Labour must learn the right lessons from German rebalancing

After a brief hiatus, ‘levelling up’ is back. The larger-than-life front man has left the stage, but Michael Gove has returned. Meanwhile, Labour’s Lisa Nandy has already seized the initiative and Gordon Brown’s commission on the UK’s future will soon report. The vital levelling up agenda has now gone way beyond Boris Johnson’s opportunistic sloganeering: all parties take it seriously. And rightly so.

All eyes have been on Germany – Labour has even been on a fact-finding mission to the country. And where better to focus? Germany has narrowed a formidable ‘east-west’ divide. East Germany’s economy now outperforms most of the UK. That is not only an indictment of UK economic policy but a good reason to pay attention.

Many Germans are surprised to hear positive reviews from British politicians. They highlight their own shortcomings: under-investment in infrastructure; the ‘debt brake’ and ‘black zero’ compelling unnecessary spending restraint; and bureaucracy that stifles innovation. Redistribution from richer to poorer regions has been controversial, and successfully contested. Clearly, sometimes we can learn what not to do from Germany.

But Germany has often done economic development very well indeed. And we would be missing a trick if we didn’t learn the right lessons. At the Fabian Society, we have worked with Friedrich-Ebert-Stiftung to understand more. Our findings are published today. Broadly, there are three things we can learn.

First, both devolution and collaboration are crucial. In the UK, Westminster is dominant and loves to play divide and rule – in Germany, a federal country, regional and local governments are four times as powerful as in the UK. They raise around half of all taxes, compared to 5% in the UK. But they collaborate on policy, from tax to education, both because the constitution requires it and because that has become their culture.

So, the UK should build formal structures that embed stability and require collaboration; make locally led pan-regional bodies, like Transport for the North, more powerful; and establish a long-term, fair settlement of tax devolution with redistribution alongside.

Second, we need long-term plans and higher levels of government investment. UK ministers currently splash small amounts of cash here and there to grab headlines and try to win elections. It’s no wonder businesses don’t have the certainty to invest. Germany is the opposite.

Its constitution helps; “establishing equivalent living conditions in all parts of Germany” is enshrined in law, not an election slogan. Spatial development, industrial strategy and funding are set out for the long term. And they have twice the UK’s rate of local or regional economic investment. Like Germany, the UK should set out an industrial and regional strategy, guarantee long-term economic development funding and set up new regional development banks.

Finally, we must develop our towns and manufacturing sector, as well as cities and services. Most UK policy makers now understand that cities have a lot of potential. This is a good thing and a big win for the cities across the UK that worked so hard to shake sense into London-centric officials. The problem is they now only see cities on the map. That means ignoring not just common sense, but the economic facts on the ground; some of the UK’s most productive areas are not metropolitan – places like Cheshire, for example. This is because they offer businesses and people something different, and often that thing is space.

Germany capitalises on the advantages different places can offer. It has very productive cities, with world-leading knowledge intensive business services, but smaller cities and towns are vital too – and towns in east Germany are charging ahead on electric vehicle manufacturing, just as our own half-baked efforts unravel.

Levelling up will fail if we treat cities like high-density islands, where we try to crank up services productivity by piling in more people. It will only succeed if we see cities as diverse regional centres, which both contribute to and benefit from their wider region of towns and smaller communities, where manufacturing has space to grow.

Our approach will be different to Germany’s – its manufacturing sector is far larger. But ours is still significant, highly productive and creating good jobs. And our business services aren’t all exporting, like the City of London. We should build on the strengths of whichever place or sector has them. The Conservatives have two years and a mountain to climb to keep their levelling up promises. Labour is rightly developing a more comprehensive programme. Learning the right lessons from Germany would help give them the edge.