Germany is a power on the rise. Unlike much of the Western world, the country’s economy is humming along as if the Great Recession had never even happened. Indeed, in the last quarter German GDP grew by a heady 2.2.%. This was the highest growth rate since the Berlin Wall fell two decades ago.
German employment is also holding up. At 7.6% in August 2010, German unemployment is actually lower than it was before the Great Recession. For those familiar with the depressing figures of American unemployment, this is quite shocking. How did Germany do it?
Not with an economic stimulus package. Conventional economic theory – i.e. that espoused by the great British economist John Keynes – dictates that the best solution for a recession is government stimulus. This can take two forms: spending and cutting taxes.
Germany’s record of spending and tax cut-less economic success is hard reconcile with this theory. Indeed, when the economic downturn began, there was a great policy debate about whether to focus on economic stimulus or balancing the budget. Most countries, including the United States, came down on the side of Mr. Keynes. German Prime Minister Angela Merkel, on the other hand, stubbornly held onto the position that balanced budgets were more important. Germany did not pass a substantial stimulus package during the recession. And now Germany’s economy is the strongest in the entire Euro zone.
As the case of Germany shows, the application of Keynesian theory to the real world has had mixed results. Stimulus did not work for Japan in the 1990s. In America today, unemployment remains high for all the jobs the stimulus saved.
Yet Keynesians can also boast of powerful successes. Stimulus in the form of WWII ended the Great Depression. China entirely avoided today’s recession through something like a trillion-dollar stimulus.
And other factors are involved in German success. Before the recession, Germany engaged in large scale restructuring and reform; it is reaping the benefits of that today. There is also its enormous welfare and short-term work program, designed specifically to fight unemployment. This is called Kurzarbeit, and no less than Angela Merkel herself stated that, “It is only thanks to Kurzarbeit that more jobs were not lost.” Finally, German banks have by and large avoided the financial implosion that initiated today’s downturn, so Germany is far away from the recession’s epicenter.
Yet in the end this does not get rid of two facts. Fact 1: Germany didn’t do a stimulus, and German unemployment is below what it was before the recession. Fact 2: The United States did a gigantic stimulus, and American unemployment is still in a terrible state. It is hard to believe in Keynesian economic theory when presented with this, no matter what mitigating factors there are.