Views from the World
How Germany copes with the Financial Crisis
Heike Gobel, Frankfurter Allgemeine Zeitung
(Keizai Koho, April 2009 issue)

The effects of the global financial crisis for Germany?fs economy are apparently more profound than anticipated even in very recent economic forecasts. The final quarter of 2008 saw the economy shrink 2.1 per cent. This shortfall was more massive than in other major nations of the European Union and larger than any since the close of the Second War. This shows - as with Japan too - Germany?fs heavy dependence on exports. About a half of Germany?fs GDP hinges on foreign trade. German growth trails again, having had the honor once at the turn of the millennium as the internet bubble burst. At that time, companies were forced to have a closer look at their products and prices - with reasonable success: there followed in 2004 an economic upswing, carried mainly by exports and continuing till the middle of 2008. There was a significant reduction in unemployment figures - from five down to some three millions - spurred on by the trade unions?f voluntary wage restraint.

In fact, real wages recently rose a bit thanks to the upswing. This in turn has somewhat stabilized domestic demand, although nowhere near adequately compensating for the fall in exports. At the moment domestic consumption is rising at a nominal rate of 1 per cent. However, experts are sure it is a mere question of time till recession shows its face in domestic trade too. If and when figures for unemployment mark a heavy rise in summer or in autumn, consumption will definitely bear the brunt.

Such prospects are alarming for the federal government because it is going to face parliamentary elections end of September. Both Social Democrats and Christian Democrats, who formed a grand coalition in 2005 and have been in government since, fear the economic downturn will drive ever more voters into the folds of the extreme Left. To prevent this, the federal government decided last year to extend and enlarge various supportive measures aimed at sustaining employment. If employers are to run out of orders in the economic crisis they may reduce their employees?f work-hours - even up to zero, if need be. Employees will then be compensated with near-full wages from the state employment insurance for 18 months. Of course employers have started making heavy use of this governmental subsidy for ?ecurtailed work hours?f. Reduction has affected all major sectors - machine tools, automobiles, chemicals, semiconductors.

As opposed to other measures for enhancing economic stability, such help as this for the employment market is being unanimously praised. Praised, because it is seen as a crucial psychological support in crises. Employees put into ?ereduced hours?f - even when firms have no use for them - do not enter unemployment statistics. However, this financial support for bridging the gap can quickly become awfully expensive for the unemployment insurance?fs funds, particularly if firms were to retrench after all at the end of those 18 months. Employees could then claim the normal unemployment allowance - two-thirds of the wage last drawn - for a further year.

Furthermore, the government now has - in cooperation with other EU nations - announced additional measures to help out companies. Firms have been promised federal guaranties and cheaper credit. The automobile industry is getting additional support in form of a ?gscrap premium?h. Customers ready to scrap a nine-year-old car and buy a new instead are being baited with a handsome support of 2500?. Builders and a number of other professions are to profit from a pot of 18 Billion Euros set to be spent by cities and municipalities on various construction projects meant to supply the usual short-term boost for the economy. But all such measures obviously do not ensure for every company a safety net in the face of insolvency in a recession. The present crisis is in fact laying ruthlessly bare weaknesses so far deftly camouflaged while the upswing lasted. This holds for a number of world-renowned companies: take for example Maerklin for model railway manufacture, Schiesser for undergarments or Rosenthal for porcelain. They all have in common that their troubles started long before today?fs recession, their products are not adequately modern and that they have failed to open up new markets. The insolvency of these - and add to this the impending bankruptcy of General Motor?fs German daughter Opel - has now produced a heated debate on whether or not the state ought to go beyond giving guaranties and securities and to directly enter the fray as it has recently done with several banks.

This question touches the very foundations of Germany?fs economy and society; it demands inspection of the basic tenets of Social Market Economy. The basic dictum of this system recommends that the state supply, via a frame of regulations, the rules of the game but never itself become a direct market-participant; that the state meet its expenses over taxes; and, at the same time, that it provide by virtue of a ?esocial net?f (Bismarck?fs social insurances) sustenance to all citizens who fail to get employment.

Guided by this philosophy the German state in the last decades did privatize many companies it once owned - Post, Telekom, various energy concerns. And it did show healthy hesitation to too eagerly offer recession support. But this reticence is turning brittle. The pressure on the federal government to help out with state-participation firms in crisis is steadily growing. Many citizens fail to see why the federal government has directly gone in to save banks but not others. The government has so far not found the right words to lucidly explain why the impending collapse of a large bank is actively and vigorously tackled lest the entire global finance system otherwise run aground whereas that of Opel and many others is not because, the loss of many thousand jobs notwithstanding, the consequences are not comparably catastrophic. The global economy would function without an Opel.

It is no part of the state?fs tasks in a market economy to ?esave?f jobs with public money in terminally ill concerns. This would otherwise prejudice free competition, and so ultimately damage citizens?f well- being. Still, given burgeoning recession, this position is being accepted ever less. Besides, in an election-year job-saving is a decisive argument. And hence there is no missing the fact that Germany in the current crisis is becoming increasingly and gladly lopsided toward trust in the state and trust in state-intervention - at the cost of free and open private markets. This development might prevent a strong recovery of the German economy even after the immediate crisis is over.

Copyright (C) 2009 Keizai Koho Center. All rights reserved