A Keynesian Success Story: Germany's New Economic Miracle
During the worst of the global financial meltdown, Berlin pumped tens of billions of euros into the economy and spent hundreds of billions propping up German banks. Now, the country is reaping the benefits as Germany is once again Europe's economic motor. By SPIEGEL Staff
It was just the sort of photo-op German Chancellor Angela Merkel urgently needs. Peter Löscher, the CEO of electronics giant Siemens, was sitting on a throne-like chair in the governor's palace in the central Russian city of Yekaterinburg. Contracts were being handed to him in brown leather folders, and every time Löscher signed one of the documents with his malachite green pen, the chancellor clapped with delight. The procedure took place four times, and by the time the round of contract signing ended, Siemens had secured Russian orders worth about 4 billion ($5.2 billion).
The German economy has indeed come roaring back to life this summer. Two years after the outbreak of the financial crisis, the auto industry is adding extra shifts once again. The machine building, electronics and chemical industries are all reporting a rapidly growing number of orders. Total unemployment is expected to drop below the 2.8 million mark this fall, the lowest level since 1991.
For the first time in decades, the former "sick man of Europe" is back to being an engine for economic growth. According to an internal government assessment, the country's gross domestic product increased by more than 1.5 percent in the second quarter of this year. In their last prognosis, completed in April, government officials had predicted only 0.9 percent GDP growth. Production in the manufacturing industry increased by 5 percent over the previous quarter. The government assessment also shows that exports grew by more than 9 percent in May.
'Number One in Europe'
If the trend continues, say the experts, the German economy will grow by well over 2 percent this year, or almost twice as much as in most neighboring countries. Economists are already proclaiming a second economic miracle, while a former French foreign minister is complaining that Germany is "number one in Europe" once again.
The unexpected comeback is the result of an unprecedented large-scale economic experiment. After last year's dramatic economic slump, Chancellor Merkel, after some initial hesitation, decided to support a bailout program modeled on the theories of British economist John Maynard Keynes. When the economy is in decline, the professor concluded based on the experiences of the Great Depression, the government must quickly counteract the trend with massive government spending programs.
In keeping with Keynes' theory, the former grand coalition government of the center-right Christian Democrats (CDU) and the center-left Social Democrats (SPD) launched an extensive package of stimulus and bailout measures, which included 480 billion for ailing banks, 115 billion for financially weakened companies and 80 billion for two programs to stimulate the domestic economy. As then-Finance Minister Peer Steinbrück said, the goal was to "fight fire with fire."
It did not proceed entirely without collateral damage. The government kept moribund banks alive and rescued companies that didn't need rescuing. It spent money to allow companies to scale back production and paid consumers premiums to destroy assets with intrinsic value. Streets were repaved only to be torn up again soon afterwards, and schools were renovated and later shut down.
Although a gigantic waste of money was put into motion, it did prove to be extremely beneficial during last year's historic economic slump. Government debt skyrocketed, but in return companies received new orders, consumers had more money to spend and banks, no longer fearing that their borrowers could soon go out of business, started lending again.
Kept the Economy Afloat
The government bailout programs reestablished the basic confidence in economic development that had been lost in the financial crisis. "Public spending, in the form of economic stimulus programs, kept the economy afloat," says economist Peter Bofinger, a member of the German Council of Economic Experts.
This is true, for example, of the scrapping premium -- a program similar to "cash for clunkers" in the US. The name alone suggests that it has little to do with conventional ideas of economic prudence. Under the program, consumers buying new cars received 2,500 for their old cars, which were then scrapped.
This was nothing but a government incentive to destroy billions in national wealth, and quite a few observers were surprised by the enthusiasm with which Germans took the government up on its offer. Hundreds of thousands of perfectly functional cars were taken out of circulation, while new car ownership grew by an impressive 23 percent.
The incentive program cost the government 5 billion, while primarily benefiting foreign makers of small cars. The biggest beneficiaries were companies like Dacia, Fiat, Suzuki and Kia. Opel, VW and Ford also profited from the scrapping premium program, while German luxury carmakers Audi, BMW, Mercedes-Benz and Porsche got nothing. "We are the only country," Daimler CEO Dieter Zetsche scoffed, "that has created a program worth billions to subsidize foreign industry."
Experts called it a "flash in the pan," while forgetting that even small sparks can be helpful in a severe crisis. The premium to encourage small car purchases did more than support the economy in the Asian and Eastern European countries where the cars were produced. It also helped Germany's substantial auto supplies industry to offset the sharp decline of the previous year with shipments to those foreign automakers benefiting directly from the scrapping premium. This helped companies survive that are now urgently needed by German automakers in the current recovery. Nevertheless, it was a success that came at the high cost of 5 billion in government bailout funds.
Only a Slight Increase in Unemployment
The second large-scale program that the government devised to assist companies, the so-called short-time working program, also helped bridge the economic slump. The legal framework for the program has existed in German social legislation for decades. When companies experience sharp declines in sales, they are permitted to reduce their employees' working hours, and the government offsets a portion of the costs. The goal is to avoid layoffs and retain employees until the recession is over.
In the most recent crisis, Berlin repeatedly enhanced the rule, thereby triggering an economic miracle that attracted worldwide attention. While the jobless count grew by seven million in the United States, Germany experienced only a slight increase. In return, however, the number of short-time workers rose sharply, until it reached a record 1.5 million last May.
Now that the economy is picking up steam once again, Germany industry already has a large reserve of well-trained employees at its disposal to handle the growth in orders, and at minimal cost. At Munich-based Siemens, for example, the number of short-time employees has declined from 19,000 last summer to 600 today. Human resources executive Walter Huber says that the situation has eased, and that the federal government deserves the credit: "The extension of short-time working benefits was the right decision at the right time."
The measure is expected to cost at least 6 billion this year alone. But even the Organization for Economic Cooperation and Development (OECD) believes that it is money well invested. According to an OECD report, the labor market in Germany "has survived the global economic crisis much more effectively than in most other member nations."
In addition to benefiting the labor market, the German economic stimulus program also boosted consumer spending. Short-time workers have more disposable income than the unemployed, and as a result, German consumers were hardly forced to cut back during the crisis.
- Part 1: Germany's New Economic Miracle
- Part 2: Throwing Cash at the Populace
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