Germany: The Success of Global Keynesianism and State Intervention

The recent strong economic growth in Germany provides yet more proof of the success of global Keynesian economics, as well as certain other state interventions that distort the free market.

In the second quarter of 2010, German GDP growth was 2.2%, and it appears that this exceptionally good growth came mainly from a surge in exports, helped to some degree by the weaker Euro.

But this immediately raises the question: where were Germany's largest export markets accounting for this growth? Although the US and Europe remain Germany’s largest export markets, the real driver of this surge in growth was mainly from China, and to a much lesser extent India, Brazil and Russia (see “German exports jump on Chinese demand,” Financial Times, July 8 2010 and Vanessa Fuhrmans, “China Cultivates Taste for German Cars,” August 19, 2010).

China, India, Brazil and Russia have all implemented Keynesian fiscal stimulus programs, so the demand for German exports in these countries is itself the result of Keynesian economics. The sheer scale of China’s fiscal stimulus is well known: the Chinese budget deficit is projected to be about $154.4 billion in 2010 or about 2.8% of China’s GDP (see “China forecasts $154.4 billion deficit,” 5 March, 2010), and it was China that was the main cause of the strong growth in German exports.

Although demand from the US and the rest of Europe was apparently not strong, even here the American and other EU stimulus packages will have propped up Germany’s export markets, and prevented a much larger fall in Germany’s export revenue.

Is it really remotely credible that if the US, EU, China, India and Brazil had implemented savage austerity that Germany could have achieved such impressive export growth? Not in the least. The idea is nonsensical. It is obvious that the recent record growth in Germany must be explained to a significant extent by Chinese Keynesian stimulus.

Chinese Keynesianism is the factor ignored by the Swedish blogger Stefan Karlsson, who notes (no doubt correctly too) that German government purchases rose only by 0.5% in Q2 2010 (as compared with 6.6% between Q1 2008 and Q1 2010) showing, he thinks, a negative correlation between German government purchasing and GDP growth (see Stefan Karlsson, “Nice Try,” August 28, 2010).

My response is: “Pull the other one, Stefan.” It is rather obvious that, since it was mainly exports driving the rise in German GDP growth in Q2 2010, you should be looking at the purchases of German goods by China that were either directly or indirectly the result of China’s large Keynesian stimulus, as well as (to a lesser extent) the other emerging economies like India, Brazil and Russia, which all had Keynesian stimulus packages as well. (As an aside, it can be noted that Australia also benefited from China's Keynesianism, and, along with its own stimulus package, actually escaped having a recession.)

Various conservatives are attributing the strong German growth in 2010 to German fiscal conservatism, but this idea is so obviously wrong it is laughable.

For an excellent account of the nonsense being spread by conservatives, see “Conservative Media attribute German economic growth to spending cuts that have not yet begun,” Media Matters, September 10, 2010.

Let’s review the facts. First, the German response to the global downturn of 2008–2009. In late 2008, the German government implemented an emergency bailout package of €480 billion for German banks. In November 2008, the government then approved a stimulus package of €23 billion ($29 billion). On 27 January 2009, the German cabinet approved a €50 billion (£46.7 billion) stimulus package over two years (at 1.6% of gross domestic product).

Germany had two stimulus packages that pumped about €80 billion ($104 billion dollars) into the economy. At about 1.6% of GDP, the German stimulus was larger than the G-20 average, and, along with Germany’s automatic stabilizers, government spending to stabilise the economy was 3.2% of GDP (see Marc Champion, “Germany says its spending package is already big enough,” March 12, 2009).

As you can see in this link, the German stimulus took effect by mid-2009 when Germany got out of recession:

http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=DEM

Thus recent commentators who are pointing to the strong growth figures for summer 2010 ignore the fact that the German recession actually ended a year ago. The recovery in 2009 was clearly caused by government stimulus (i.e., good old-fashioned Keynesianism). Even in 2010 the German economy is still feeling the effects of the stimulus, and austerity measures will not begin until next year. Merkel’s recent €80 billion austerity programme is spread over 4 years and will commence slowly in 2011 (see Quentin Peel, “Hefty stimuli dent Germany’s ‘Swabian’ habit,” June 21 2010).

Furthermore, one important part of Germany’s state intervention to stabilise the economy was the “Kurzarbeit” (“short work”) program. This was a program of government subsidies to German industries to keep people employed by working shorter hours. The measure has significantly supported aggregate demand, which in turn prevented a large fall in consumption and production. The measure also stopped unemployment from rising significantly. You could not have a more obvious instance of state intervention and distortion of the free market than this program, but it was clearly highly successful.

Moreover, the German government moved quickly to protect its manufacturing sector and other industries from the effects of the financial crisis by setting up a “German Economic Fund” (first with €100 billion and then €115 billion) through the state-owned development bank KfW. This allowed the government to lend money directly to German companies unable to borrow from private markets. As of July 2010, some €13 billion had been borrowed by German companies. This is an obvious example of emergency industrial policy – and a sensible one as well. Britain and the US should have copied the Germans and protected their industries by adopting similar measures.

But there is growing evidence that the recent record growth might be the highpoint for the German recovery. Like Japan, Germany is an export-led growth economy. With the abandonment of Keynesianism and the turn to austerity measures increasing worldwide, it is likely that Germany’s exports will fall, which will cause growth to slow.

For the various aspects of Germany’s stimulus, there is a good account in Der Spiegel (see “A Keynesian Success Story: Germany's New Economic Miracle,” Spiegel Online, 19 July 2010).

To attribute German recovery to austerity is, quite frankly, a sign of ignorance, idiocy, or outright dishonesty. Whether the various conservatives peddling this nonsense are idiots, ignoramuses, or just plain liars is a question I’ll leave for readers to decide.