The COVID-19 pandemic has disrupted the society and economy worldwide intensely. However, today, in this pose, we are specifically going to discuss the economic crisis in Germany because the crisis had been occurring even before the pandemic. Now, the economic anthropology of Germany dictates that in between February and May 2020, eleven million short-term job applications have been filled. Due to the measurements taken for the lockdown, several thousands of retailers in Germany are in danger of bankruptcy.
Though the government of Germany has pledged the assistance of forty percent of the national output, the second quarter of the year 2020 showcased the economic crisis in Germany as there was a collapse in the economic activity numbering to -11.3 percent year on year. In the third quarter, the economy in Germany made a remarkable recovery but then plummeted again by the second lockdown in November. According to the current economic anthropological estimations, the GDP had been contracted by five percent in the whole of 2020 as expected by the Federal Statistical Office of Germany.
Germany plays a vital role in leadership in one of the surrounding countries of the eurozone. The country has the largest economy and a lower unemployment rate than other countries in Europe. Therefore, the economic crisis in Germany not only affects internal affairs but the external international economy too.
History of Economic Crisis in Germany
This is not the first time that Germany has dealt with an economic crisis. The end of the Second World War destroyed the economy in Germany. The Allied forces have bombed or attacked the largest portions of the infrastructure and the city of Dresden was completely ruined. In Cologne, the population had decreased from 750,000 to 32,000.
The industrial output had dropped by a third. The housing stock of the nation was reduced by twenty percent. The level of food was half of the food level that was before the beginning of the war. The demographic of eighteen to twenty-five of the country who could bear the load of rebuilding the structure of the country, was either crippled or dead.
Hitler had implemented food rations during the war, limiting it to two thousand calories per day. The Allies, even after the war, ensured the food rationing policy and limited the citizens to one thousand to one thousand five hundred calories per day. Price controls on the products and services resulted in shortages of the goods and a huge black market. The reichsmark which is the currency of Germany had been completely worthless needing its populace to barter it for products and services.
Germany was inhabited by four countries and soon it would be broken into two halves. While the western half became a democracy, the eastern half became a part of the Iron Curtain that was deeply impacted by the Soviet Policy. In the middle of these two halves, the capital of the country Berlin was caught which was divided into two as well and referred to as the Berlin Wall eventually.
The Birth of Social Free Market
Walter Eucken, who started to teach economics at the University of Freiburg, obtained followers at the university which quickly became one of the spaces where those who were opposed to Hitler could express their thoughts and opinions. However, more significantly, it is the place where Eucken started to develop his economic theories based on economic anthropology. And the place soon was known as the “social free market” or ordoliberalism.
The concepts of Eucken were firmly dependent on free-market capitalism where there would also be a role of the government to assure that the system would work for as many people as possible. For example, strong laws would be in place to prevent monopolies and cartels from the founding. Additionally, a massive social welfare system would be there to help those who are struggling.
He also supported the idea of an independent central bank that would be separate from the government and concentrated on utilizing monetary policies and keeping the prices stable.
The Reaction to the Concepts of Eucken
Though the ideas of Eucken seem normal today, it was pretty radical when it was actually formed. You have to remember that the time was an economic crisis in Germany. It was the time when the Great Depression had consumed the entire world, and Germany was in a precarious condition. Hyperinflation had destroyed the economy of the country and resulted in the rise of Hitler. After the war was ended, the western part of Germany which was now ruled by the Allies, and Americans would have to decide which path leads to economic prosperity.
Recovery from Past Economic Crisis in Germany
When western Germany was at its dawn, a debate came on the direction of the fiscal policy of the new state. Several, including the members of the Social Democratic Party and the labor leaders, wished to have a government-controlled system. However, Ludwig Erhard, a protégé of Eucken had started to obtain eminence with the American forces that still had the power in Germany.
The New Currency in Germany
When Erhard started to gain more political influence than before, he started to form a multi-faceted effort to rebuild the economy of Germany. That is why he’s called the father of the German Economy Miracle. He played a vital role in forming a new currency implemented by the Allies to eliminate the worthless past remnants. The plan would decrease the amount of available currency to the public by a shocking ninety-three percent and it would also decrease the little wealth held by companies and individuals. Furthermore, large tax cuts were issued to start investment and spending.
In a move that was extremely criticized by the whole world, Erhard also removed price control the same day he introduced the new currency. Markedly, Erhard proved everybody incorrect as he self-assuredly and famously answered U.S. General Lucius Clay’s doubts about how the policy would be a terribly wrong move as mentioned by the advisors. He said, “Don’t listen to them (the advisors). My advisors tell me the same thing.”
The German Economic Miracle
As the public realized that the new currency had value, the shops were full of products and West Germany came to life. The black market ended and the bartering ceased to exist. Economic anthropology states that when the commercial market took its place, the citizens had gathered the incentive to be employed. The sense of industriousness in West Germany came back in full force.
In May 1948, the people lost around 9.5 hours of work per week due to the desperate search for food and necessities. However, after one month of the introduction of the new currency, the number was dropped down to 4.2 hours a week in October. In June, the country’s industrial production was approximately half of its level in 1936. By the end of the year, the number was near eighty percent.
Present Economic Obstacles in Germany
Inflation and Low Wage Development
One obstacle that Germany faces now is to improve wage growth for employers. Continuing the economic crisis in Germany in 2008, the workers have accepted low bonus growth instead of job security. In 2020, Germany still has a low unemployment rate in spite of the higher unemployment rate in other nations. If German employers receive increment, they might want to spend more money rather than saving it. That in turn will spark the German economy.
As per Lagarde, the President of ECB or European Central Bank, the increase in wage growth in Germany would also assist other European countries. Because it would bring the rate of inflation in those countries closer to the target of the European Central Bank and retain the prices stable. According to the Phillips curve, economic growth results in inflation which means the low inflation rate in Germany leaves opportunities for pro-growth policies.
The Ageing Society of Germany and Low Debt
Before the coronavirus pandemic, the country had a budget surplus and the public ratio of debt was lower than other developed nations. Thus, the government has room to maximize the spending of the public. But, the government has to decide how to allocate the resources to investment initiatives that are long-term as well as saving money for the aging pensioners and healthcare. Several of these initiatives involves training programs for the current influx of the refugees, after school program, road construction and quality childcare.
The economic anthropology of Germany tells us that the country relies vehemently on the auto industry and its export to Asian countries, several of that are industrializing. However, some economists perceive the necessity of investing more in R&D and digital endeavors by Germany. The government provides money to give it momentum for the venturing of capital investment in small to mid-size businesses of technology and software innovations.
Balanced Investments and Savings
The country had the largest current account surplus in the globe that defines the country’s more exporting rate than importing. But, this also implies that Germans are saving more than other countries which are hampering the economic development of the nation.
Lagarde considered that the current account surplus is too massive. She perceives an important economic challenge for the country in terms of decreasing the necessity of the citizen to save for their future pensions and encourage the older employers to stay in the workplace.
Though it is correct that the COVID-19 crisis has led to the closing of borders and a decrease in business, the low rate of deaths due to the virus and the reopening of the finances could maximize the advantages as business resumes.
Europe and Maximized Cross Border Danger
The entire euro area was showcasing indications of probable strong growth in 2018 according to intensive economic anthropology of Germany. Lagarde, however, had foreseen that Germany and its neighboring nations needed a cushion to give relief in the time of the next economic crisis. She called for the progress of the capital markets union to persuade a cross-border sharing of risks which would require the countries with a high level of debts to restructure their budget and to increase their productivity.
Since the worldwide financial crisis, productivity unfortunately mostly has been slumped. In addition, during the crisis of COVID, the temporary breakdown of the open borders within Europe accentuated the importance of the strengthening of European integration. Though Germany started 2020 with a progressive economic outlook, that was prior to the coronavirus recession. Undoubtedly, the nation will be influenced by the speed of the reconstruction of other countries in the euro area which will be a lot slower than Germany would like. There were already barriers to trade which maximized dramatically due to the outbreak. These all will hamper the economic growth in Germany.
Recovery from the Present Economic Crisis in Germany
- The economic activity in Germany was started to recover proceeding with the reopening of the borders in late April but the second infectious wave in the Autumn has triggered another round of lockdown. Overall, the economy in Germany has contracted over five percent in 2020. It was expected that the economic development would increase by 2021 as vaccines were distributed widely but the wanted output will not be here until 2022.
- Kurzarbeit, the well-established short-term work has played a vital role in retaining jobs, yet, it cannot fully address the shock at the labor market by itself only. It should be supplemented with a widespread safety net, targeted incentives for hitting, and progressive training to protect vulnerable workers.
- The banking sector in Germany is broadly resilient but the restricted payouts and capital relief should stay in place until the recovery proves to be stable. Thanks to the multi-pronged support policies for borrowers and the strong equity buffers, the banks should absorb the shock to their capital ratios without breaking the requirement for regulatory capital. However, to manage the economic stability, the supervisors should permit the banks to ensue to dip into their extended dividend restrictions and their capital buffers until the recovery obtains momentum.
Here we are at the end! I hope to have given you a brief glimpse of the economic crisis in Germany to make you aware and seek more. Until then, travel well, be well.