Germany Defies Keynesian Stimulus And Recovers!

Econophile's picture

From The Daily Capitalist

Back in August 2009 I made a bet that Germany would recover before the US because they were doing far less stimulus than were we. In fact Germany's Chancellor Angela Merkel said:

“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allowed them to do so by neglecting to set the necessary [financial market] rules and, for instance in the US, by increasing the money supply too much.”


[Mrs. Merkel] is robustly unapologetic when discussing the origin of the global financial meltdown. The fault, she says, ultimately lies with misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system. “We must look at the causes of this crisis. It happened because we were living beyond our means. After the Asian crisis [of 1997] and after 9/11, governments encouraged risk-taking in order to boost growth. We cannot repeat this mistake. We must anchor growth on firmer ground.”

In that article I noted:

According to the IMF Germany’s stimulus amounted to 1.5% of GDP and France’s .07% of GDP. The article claimed that the U.S.’s stimulus amounted to 2% of our GDP but that is quite inaccurate. If you look at total commitments to spend, the U.S. pledged about $11.6 trillion (about equal to GDP) and had committed about $3.8 trillion at the time of the G20 meeting. So, if my math is correct, and assuming our GDP will be in the $13 trillion range in 2009, our stimulus was about 25% to 29% of GDP.

I may have been off on our stimulus commitments, but it is far more than 2%. The numbers are still coming in.  But the cool thing about Merkel's comments is that they were in response to the March 2009 G20 conference when Treasury Secretary Tim Geithner and Presidential Economic Advisor Larry Summers admonished the Europeans to engage in much larger fiscal stimulus efforts like the U.S. to synchronize a worldwide recovery. She was under a lot of pressure from the Social Democrats at home to do more stimulus.

In October 2009, Merkel's party, the Christian Democratic Union (CDU), a center-right party, with its political ally, the Free Democratic Party (FDP) and another Bavarian party, won the Bundestag (lower house) elections. The FDP are my kind of people, and they came in on a platform of lower taxes and cutting government spending.

With regard to the election, I wrote:

Germany is my lab experiment for the failure of Keynesian fiscal policies. If Germany recovers first as I think it will, then I suggest we fire Larry Summers and Tim Geithner and hire Mr. Solms to implement the German model instead of following Japan down the drain.

She suggested that the prevailing economic theory on stimulus—that increased deficit spending promotes growth— doesn’t apply in Germany.

In the June G20 meeting this summer, Merkel was again pressured by President Obama to not withdraw stimulus for fear that things would continue to sink worldwide. Merkel was unimpressed:

Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”

Germany is the world’s fourth largest economy, they are successful manufacturers and exporters, and their government’s deficit as a percentage of GDP in 2010 is expected to be about 5.5% versus about 10.1% in the U.S. Their fiscal stimulus was largely in the form of tax cuts rather than government spending.

Read it and weep all you Keynesians (from today's WSJ):

Germany's economy is set to grow 3.4% this year as its recovery continues across almost all sectors, the government said Thursday in its updated forecast for this year. The growth forecast for 2011 is a more modest 1.8%.


The government's previous forecast in April predicted 1.4% growth this year, before Europe's largest economy posted a blistering 9% annualized rate of growth in the second quarter and other indicators, such as unemployment rates and business confidence, continued to suggest a more rapid rate of recovery.


"After a period in the on-ramp, our economy is now driving in the fast lane," Economics Minister Rainer Brüderle said. ...


Mr. Brüderle said the recovery is being led by demand for German products abroad—particularly from China and India—as well as more recent signs of improved domestic demand. "The recovery has reached nearly all sectors of the economy and is gaining force," Mr. Brüderle said. He added that Germany will likely grow at around 2% annually over the next five years. ...


Unemployment, in turn, is dropping. The government projects that 3.2 million Germans will be out of work at the end of this year, with the total falling to 2.9 million next year. Mr. Brüderle said the total could fall below three million by the end of 2010.

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Mediocritas's picture

Last time I checked, Germany's banks were still in a world of shit with no hope of getting out of it. So being impressed by a 'recovery' in Germany is like being impressed by the chocolate sauce on a shit-cake, yum yum.

Martel's picture

Germany is recovering to a great extent because eurozone countries kept the free money rolling into Greece. Cheap loans, no collateral required. Thus they kept a German customer alive, and bailed out the French and German banks as well. In other words, Germany is standing on the shoulders of eurozone idiots. Most of those idiots are clueless group-thinkers - prime ministers and finance ministers of their respective euro countries.

After the Greek debacle, ECB in Frankfurt bailed out the Irish, Spanish and whatnot sovereign debt auctions. This enables Germany to export for a few more years; a few more Merceds-Benz, BMW, Audi and VW into the Mediterranean countries. Things are hanging on a thread, though; e.g. Spanish Q3 was bad, and Q4 will be worse.

German leaders know this is not sustainable, so they naturally try to grab as big chunk of the chips on the table as possible. The leadership in some smaller eurozone countries don't even know the end game is on, while Frau Merkel & Co. are already thinking about the Endlösung. The real losers are the taxpayers in those eurozone countries, which participated on the bailout packages, but don't export much to PIIGS.

sunstreaker's picture

Correct. However, I think the endgame for any European leader is a post in Brussel. This is where the power is shifting too, a Eutopia, that can be ruled without answering to an electorate. This is why Europe will be held together by nails and teeth, by all European politicians.

Martel's picture

That's correct.

Europe is moving into a neo-feudalist situation, where the politicians and eurocrats in Brussels are the new priviledged nobility, living off the toil of citizen-serfs. Just as in feudal times before, the nobility is international and more loyal to the nobility of other countries, than the peasants/serfs of their home country.


sunstreaker's picture

Strange article. Germany is FULLY committed to Keneysian economics.

Look at the solar industry. Notice there is hardly any sunshine in Germany.

All its major industries are subsidized, if not nationalized, especially car manufacturing. 

Its banks are stuffed with shitty mortgage securities and shitty government debt.

It finances an enormous welfare system.

The difference with other countries is that Germany is populated with obedient, diligent, hardworking sheeple. They all pay their taxes and love it.

Beard of Zeus's picture

German people are smarter on average and the culture reflects it.

Sometimes the bio-genetic advantage is the best explanation.

kaiserhoff's picture

Plenty of truth in what you are saying, but look at the direction of change.  Workers will put up with a lot of crap if there is hope for the future.  Germany has identified some real problems and is making progress.   Wish I could say as much for the States.

Crispy's picture

From mass murdering national socialists to proper democracy and capitalists in only 77 years. Not bad.

dogboy12's picture

Paul Krugman's head just exploded.


The policies of Keynesian economics is partially why we are where we are at.  More debt, more stimulus and more spending aren't always the answer to every problem. 

Young's picture

They will recover faster. But they haven't yet...

Mercury's picture

For a land famous for it's fairy tales, Germany is really getting tough with treasured Western myths these days.  First Keynesianism, now Multiculturalism:

Makes you wonder which European country will be first to outgrow the cosmopolitian We've evolved past war thing...

Beard of Zeus's picture

Makes you wonder, too, if Keynesianism debt fantasies and Multi-Cult racial fantasies go hand-in-hand.

Sure seems like it.


Azannoth's picture

I think her main strength is that she comes from East Germany, she hates communism and is not culturaly impaired like most people in the West

toros's picture

This supports your argument -

compare the employement picture to the US

"Among the marginally attached, there were 1.2 million discouraged work-
ers in September, an increase of 503,000 from a year earlier."

Orwell was right's picture

Also...lest we forget, the US was hell-bent on spending billions of dollars on two wars.    If we want to cut Federal spending, we might think twice before launching off to blow shit up that we eventually decide to try and rebuild later anyway.    

tim73's picture

US economy is pretty much as fucked up as possible. Basically huge casino/shopping mall economy. When you shutdown that shopping mall, that is now slowly happening, what useful skills those ex-mall workers possess? Nothing worthwhile whatsoever. Giant Las Vegas now letting people go...

Every time there was a problem, FED just papered it over with extra liquidity injections ever since mid-80's, now the next QE2 might be into trillions of dollars even. But it won't help and one huge crash is inevitable.

It will go all the way down to growing tomatoes and potatoes in some areas. Things are even worse than in the former USSR mid-90's, at least their workers had skills like fixing a fridge, car or tv.

Djirk's picture

"It happened because we were living beyond our means.  We cannot repeat this mistake. We must anchor growth on firmer ground.”

Anyone in the US have the balls to say this and actually act on it? Someone, anyone?OK forecast calls for pain.

Mien Liebe....let's put the lights down low and I'll show you some growth....


dcb's picture

I don't really knkw the numbers, but I am

not sure the analysis is entirely corrrect.

although I agree 100% on the german view of the cause of the crisis

The analysis has to include ecb programs of buying bonds, and other support measures for the entire Euro zone. My guess is that these programs aren't reflected in tha data.

Anton LaVey's picture

Yes, and you raise a very good point, indeed.

SheepDog-One's picture

Yea well I wouldnt call it 'VE' day just yet Germany, dont you have 3 million newly unemployed? What the hell is with these sudden declarations of 'all is well'?

Chartist's picture

Shipping some jobs to China is going to payoff....China needed to start building a solid middle class....Unfortunately it came at the expense of our current middle class....In a couple decades, this is going to payoff handsomely for everyone as they have a quarter of the world's people.

SheepDog-One's picture

LOL, pay off for who? Are you Chinese? Yea the entire USA manufacturing was dismantled and sent to China so we could have a 75% Borrow and Consume economic model which is now out well if youre the Chinese prime minister I guess! BK USA middle class? Not so much.

ella's picture

1.  German policies did not allow a German housing bubble.
2.  German policies did not allow their companies to off shore and hollow out its manufacturing base.
3.  German policies used taxpayer dollars to pay part of the wages of its private sector workers to keep them working during the economic crises.
4.  German policies keep health care costs low and provides pension benefits to the public and private sector, thus allowing the workers more money for consumption.

 No Keynesian policies in Germany.  Too bad Americans don't have the same benefits as the Germans.

fearsomepirate's picture

Where do get the idea that the #1 manufacturing country in the world, the USA, has "hollowed out its manufacturing base"?

Anton LaVey's picture

Let's go back on these points for a second...

1) ... But it also helps that the German population is decreasing - worst demographics in Europe - and that, in some parts of Germany, local government will actually allow you to stay in a house for free, as long as you maintain it. It also helps that rents are going down all over Germany, except for the absolute wealthiest parts.

Seriously, I have friends who relocated to Germany (near Frankfurt if I remember well) and they told me rents are absolutely ridiculous compared to the US or other European countries. And they have a HUGE place, including a very nice garden.

2) ... But it also helps that German companies tend to stick with German workers and practice a healthy nationalism when it comes to business decisions. Not to mention a Euro that plunged following the Greek tragi-comedy.

3) ... But it also helps that wages have been cut drastically to boost Germany competitivity.

4) ... But it also helps that benefits have been cut,and sometimes drastically as well (see 3).

No Keynesian policies, indeed. But not a very long-lasting boost to the economy in any case, contrary to what our friend Econophile said in his article.

The Alarmist's picture

1) True only in the east ... wrong about rents, btw, they are firm in most of the west and parts of the east.

2) I was surrounded by more than a few foreign nationals in my german office.  Moreso that I ever had in New York, unless you count the cleaning crew.

3) Not exactly true.  They were held down for years while countries like the US were witnessing 5%+ raises each year.  During the downturn, however, a number of Germans went to Kurzarbeit (shortened hours with some state subsidy) rather than simply being laid off to the unemployment roles.

4) Benefits have been cut in a number of ways, starting with retirement ages going to 67 (without riots, btw). 

If the people hate Angie, it is for a few reasons. Those on the dole hate the fact that her administration has not boosted benefits during these difficult times.  More than a few are angry that she was not tough enough on the PIIGs and the Eurocracy and is letting France push her around.  All in all, she has been a more effective leader than Big O.

Anton LaVey's picture

All in all, she has been a more effective leader than Big O.

Agreed. Or any other European leader, for that matter. And don't get me started on Sarkozy, OK?   ;-)

Azannoth's picture

Well you are told always vote for the lesser evil, well out of all evils imaginable Angie + FDP are truly the least evil

i-dog's picture

You are just making critical statements, not sense.

All 4 points make for a sounder economic base for the long term.

dpr10's picture

we will see what Merkel does when German banks' loans are not coming back and they need trillion euros in capital...ok they have manufacturing for now, but their banks are as screwed as those of us...and who will need manufacturing when "manufactured" demand goes away...

i-dog's picture

"who will need manufacturing when "manufactured" demand goes away"

Manufacturing will always be in demand while 90% of the planet lives outside of the US and EU. Quality manufacturing from Germany will be in demand for a long time to come ... not only in the BRICs, but in smaller states as well.

So much of the commentary on ZH seems to assume that "the world" = USA, or USA+EU. Sheeeeesh!!

JW n FL's picture
Ordos, China: A Modern Ghost Town,29307,1975397_2094492,00.html

The BRIC's are a bangin! Baby! Man-U-Fact---errr... ing... Germany...

mohadiep's picture

"The FDP are my kind of people..." Well, your are certainly not German. The FDP is a bunch fucking idiots!!!

Azannoth's picture

And you certainly Are German, fuking idiot, btw. how's that Hartz IV going for ya ?

f16hoser's picture

Hey Angie, any jobs for a middle class white boy with German ancestery? US is heading in the wrong direction.



JW n FL's picture

3m Germans out of work! YAY!!! Lets Party!


Wait? 2% over the next 5 is..... YAY!!! Lets Party!


Germany... is a 5hp lawmower engine... on its best day as compared to re-starting the Space Shuttles Solid... never mind, stupid is as stupid does!

SheepDog-One's picture

Everything's certainly just stupid, in fact full-retard now.

working class dog's picture

Forget the Keynesian, and Friedman rhetoric, the eurozone is the problem, Mrs. Merkel will be on the bread line soon when Greece Ireland, Portugal ,  etc. etc. etc. come begging for more trick or treats, they provide the trick and the germans give them the treat, a free ride on corruption.

More shoes to drop, just like in the US. stay tuned.

Azannoth's picture

Germany has no obligation to Ireland or Greece(the Mastricht Treaty explicitly forbids it even), only German banks do, in the USA u can't say no to California when it goes bankrupt we can say fuk u to Ireland and Greece very easily and this is what the voter will vote here for

Dollar Bill Hiccup's picture

On last look, Deutsche Bank had assets of 84% of German GDP

German banks have an estimated exposure of $177bn to Ireland alone and given the nature of falling dominos, $465bn in total to the PIIGS ...

If the German economy is $3.3tn in size (IMF WEO database), that's 14% of GDP.

Lednbrass's picture

The US cant say no to California? I disagree.  An attempt to bail out California, New York, Illinois, or any other big liberal state is going to spark massive anger in the south and midwest and at this point the lawmakers from those areas may be scared enough of their voters to refuse it. I think there may very well be enough legislative clout after the election among those who truly despise those states to drop any such attempt in its tracks.

Azannoth's picture

The Germans might be missguided in many areas, but there not stupid, suck it up Americans

dpr10's picture

germany recovered because everyone else is doing stimulus (and germany did too by the way)...and they bailed out rest of europe for now...and due to US /FED measures, interest rates in emerging markets dropped and people are buying more cars with make a statement like germany is doing the right thing is totally baseless...

Anton LaVey's picture

Oh boy, there are so many things wrong in this article that I don't even know where to start...

Germany "recovered" because they followed a drastic policy of "beggar thy neighbour" vs the rest of Europe by lowering the salaries and cutting the benefits of all their workers. They also pursued a systematic (and fairly traditional) policy of exporting based on these lower worker costs. This had the effect, essentially, of exporting Germany's problems to the rest of Europe.

Keynesian policy had nothing to do with it, and it may well be that Germany's economy is going to implode as soon as the rest of the world (including the rest of Europe) stops buying their products - which should be a question of time, now.

Examples? German cars are not going to sell that well in the USA in the near future, with the high unemployment there, China is not going to buy "Made-in-Germany" tools and machines if its economy also goes down the drain and Greece and Ireland (among others) are definitely not going to buy anything, period, given the situation both are in.

As far as Keynes is concerned, Germany's situation has nothing to do with the policies he recommended (specifically, government as a lender and buyer of last resort) and everything to do with the fear the Germans have of inflation and hyperinflation (see: Weimar, Republic of - monetary policies). There is a case to be made against Keynesian policies at this time - but, again, it has nothing to do with the policies of the current German government (and everything to do with governments not being able to pay for it).

Finally, my dear "Econophile", I will note that Ms Angela Merkel - quite a smart person, and certainly a cut above the rest of European leaders - is widely disliked in her own country, has lost regional elections already and is increasingly anxious about the German economy slowly sliding into "double dip" recession again. Not to mention she compromised (under French pressure) on several key monetary policy points, such as automatic sanctions against European nations that violate deficit rules.

All of this to say, please, stop the Keynesian bashing already, it is really getting quite tired.

Full Disclosure: I am against Keynesian policies right now, not because I think they are bad, but because I believe no westeern governement has the MEANS to prusue & finance such policies. All western governements - with the possible exception of Germany - were running DEFICITS, which simply precludes further deficit spending once in a crisis. What should have been done was a complete nationalization of banks, administering a nice haircut to all bank stockholders in the process, a return to 'sane' banking regulations, and a ban on any and all speculative activities, especially with regard to CDS. Not a single country has tried that, and the end result (and final implosion) is still ahead of us, unfortunately.

Of course, I don't know anything, so feel free to ignore me.

linrom's picture

Outstanding post. And I may add, are the German banks out of the woods or have they not been bailed out.