is acknowledged by all and sundry to be in the depths of a full-blown housing crisis, supply has flat-lined around 140,000 completions per annum and government forecasts 135,000 completions in 2015. This suggests that housing supply is significantly more responsive in Germany than in Britain, despite not actually experiencing a housing crisis. The reasons for this critical difference will be explored in future blog posts.

Total Dwelling Stock and Adult Population: demand

Another way to examine the situation is to examine the changes in adult population (over 18 years of age) and the extent to which the total dwelling stock is keeping up with the changing demand. During the period 2002-2013, the adult population in Germany increased by 1.8 million. During the same period, the dwelling stock increased by over 2 million units. By contrast, whereas the adult population in Britain increased by 4.4 million, the dwelling stock only increased by 2.1 million units (see Hypostat 2014, 26 Population 18 years of age and over). I shall explore other indicators of demand in future posts to illustrate the point that supply is lagging behind demand and has done so for decades in Britain.

House Prices

The OECD’s real house price index for the period 1970 (2nd quarter) to 2013 (4th quarter) reveals fascinating trends, as illustrated in the graph below.

Graph 2: Real House Prices in Britain, Germany and Euro Countries (1970-2013)

Graph 2 Real House Prices

 

 

 

 

 

 

 

 

 

Source: OECD Real house prices database (seasonally adjusted, index based in 2010)

What the real House Price Index shows is that British house prices have historically been significantly lower than the German ones. But whereas the prices declined gradually from 1994 onwards in Germany, the UK experienced rapid price increases (with some volatility, especially during 1989-1992) until the end of 2007, when the global economic and financial crises hit. Thereafter, German house prices flat-lined for a while, but increased rapidly from 2010 – 2013, a trends that continues today. By contrast the UK prices experienced a steep decline in 2008, followed by a gradual increase from the end of 2013 onwards, a trend which has more or less continued to today.

Rising since the 1970s, the UK house prices eventually surpassed those of Germany for a five-year period (2005 and 2010) but a gap is evident once more. For Germany, the real house price index remained more or less the same in 1970 as in 2013, suggesting a fairly stable housing market.

The trends in house prices in the two countries are ultimately a reflection of demand and supply issues. Since supply is highly restricted in the UK for various reasons to be discussed in a future blog post, the trend of house price increases is almost certain to continue, especially in London and the South East region.  It is only a matter of time until the UK house price index outstrips that of Germany once again.

Housing Affordability

Housing affordability is a fundamental issue. Countries have broadly the same definition for this, namely that affordable housing should address the housing needs of the lower or middle-income households. The level of disposable household income is a key factor in determining affordability and it is ultimately the responsibility of governments to create the framework conditions for the delivery of affordable housing.

Eurostat defines the proportion of the population living in households that spent more than 40% of their disposable income on housing as the housing cost overburden rate. Table 5 illustrates the situation in German, UK and EU-28 countries.

Table 5: Housing Cost Overburden Rate, 2011 (% of population)

Dwelling Type Britain Germany EU-28
Owner
– with mortgage or loan 8.8 13.6 8.6
– without mortgage or loan 9.1 10.5 6.2
Renter
– market price 45 21.4 26.8
– reduced rent or free 23.9 16.5 13.3

Source: Eurostat Housing cost overburden rate (ilc_lvho07a). Data from 2011 used because there was a break in the UK time series in 2012.

As a general rule, a significantly higher proportion of the population in the rented sector experience affordability problems than in the owner sector. Furthermore, the problem is particularly important in the private renting sector (market rents) and is especially acute in Britain, where 40% of the population in the private renting sector experiences a housing cost overburden. Overall, although the housing cost overburden rate is higher in Britain than in the EU-28 countries, the rate is higher still in Germany in the two owner categories. However, the housing cost overburden rate in the private and public rented categories are significantly higher in Britain than elsewhere.

The housing cost overburden rate also varies between different groups of society. Generally, women are more vulnerable to housing cost overburden than men and, in some countries, the elderly tend to experience it more than the younger age groups. But the housing cost overburden rate says nothing about the extent to which people can afford to get a foot on the property ladder or rent privately. If people cannot do so, they have little alternative but to live with parents, friends, etc. in order to meet their housing needs.

Two Markets: different realities

Based on the analysis above, the tenure pattern in Britain and Germany is very different in some ways: there are many more owner occupiers, people living in houses rather than flats, the dwellings are smaller and getting smaller over time and there is noticeably less responsiveness in the supply of housing in the UK than in Germany.

On the other hand, the two housing markets converge in other respects:  general overcrowding rate, overcrowding rate within the population at risk of poverty, severe housing deprivation rate, etc. are remarkably similar.

Other indicators are mixed:  house prices suggest a fairly stable German housing market but a somewhat volatile British housing market which is likely to exceed the German prices. The owner sector seems to exhibit more housing affordability issues in Germany, yet affordability concerns are much more acute in the British rented sector, especially in the case of private renting.

The temptation may be to conclude that the differences in the two countries are not that great: wrong and double wrong! We all know the quotation: “There three kinds of lies: lies, damned lies and statistics”. Statistics are one thing but the housing reality is quite another. In the course of the next few blog posts, I intend to elucidate my starting point, namely that if I had to choose one thing that fundamentally differentiates Germany from Britain, it would be its housing system.