Ausgabe 29/2010

A Keynesian Success Story Germany's New Economic Miracle

Germany's economy is rapidly rolling toward recovery.

Germany's economy is rapidly rolling toward recovery.

Part 2: Throwing Cash at the Populace

Foreign countries also benefited. US economists are still critical of Germany for saving money at the expense of its trading partners during the crisis. But precisely the opposite is true. Last year, Germany saw a significantly sharper decline in exports than imports. On balance, German imports boosted demand in the global economy by about €42 billion.

The two economic stimulus programs launched by the cabinet were partly responsible for the boost. They were designed to stimulate domestic demand, and as part of the program, the government spent more than €20 billion in additional funds for new construction and the renovation of existing buildings. Sidewalks and streets were paved, universities were renovated and windows were sealed.

The package was of truly Keynesian proportions. For the British economist, whether government spending programs provided practical benefits was secondary. He argued that the most important thing was to distribute as much money to the population as quickly as possible, even if it meant that the government "were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again."

Seen in this light, the most recent stimulus programs completely satisfied Keynes' requirements. Millions were spent on swimming pools that had seen declining numbers of visitors for years, or on schools that had to be closed soon afterwards, because there weren't enough children to fill the classrooms.

Questionable at Best

By law, recipients of public investments under the second economic stimulus program must be permanent. But according to a previously unpublished report by the German Federal Audit Office, this requirement is often not met. The auditors at the Bonn-based agency identified many measures for which long-term use is questionable at best.

For instance, they wonder whether it truly makes sense to spend €222,000 on the renovation of a cultural center in a neighborhood with only 300 residents. And they question whether it is reasonable to invest in firehouses in regions that have seen population decline for years.

In some cases, local governments are spending stimulus funds to fulfill costly wishes. A government-owned stud farm in the southwestern town of Marbach, which includes a breeding facility for Arabians, is being renovated to the tune of €7.5 million. Schöningen, a town in the northern state of Lower Saxony, has plans to build a €15 million interactive museum for old hunting weapons. The Hamburg zoo is using €7.5 million in government subsidies to build an Arctic Sea habitat that will initially house polar bears, common murres and other animals.

According to the Federal Audit Office report, in 9 percent of projects "the subsidization criteria were not adhered to" or "it was not possible to achieve the goals associated with them." The auditors are particularly troubled by the fact that the money from Berlin is being used to fund so many small projects. They report that about a third of all projects cost less than €50,000, and that about 2 percent come in at less than €5,000. Projects like a wall-mounted diaper table for a kindergarten, historical wall charts and the construction of a sandbox are not suited "to achieving the economic goals of the Future Investments Act," the Bonn auditors conclude. In addition, they argue, such "very small projects" are "consumptive in nature."

Perhaps they are right, but during the crisis, it was more important to provide companies with orders. No one is more aware of this than Jörg Meseck, who owns an engineering firm in the eastern state of Brandenburg. When the economy declined, Meseck lost about €13 million in orders. Just as he was contemplating having to let some of his employees go, he started receiving new orders funded by the government's second stimulus program.

'Pick Up the Pace'

Most of the projects Meseck accepted were small, including a school renovation and replacing the windows at a high school. But without the orders, he would hardly have been able to retain all of his employees.

Now the crisis is over and Meseck's business is going so well that he even plans to hire another engineer soon. He says that customers have been calling him for the last two months and saying: "Things are looking up for us, so you're going to have to pick up the pace."

The same story is now unfolding across the entire German economy, even in the long-ailing construction industry. To the surprise of many experts, private demand is growing again in the wake of the artificial boom triggered by the economic stimulus program. In the fourth quarter of 2009, the number of building permits issued for new multi-family dwellings was up by 25 percent over the previous year, and since then statisticians have seen a rise of 5.5 percent. If there had been no government stimulus programs, many companies would no longer be around to benefit from the current boom.

Companies that still ran into difficulties despite the measures could fall back on another government assistance program. The German Economic Fund kept €115 billion available for companies that could no longer qualify for loans from their banks because of the crisis.

The package designed to head off a feared credit crunch proved to be grotesquely oversized. By early July, about 15,000 applications had been approved for loans or loan guarantees, for a total value of just over €13 billion -- far less than expected.

Financial Boost from Berlin

Many businesses had exhausted their credit lines with banks. Often, they could only receive fresh funds by providing more collateral or by paying higher interest-rate premiums than before the crisis. Some companies were simply unable to meet these conditions, even when business was going relatively well again.

A subsidiary of Düsseldorf steelmaker Schmolz + Bickenbach needed about €500 million, most of which came from the federal government and the state of North Rhine-Westphalia. The money served "as the basis for the successful completion of a new financing framework by the end of 2010," says Marcel Imhof, the company's chief executive. The company received a loan for €200 million and loan guarantees worth €300 million. If the company had not received the funds, "the rug would have been pulled out from under us," says Imhof, referring to the banks with which his company normally does business.

ZF Friedrichshafen, an auto parts supplier based in southern Germany, also received €250 million from the Germany Fund. The company didn't need the money to stay afloat, but to keep its banks happy. ZF, which specializes in transmissions, set the money aside as a safety cushion, "in case the crisis had lasted longer," according to the company's official statement. ZF still hasn't actually used the financial boost from Berlin.

It's a completely different story in the northeastern state of Mecklenburg-Western Pomerania. Last year, shipyards in two coastal towns, the former People's Shipyard in Stralsund and the Peene Shipyard in Wolgast, which have since merged to formed P + S Werften, were hit with nine cancellations of orders for new ships worth a total of €300 million. The group slipped into the red and layoffs began.

The new shipyard was able to acquire new orders, but now it needed additional loans to pre-finance the labor. The banks hesitated, and the Germany Fund eventually approved a guarantee for a €326 million loan. "Without this assistance," says P + S Werften CEO Dieter Brammertz, the continued existence of the company "would certainly not have been possible to this extent, and presumably not at all."

Not as Positive

Cases like this lead many economists to conclude that the impact of the bailout programs on the real economy has generally been positive. A lot of money was wasted and many pointless projects were subsidized. Nevertheless, the government stimulus programs helped pull the economy out of the recession.

The verdict on the oldest of the crisis programs, the Soffin bank bailout fund, is not as positive. Only a few weeks after the Lehman bankruptcy, the German government, in what was an historically unprecedented move at the time, made €480 billion available to rescue the country's crisis-shaken banks.

Since then, the banks have received about €150 billion in guarantees and about €30 billion in capital assistance. Some banks went under and others were nationalized.

Today, conditions have somewhat returned to normal in the German money and credit markets. But the financial sector, unlike industry, is still a long way from recovery. On the contrary, a large share of the country's state-owned banks still lack a sustainable business model, and it remains to be seen whether government-supported lenders like Munich-based Hypo Real Estate can survive in the long term.

'Quite Underdeveloped'

The unsolved problems of the German financial industry show that although the economic recovery is clearly visible, it is still far from certain. Banks around the world still have large numbers of toxic securities and treasury bonds from highly-indebted countries on their balance sheets. The bankruptcy of a major bank or an EU member state would be enough to trigger the next global downturn.

Besides, Germany, for better or for worse, is tied to the global economy. The fortunes of German industry are still dependent on the economic health of trading partners. If the United States were to plunge into another recession or if growth weakened significantly in China, Germany's recovery would end very quickly.

As such, Germany's greatest strength is also its biggest weakness. "We have a world-class industry," says Deutsche Bank chief economist Thomas Mayer, but adds that the key sectors of the domestic economy are "quite underdeveloped."

By Markus Dettmer, Dietmar Hawranek, Guido Kleinhubbert, Alexander Neubacher, Christian Reiermann, Friederike Schröter and Janko Tietz

Translated from the German by Christopher Sultan


© DER SPIEGEL 29/2010
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