Fri, May 01, 2009 page9

• Germany: the world’s biggest shock absorber

  • By Hans-Werner Sinn
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  Since last autumn, Germany has been accused by a number of Anglo-American economists, above all the 2008 Nobel laureate Paul Krugman, of not doing enough to combat the world economic crisis and of free-riding on other countries’ stimulus programs.

  Recently, the Financial Times asked where the German economists are who defend Germany’s policies, voicing the presumption that they disagree with their government’s policies but are too cowardly to say so publicly, thus conforming to the rituals of the German “consensus society.” From a German point of view, this discussion is a ludicrous inversion of the truth.

  Germany has implemented two economic stimulus programs amounting to 80 billion euros (US$106.5 billion), or 3.2 percent of GDP, of which 1 percent of GDP will take effect this year. At first glance, this is indeed less than the US program, which totals 6.2 percent of GDP, of which 2 percent will be spent this year. But this impression is deceptive, since the German state, through the built-in flexibility of its extensive social-welfare system, already contributes to stabilizing the world economy.

  Indeed, Germany’s generous unemployment insurance policies ensure that people are able to maintain their consumption standards even if they lose their jobs. Germany even has short-time allowances that enable companies to reduce their employees’ working hours, with the loss in earnings partly reimbursed by the state. Without this short-time allowance, the average number of unemployed next year would be 300,000 higher than it is now.

  At the same time, more than 40 percent of Germany’s adult population (pensioners, social-welfare recipients, unemployed, accident victims, students) receives some form of state transfer income, especially those in eastern Germany, while the burden of taxes and social security contributions on those in employment is high. While this certainly impedes long-term economic growth and causes great structural problems, it also means that the state reacts extremely counter-cyclically and stabilizes the economy to a great extent, which benefits the entire world.

  The German state recorded a budget deficit of just 0.1 percent of GDP last year, which, according to a recent Organization for ­Economic Cooperation and Development (OECD) forecast, will soar to 4.5 percent of GDP this year. Thus, the economic stimulus provided by the German state budget will amount to 4.4 percent of GDP this year. In the US, the budget deficit last year stood at 5.8 percent of GDP, and, according to the same OECD forecast, will amount to 10.2 percent of GDP this year, which translates into exactly the same economic stimulus as in Germany, 4.4 percent of GDP.

  In addition, Germany has much more inner stability than the US, because it does not have the problem of heavily indebted households that are now restricted in their borrowing. German banks grant mortgages only to a maximum of 60 percent of the value of a house, instead of the 100 percent mortgages that were frequently seen in the US and UK.

  Likewise, there is also virtually no credit card debt in Germany, or other reasons for US-style household indebtedness. A normal German household is not on its last financial legs, and is therefore able to compensate for income losses by adjusting its savings. This is an additional reason why private consumption in Germany, according to last week’s joint forecast by Germany’s leading economic institutes, will increase by 0.3 percent this year in the midst of the worst post-war economic crisis, whereas private consumption is in freefall almost everywhere else in the world.

  Germany is the world’s second-largest importer, closely behind the US. Thus, the stability of German consumption is currently the world economy’s strongest economic pillar. Whereas German exports are falling at an annual rate of 20 percent, the portion of imports that does not consist of intermediate products for export goods is stable, helping the world as a whole.

  The data clearly supports this view. According to the OECD, the annualized flow of German goods exports from January last year to January this year declined by US$173 billion more than the corresponding flow of imports fell, which means that Germany’s annualized trade surplus fell by the same amount. This is the strongest decline in net foreign demand facing a single country, or, equivalently, the strongest increase in a country’s net demand for foreign goods. Japan, for example, has confronted only a US$157 billion decline in its annualized trade balance.

  During the same period, annualized US imports declined by US$284 billion more than US exports, and China’s annualized trade surplus increased by US$249 billion. In other words, from January last year to January this year, the US withdrew US$284 billion and China US$249 billion in annualized demand from the world economy, whereas Germany provided US$173 billion and Japan US$157 billion in annualized demand stimulus to the world economy.

  For Europe’s bigger countries, the picture of annualized demand in the same period is mixed. While Italy, like Germany and Japan, has added demand, totaling US$6 billion, Spain has withdrawn US$101 billion, the UK US$50 billion and France US$19 billion. The US$7 trillion decline in US house prices over the past two years was equivalent to the explosion of an atomic bomb. Germany, Japan, and other countries absorbed and mitigated the shock waves. So, instead of belittling German efforts, the world should show Germany a little more gratitude.

  Hans-Werner Sinn is professor of economics and finance at the University of Munich and president of the IFO Institute.

  COPYRIGHT: PROJECT SYNDICATE
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