Reversing the Economic Plunge Will Germany Beat the US to Recovery?
It has been a rhetorical battle of Anglo-Saxon vs. Continental capitalism. Since the onset of the economic crisis, German leaders have scored political points by railing against the flaws of the US and British economic systems, even as counterparts such as US President Barack Obama and UK Prime Minister Gordon Brown pressed for bigger economic stimulus packages. Just this month, German Economics Minister Peer Steinbrück warned that the "casino capitalism" practiced in overseas financial centers will resume without stronger regulation.
On Aug. 13 the Continental gang got a bit more to crow about. Data released that day showed that France and Germany both posted surprising 0.3 percent economic growth in the second quarter, even as US gross domestic product slipped 1 percent and Britain's sagged 3.2 percent over the same period. It was a vote of confidence in the Continental model, suggesting that the more traditional, consensual, and export-driven German economy -- Europe's largest -- could be better positioned for economic recovery.
Of course, one quarter's growth rate doesn't provide a complete picture -- and it's too early to tell how each economy will fare once recovery has set in. But the unexpectedly faster European turnaround only deepens the debate over the merits of different economic models. Could export-driven economies with considerable social-assistance programs be in a better position to bounce back than those, such as America's, that rely heavily on services and consumer spending?
Support for the Jobless
Not surprisingly, economists don't share a consensus on the answers. But many point to several factors that helped Germany return to growth in the second quarter. One is the success of the government's €2,500 ($3,540) cash-for-clunkers subsidy (Abwrackprämie) for trading in old cars for new, more fuel-efficient ones. The program stimulated considerable demand in new car sales. Another is the oft-cited "automatic stabilizers" in the German economy, including more generous support for the jobless and government subsidies for workers whose hours have been cut. Analysts say this "Kurzarbeit" (short term work) program has prevented hundreds of thousands of job losses this year.
A recovery in China and the developing world also stands to benefit Germany, whose economy relies heavily on exports. German second-quarter growth was already helped by exports to non-Japan Asia, especially China, says Thomas Mayer, chief European economist for Deutsche Bank in London. That bodes well for the country's economic model, he says: "Germany's export model has been sustained for the last few decades and will probably remain in place for the future."
Indeed, amid an overall revival in global trade, "European economies are in a better position to recover," says Martin Lueck, an economist at UBS. "In the US, everything hinges on the consumer. As long as the savings rate keeps rising, house prices falling, and employment weakening, there is very little leeway for the consumer [sector] to recover."
However, Lueck sees the most critical split occurring not between countries or economic regions but rather between economic classes. "If you draw a line dividing the winners and losers [of the past 20 years], it is not between US or UK economic systems and Europe's, but rather the owners of capital vs. the owners of work. The losers are the owners of work in all parts of the world, particularly Western countries. The winners have been the owners of capital."
A Sustainable Recovery?
That's why, in spite of the good news about the second quarter, doubts persist about sustaining the recovery in Germany and the rest of Europe next year. Stimulus measures, including Germany's cash-for-clunkers program, will expire in 2010, when new car sales could fall again. Some analysts say Germany's temporary assistance to workers, which allows them to stay employed, may have merely delayed layoffs and that unemployment will rise again by the end of the year. And European banks still aren't lending at previous levels as they work to rebuild capital.
So while Germany will likely hold on to its export-powered economic model, analysts say the global slowdown won't allow it to regain the strength it once had. "An export-led economy is of course reliant on growth elsewhere, and if major export partners suffer, Germany will suffer, too," says Natascha Gewaltig, director of European economics at consultancy Action Economics.
"The road of the German economy to pre-crisis levels remains long and winding," wrote UniCredit economists Alexander Koch and Andreas Rees in a research note.
Dirk Schumacher, senior European economist for Goldman Sachs, suggests that Germans will have to start consuming more so their economy doesn't rely too heavily on exports. "A global imbalance means it's not just one country's problem," says Schumacher. "Every country needs to take a deep look and see what needs to change."