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Der Spiegel: How Keynes saved Germany

It worked for Germany: government stimulus done according to the Keynesian philiosophy of government intervention two years ago has brought the country's economy up to speed again. This is especially interesting for Hungarians as the Fidesz government's economic think tank is a firm believer in the same philosophy.

During the worst of the global economy meltdown, German banks and companies were in immediate danger of crashing. German Chancellor Angela Merkel, the former grand coalition government of the center-right Christian Democrats (CDU) and the center-left Social Democrats (SPD) launched a stimulus package worth approximately €670 billion.

The bailout program was modeled on the simple theory of the British economist, John Maynard Keynes who built the economic theory after the big depression. The theory simply indicates that when the economy is in decline, the government needs to take quick counteraction with massive spending.

The majority of the stimulus package, €480 billion, went for ailing banks, the rest went to financially weak companies and for programs to stimulate domestic economy. When the bailout program was approved in October, 2008, Michael Glos, Germany’s former economy minister, said: “We can solve the problems.”

 

Although a gigantic moneysucker was put in the motion, it did have results during last year's historic economic slump. Government debt skyrocketed, but in return, companies received new orders, consumers had more money to spend and banks, no longer fearing that their borrowers could soon go out of business, started lending again, Germany’s Der Spiegel wrote.

 

The main idea of the model is to make sure the economy is kept afloat, “in the form of economic stimulus programs” says economist Peter Bofinger, a member of the German Council of Economic Experts. One of the program goals was to save the car industry in Germany, under the program consumers buying new cars received €2,500 for their old cars, which were then scrapped. Due to this program, the new car ownership grew 23%, the program also helped the small car industry, which is produced outside of Germany. “We are the only country that has created a program worth billions to subsidize foreign industry,” said Daimler CEO Dieter Zetsche. “But more than it helped Eastern European and Asian countries where small cars are produced, it helped Germany's substantial auto supplies industry to offset the sharp decline of the previous year with shipments to those foreign automakers benefiting directly from the scrapping premium.”

 

The stimulus program also included two programs for the domestic economy. The success of the program really satisfied Keynes, who argues that the most important thing in a crisis is to distribute money to the population as quickly as possible. Universities were renovated, sidewalks were paved and swimming pools with low turnovers got more money to survive.

 

This summer, after the unexpected but very welcomed economic recovery, German companies has once again received orders from all over the world, auto industry is once again growing and the total unemployment is expected to drop below the 2.8 million mark this fall, the lowest since 1991.

 

Although the German economy is on the right track, it is still far from full recovery. Germany depends on the world as much as the world depends on Germany, and countries in the EU are still struggling. The bankruptcy of a major bank or an EU member state would be enough to trigger the next global downturn, the Der Spiegel warns. (BBJ)