The German locomotive has slowed down. Will it speed up again on the old rails, or will it have to change the rails?
Miroslaw Skórka, February 22, 2010
The German economy has been considered for many years to be a locomotive of the European Union. Its conditions have always directly affected the state of other European economies. The process has built up especially us a result of functioning within the EU structures. The crisis of one of the greatest economies always results in domino crisis effect in other cooperating economies. Also a response to the crisis phenomena within European Union becomes more complex since it makes difficult or even impossible to apply some corrective actions especially in monetary policy, such as changes of interest rates.
Even before the crisis, Germany had experienced a slowdown. Despite being the world's largest exporter, Germany had only a 0.5% growth per year. With a huge surplus in current balance of trade, the consumption in Germany was not high enough to consume the money earned. Therefore, large amounts of the export earned capital were located in a number of investment funds, sometimes bearing a significant risk. Those days investments in the U.S. were considered as a rather safe way of allocating money. Therefore, when the U.S. was heavily stroken by the financial crisis, Germany was too. However, Germany did not experience any extraordinary wave of bankruptcies. The fact is that some institutions have made significant losses, which undermined their prestige and accountability, but they nevertheless survived the crisis. The financial results of certain institutions in 2008 were as follows (all sums given in USD): Royal Bank of Scotland made a loss of 59.281 billion, Citigroup - 53.055 billion, Wells Fargo & Co. - 47.788 billion, Fortis Bank - 28.248 billion, UBS - 19.636 billion, HBOS - 15.780 billion, Credit Suisse Group - 14.010 billion, Deutsche Bank - 7.99 billion, Hypo Real Estate Holding - 7.481 billion, Bayerische Landesbank - 7.19 billion.
In 2008, nobody in Germany believed that the crisis would adversely affect German economy. The first tangible result of the crisis was the worsening of financial performance of German institutions. Finally the economic crisis resulting from the financial one made Germans realize the huge scale of the problem. The German economy is export-oriented and the scale of the phenomenon is visible in numbers: 80-million Germany exports more than 120-million Japan and the 300-million U.S. In 2009, Germany had to give up its leading position to 1.328-billion China. It can be said that 1 German exports now slightly less than 16.6 Chinese. It is striking and perfectly shows the scale of the fluctuations of German exports. However, the downturn in German export, together with relatively low domestic, demand led to the crisis that significantly affected German economy.
Comparing the quarterly data for 2008 when GDP growth was at its highest (in various countries there were different periods) to those for 2009 when GDP growth was at its lowest, German economy has shrunk by as much as 6.9%. At the same time, China experienced an increase of 10.2%, India - 7.6%, Poland - 2.2%, whereas the U.S. suffered a decline by 3.9% Spain - 4.1%, South Korea - 5.1%, Great Britain - 5.6%, Italy - 6.5%, Japan - 8.3%, Russia - 11%, Turkey - 14.2%.
How has Germany reacted to the crisis? It has been convinced for long that their economic success, and thus the state success, is the result of the philosophy of social market economy. It is based on the principles of free market and free economic activity. This means recognition of and respect for private property, free competition, but also the important role of the state as a governing factor. The idea is that progress cannot be made based on the antagonism between capital and society. The objective is, therefore, not so much to have rich capitalists, but rather rich society that gets richer with the capitalists. Germans often argue that their economic model is a variation of liberalism, liberal capitalism and socialism. It has proved very effective and has brought Germany to the top of power despite colossal war damages, compensations, etc. No wonder that in the initial stage of the financial crisis in the U.S. Germany experienced the results of the Anglo-Saxon liberal capitalism for which the ultimate goal proved to be short-term profit rather than slow, but persistent building of stable mechanisms of growth.
The analysis of statistical data clearly shows that the crisis hit Germany much more than the U.S. and the UK, two model countries of liberal capitalism. However, the CDU and other political parties assess consistently that the social market economy should remain the model not only for German, but also for other European Union countries (including Poland).
The response of the Federal Government to the crisis was called Package I. Within this package the special fund - Bad Bank was created. It was meant to take over the so-called toxic securities or bad credits and restructure the arising obligations. It made a total of 400 million EUR. The objective of the second package - the Emergency Package II was jobs protection and strengthening of domestic demand. The Government have supported all these activities, which resulted in lower workforce reductions (shortening working week, giving loan guarantees to companies affected by the crisis) and even agreed to cut taxes and temporarily take over the companies just to raise the level of internal consumption. The most spectacular anti-crisis action was called -the Scrapping Premium. That was the policy of offering a 2500 EUR discount to all those who would wish to buy a new car after scrapping the older than 9 year cars. The Government assign 5 billion EUR for this project. All these programs resulted in decrease of unemployment and gradual increase of economic indicators in the second half of 2009. Any emergency action and support, however, must come to an end. Now this is really important, whether the increase is sustainable or the trend can only be the result of short-term intervention. Peer Steinbrueck, a former finance minister calmed down enthusiasm of some politicians declaring the end of the crisis. He claimed "the light visible in the tunnel does not necessarily mean the end of the tunnel.” Recently German economists and politicians have been very cautious in their assessments and declarations waiting for a clear and explicit performance of the economy.
Germany paid a high price for the economic crisis. The budget deficit rose from 65.9 billion in 2008 to 73.1 billion EUR in 2009. In 2010 the deficit is estimated for 76.7 billion while in 2011 - 79.7 billion. In 2010 and 2011, the deficit is anticipated to increase to nearly 80% of GDP. No sooner than in 2012 is the deficit expected to go down by 10 billion EUR.
German politicians and economists are currently considering how to avoid another similar crisis. They propose closer supervision of financial institutions, salary reductions of board members of the institutions in question and in general the so-called ‘tax havens’ control. Politicians want to make sure the taxpayers will not have to pay for risky transactions of those who want to quickly and easily multiply their capital. The success of the whole European Union surely depends to a great extend on the success of this policy.