Another quarter, another set of GDP results are out. The star of the developed world was Germany, and for the developing regions of the world, once again it was China. Meanwhile, the rest of the developed world is left eating dust. Can it continue?

“One should not underestimate Europe” said ECB President Jean-Claude Trichet a few weeks ago. He made those comments during the final stages of the World Cup, and pointed to the fact that the final was being contested by two European teams. His analogy with the football tournament was ironic, because of course the ultimate winner, Spain, happens to be one of Europe’s most troubled economies.

And for another dose of irony, Spain knocked out Germany in the semi-final – it was a contest between Europe’s economic star and its economic loser.

While Germany expanded at a quarterly rate of 2.2 per cent in Q2 (not much slower than China), Spain and Portugal could only manage 0.2 per cent. Italy did a touch better, expanding by 0.4 per cent; France did even better by expanding at 0.6 per cent; but Greece saw a simply dreadful 1.5 per cent contraction.

And the differences in growth underline a fundamental problem; Germany’s expansion is paid for at the expense of contraction in other countries.

The truth is, Germany’s exports have expanded at a rate that is vastly greater than the expansion in global demand. In 2009, no less than 41 per cent of Germany’s GDP consisted of exports. To put that in context, for Japan the figure is 13 per cent, the US 11 per cent.

The German savings ratio was 11.4 per cent last year, compared with 5.5 per cent in the US and 7.2 per cent for the UK (Q4 2009).

 According to a piece on Bloomberg, since 1990, when East and West Germany were re-united, private consumption in Germany has risen by 21 per cent, less than one-third of the rate at which US private consumption has increased.

A part of the problem is that in Germany wage restraint and corporate profits are the main priorities. This is no bad thing per se, but, as ever, there has to be a balance. In the UK during the pre-Thatcher days maybe the problem was that wages rose at the expense of profits. Just because Germany’s problem is the precise opposite does not mean it is any less serious.

This is the great irony of the wages-versus-profits equation. Companies that make high profits and squeeze costs down to the bare minimum are stronger as a result. But if all companies do that, wages fall, aggregate demand falls, and corporate profits consequently fall.

On the other hand, we are not arguing that companies that are ultra efficient are bad for the economy. Not at all. In the short term, improvements in productivity can lead to unemployment. In the long run, however, new opportunities emerge. The problem doesn’t occur when companies find new, efficient ways of producing goods and services, so they can produce more for each given unit of labour input. Rather, the problem occurs when companies start squeezing pay per unit of labour.

Actually, to an extent, this is a global phenomenon. Globalisation has the effect of increasing the rewards to capital, but making the labour market more competitive and at least partially reducing the rewards to labour. This is an issue in the US, where global profits to GDP hit an all-time high just before the recession. In the UK, the globalisation of labour meant households did not enjoy rises in disposable income that kept pace with economic growth. So this gap between economic growth and growth in wages, should have created a recession several years ago. Instead, however, the recession was delayed by the rise in consumer borrowing.

This issue partially shows up in the divergence we are currently seeing between economists’ prognosis and equities. Markets seem to be expecting strong profits ahead. Economists are typically anxious about the economic prospects. This may be indicative of the way corporate profits are occurring at the expense of wages, but this divergence between profits and wages cannot continue in the long run. We saw a similar pattern in the US during the 1920s, too, which ultimately unwound, leading to the Great Depression and a quarter-of-a-century time lag before equities returned to their 1929 high.

This is why we say the problem today is not so much a debt crisis, rather this is a symptom of a deeper ill.

But for Germany and China, this imbalance between growth in profits and growth in wages is more pronounced. But the good news is there are signs that things are gradually changing on the other side of the Great Wall.

Alas, Germany’s position is becoming more entrenched. It is even trying to export its economic model to the rest of the Eurozone.

Be in no doubt, if all countries in the world adopted the German approach, the result would be global depression.