What’s Up With Germany?

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.

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4 Responses to What’s Up With Germany?

  1. inoljt says:

    Student: I remember watching that video in my Microeconomics class, actually. It is quite funny.

    Jon in CUO: I do think you’re right in that the issue is a lot more complicated than I make it out to be; you can probably write a book on this and still not cover everything.

    But in social sciences and especially economics, the example above is the best you’re going to get when testing an economic theory in real life. At the least we can draw some conclusions from it; otherwise you’re never going to get the perfect experiment to see whether an economic theory really works.

    • Jon in CUO says:

      Agreed on the complexity of the issue. Like I said in my previous post, it’s an interesting topic and I’m glad you took it up.

      My point of view is basically this: generally speaking, some countries were in better shape than others before the recession (or, structurally better prepared to deal with an economic downturn.) For many of the reasons you mentioned in the article, Germany was simply much better prepared than the US. So I’m not surprised that they’ve fared better and haven’t had the prolonged unemployment issues that we have.

      While comparing the two countries’ respective recession-fighting efforts is interesting and helpful, I think most of the difference can simply be explained by pre-existing economic factors. Unless Germany managed to royally screw things up, they were probably going to come out of this faster than the US. When we’re talking about a crisis of this magnitude, governments just don’t have as much influence over economic outcomes as we’d like to think.

  2. Jon in CUO says:

    Certainly an interesting and timely topic, but I think it’s too much to handle in a short blog post. Focusing on stimulus/no stimulus seems to be selling short the complexity of this issue. The differences between the German and American economies are real and structural – so I don’t see the point in comparing their respective recession-fighting efforts. They’re just different, so focusing in on temporal monetary or fiscal policies won’t tell us much.

    And what of the counterfactual? Could not the Germany economy be even stronger today if they had done a stimulus? Wouldn’t the American economy be even more in the toilet, but for the stimulus? Like I said, it’s an interesting subject, but your take on it feels a little too much like a false choice.

  3. Student says:

    If you haven’t seen this one already, it’s definitely worth a watch. Partly hilarious, partly just awesome.

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