23
May

LESSONS FROM THE FUTURE PAST: GERMANY

Escrito el 23 Mayo 2009 por Mikel Aguirre en Economía Global

I indulge myself to take  as a loan idea the  great article wrote by Peter Gumbel in Time magazine

 

After all the solution to the actual crisis come from huge packages of money,  put by all the different governments all over the world into the economy , there is a case we could look after: The reunification of Germany in 1990 and the two  decades after. 

 

 Although there is a big difference with the situation today, the objective then was political and economic, and  now the key purpose is to obtain some economic success in the biggest business downturn of half a century. 

For Germany USD 2 trillion allowed first a big a necessary development in the infrastructures –very important if your are the biggest exporter of the world; second it developed a encouraged business tradition in the east Germany –most of Europeans now want to obtain a public job- and third the industry obtained growth using a developing for green technology- giving the local industry a decade advance with the other Ocde countries regarding green technology.

 

In the opposite side the big spending didn’t bring a job creating scheme in the east- so stimulus packages don’t reduce unemployment?-;they created a lot of houses that didn’t find an owner in the subprime bust – and finally spending with no particular criteria in the 16 federal states made successful regions less profitable and many places pleased to have subsidies  for life.

 

After twenty years from that lesson and assuming that from a political point of view the reunification was a success, Germany now is victim also of the downturn in the world economy and the government is predicting a 6% decrease in the national economy in 2009 (EU will decrease in average 4,2).

New billion packages will bring a change of turn or it will bring more people relaying and expecting to obtain state aid  and wait for better times?

What we did learn from the German case?

Comentarios

anuj jain 24 Mayo 2009 - 12:03

With banks weary of lending and consumer spending on the decline, Government spending is the only alternative to help an economy pick up. While Germany, during the reunification faced several economic hardships, with a decreased production and increased unemployment in the eastern part, the long term positive ramifications are poiitve and reliable.

What I learn from the German case is o allow for trade specialisation, not force production in an area which is not the economy’s forte. Additionally, once barriers of to entry were removed, several East german companies, thus far under being nurtured by the state found themselves uncompetitive. The present crisis, being predominantly financial in origin, has not affected basic industrial or agricutural areas and hence there is a good potential for future growth resulting from the government stimulus package.

Estevam Sa da Bandeira 24 Mayo 2009 - 13:09

After the fall of the Berlin Wall, an aid package was needed for East Germany because it was economically and socially backward compared with West Germany. Under Soviet rule, it had operated under a centrally planned economy with few possibilities for innovation, entrepreneurship, and open competition. This created not only a morbid economy but also a passive working mindset, which did not fuel progress.

Although the differences between “West Germany” and “East Germany” can still be felt today in unified Germany, the divide would be much greater (and unification not possible) if the aid had not been given.

The current world situation stems from different problems that can be attributed to basically everyone (banks, businesses, governemnts, and consumers). Packages are beneficial if applied conservatively and with a development plan in mind. Banks have to become less risky and more responsible in what they sell. Governments have to keep an eye on what goes on in their country and not be overly laissez-faire. Businesses have to understand that unlimited growth is not the path, but instead sustainable growth, which is not so heavily dependant on credit. If you rely on credit for the bulk of your operations, chances are that your revenue stream is not healthy. Finally, consumers have to take responsiblity for their actions, they are as much at fault as all the others. If you can’t afford a house, don’t buy it. If you can’t afford a mercedes, don’t buy it (buy a Fiat). If you can’t afford a vacation in Cancun, don’t go (go to Cadiz). Don’t buy financial products you don’t understand (don’t buy anything you don’t understand for that matter). Remember, if you can’t afford something today, it is very likely you will not be able to afford it tomorrow, credit is not “free money”, it’s expensive money.

In conclusion, after this slight digression, it is important that these aid packages are applied not as a temporary life boat that will sink once the next storm hits, but that they create sustainable and resposnible platforms for economic stability and progress. Private individuals have to realize that they are responsible as well, and that they are a crucial part of getting the economy back running as well. The economy is not a “magical animal”, it’s composed of people and dependant on the actions of these. What we can learn from the German case, is that we have to apply the money to the root of the problem and change the attitudes that have lead to this mess.

Fernando Peral 25 Mayo 2009 - 12:38

The problem seems to lie in the fact that Germany backed reunification in exports, and now the scenario of foreign trade seems rather pessimistic (which explains Germany’s GNP recent sharp falls). Said that, their perspectives of recovery are much clearer, and reunification is now a fact.

Natalie Jadalla Maria 25 Mayo 2009 - 15:52

There will always be an economic cycle of booms and crisis, what we should take from the past is how we can minimize the crisis part. East Germany was far behind West Germany in many aspects such as infrastructure, unemployment, living standards, etc. There was a flow of money into the old GDR and currency was matched to West Germany’s currency. Personally, I think that a package was necessary since it was a bridge for East Germany to become economically stronger and it enhanced living standards and infrastructure. However, the reasons this package did not decrease unemployment was because the inflow was not properly managed. As Estevam mentioned there was no incentive for entrepreneurship which in the long is needed to decrease unemployment and also the money was invested into real estate which plummeted. Also the fact that the currency was matched caused devaluation.
So comparing Germany’s past with the present will show that financial package is needed in order to jump-start an economy such as East Germany. However, as we learned from the German history, in order for the injection of money to be sustainable in the long run it is necessary to spend it in the right way. There should be control and monitoring of how the money is spent and invest in areas of the economy that can bring returns such as business rather than infrastructure.

Isabel Carvajal Sardi 27 Mayo 2009 - 12:08

Although there is a popular saying that states that history repeats itself I think that it does not apply in this case. Why? Because although the previous stimulus package had some positive impact and helped unify East and West Germany it also had some flaws, it did not help fuel employement or the entrepreneur spirit, while encouraging investments in expensive real state.

So what can we learn from the past? The main lesson is that a stimulus package per se does not guarantee positive results. A stimulus package should be directed to does areas where the country has a competitive advantage. A package’s impact is minimized if most of the money is invested in non-core businesses because it will take time for them to be competitive and their impact on the overall economy will not be as significant.

Like in many European countries, stimulus packages should not create unnecessary expectations or create dependency from citizens. Once citizens grow accustomed to receiving government subsidies it is very difficult to eliminate them and they may become an additional burden for the public sector. During a crisis when government indebtedness has seen an substantial increase, subsidies become an additional burden that is difficult to eliminate in the future. I think it is good for citizens to learn to fend for themselves and not become used to having the government solve everything for them. Like mentioned by Anuj, individuals also have to assume responsibility for their actions and not offering stimulus packages are a way to do so. Finally, as has been the case in the United States, stimulus packages do not guarantee increased spending on behalf of the citizens. So, why incur in a somewhat permanent expense, that does not teach citizens to be responsible for their actions and does not guarantee increased spending.

Miguel Angel Hernandez 28 Mayo 2009 - 19:25

I think that some people might not be educated in how to spend their borrowed money so that task should be for banks because they are risking their money.
In my opinion many banks have become uncompetitive because they didn’t wonder about the waterfalls while they were sealing comfortably and watching the others doing the same.
Goverments have also failed, specially EEUU’s, by permitting massive loans with no question about the long term.
Money packages are helpful in shorterm but what is really needed is to take measures by promoting entrepeneurship and having more control of the system just to grow in a sustainable way as Stevam said.

Kai Ting HSU 28 Mayo 2009 - 22:40

Hello everyone. After reading the above comments, I think what Estevam said makes great sense and I agree with the point. What do we learn from the unification of West and East Germany? I am not very familiar with the history of East and West Germany, but still I find that the problem is that people tend to learn NOTHING from the tragic human history.

I think it is exactly like what Professor Miguel said, governments, industries, and businesses are failing together, even though they probably know they are repeating the same failure which caused the whole crisis. We are here at IE Business School, and if you recall all those cases about economics, it is quite easy to find that simply giving away money to aid does not help to solve the root of the problem. If we take the money given by IMF as an example, you can also find that the result was mostly a disaster. I think the problem is just like what Estevam said: money should be injected into the right place, and if people fail to manage to do this, then we are simply giving cheap credit. And you know what happens after so many cheap credits.

I think the risk of misuses of money also applies to, for instance, government spending or any other public spending. I think it is true that these measures are useful only in the short term, and because the real world does not equal economic theory, governments should be really careful about using all kinds of public spending, too. In Taiwan, the government implemented a “consumer coupon” trying to stimulate consumption. Under the benefit of the policy, “each” Taiwanese can receive a coupon equivalent to around USD120 to purchase anything they want. And there are 23.5 million people on the island. But was the economy stimulated? Not really. People spent the coupon to see ten movies a month. Can you imagine how much did that cost? And now they are trying to do it again. I think this is a typical example that government tends to use short term solutions.

I believe what we learn, and also what we should learn from the past is that risk is always around. What you see now is not always what’s going to happen.

Andres Camacho 9 Junio 2009 - 16:35

Nice blog, however, I beleive that we should focus more on the idea of what would have happened, if they did not spend any money at all.
As you already know, Germany relies on their small and medium size businesses; Which are highly taxed (they have a strong Corporate Tax,a reunification tax of around 3%, and others). This might not sound like a lot, but million of people are paying it, which in return, turns into a lot of profit.
However,this money paved the way for more opportunities in Germany. For example, Porsche was able to establish factories in Germany, still, they charge more money in Germany than in other countries. Moreover, the money that is spent on building roads and freeways, provided Porsche an opportunity to build a freeway. (If this had not happened, they would not have built the factory.)

The German government, does not want to spend money and lower the countries interest rates since they are afraid of jumping back into the big depression there was during WWII.However, the German economy is increasing 2-3% per year so 6 percent is not that bad compared, and in all, might not be something to worry about.

Claudia Monroy 15 Junio 2009 - 10:16

I do agree that the stimulus package did help in unifying East and West Germany. However it is difficult to compare the German situation in 1990 with the actual crisis that we are faced with today. In the case of a divided Germany, the goal was a clear one encompassing political aims backed up with boosting a dormant economy. Packages were efficient in this case because they were used to build the core infrastructures of a war affected country. On the other hand, the current crisis is a global one where we have experienced the largest failure and depression of business organizations in the past 40 years. What is more ironic is that it was initiated by financial institutions which are supposed to be the backbone of economies and trustworthy. Another important fact about the crisis is that it involves numerous nations, therefore making it difficult to define clear goals for the packages to aim. As a result, I believe that a stimulus package could do more harm than good in this instance.

It is important to look at history and learn from it. In the case of Germany we can take away the fact that although stimulus packages fuel an economy, it is not without its faults. One of the main problems observed with lending is that even though the motives might be good, ultimately in can be detrimental to the borrowers as they create a dependency. Packages have to be given with a clear deadline, because borrowers can become reliant on it, and then stop striving to become self sufficient.

Leti Salama 15 Junio 2009 - 10:47

There is a big difference with the situation nowadays and the situation that Germany was facing in the 1990´s.
Germany passed from being a country that was completely destroyed, politically, economically, and physically to the largest national economy in Europe, the fourth largest by nominal GDP in the world, and ranked fifth by GDP (PPP) in 2008. However, the overall unemployment rate has consistently fallen since 2005 and reached a 15-year low in June 2008 with 7.5%.
So our main issue is if the aid packages actually help country to overcome economically or by the contrary bring dependency and will make people to wait to obtain state aid while waiting for better times.

Taking into account that all countries are in crisis nowadays, Germany is the one less affected by the crisis and even though it has a high level of unemployment it is not as bad as other countries and it is trying to solve the situation by launching a comprehensive set of reforms of labor market and welfare-related institutions while the current government runs a restrictive fiscal policy and has cut regular jobs in the public sector.

Therefore, I think that in this case the economic aid package was a total success for Germany, but we cannot generalize for all the countries to react in the same way.

Louise 15 Junio 2009 - 23:55

Actually, what I first thought of when reading this case are the issues related to free trade…
Before 1989, berlin didn’t benefit from these benefits, and thus the German power and strengths couldn’t be seen as such. However, and since 1989, Germany has been improving from and export point of view. Companies from both parties started expanding and made the country as a whole better off. And to compare it to today’s climate, in these times a protection against risks might be aleviated by reducing ecportation?! is it a good idea?! probably not basing ourselves on the german example.

concerning the economical crisis, I think that because it is an extraordinary event and not specifically oriented toward germany, nor provoced solely by germans, is might be very critical to compare today’s situation with another extraordinary (but diffirent)

Farah Hudhud 16 Junio 2009 - 00:45

I do agree with what was mentioned in the article regarding the stimulus package back then being more of a political and economical reasons. This has more or less been approved by its outcome meaning unifying the EAST and West to an extent and worked on imrpoving the infrastructure, yet it did not improve on employment simply that it was not tailored to that. Germany back then was the most affected and the package was planned for the right reason but using maybe the wrong means. The country was indeed in need for funds to improving its infrastructure having had walked out of war but maybe allocating the resources was unplanned building the houses. However i believe that countries such as Germany and the States, do not repeat the same mistake twice. The lesson learned i think is in the fact that Germany has learned from its own history and managed to create a mmore tailored package. I do not think that the two crisis could be compared but rather are
related on how the packaged has been divided and what it addressed in it. The crisis today is not similar simply as the whole globe is affected. Today as the article mentioned that purpose is to obtain some economic success is true since it is no longer called stimulus package but
ecovery package. It is no longer the purpose to generate direct economic activity like before but rather invest in things indirectly related to creating an economic activity in a stable way for the long run. Germany today has a €50bn (£46.7bn) recovery package to tackle overcome the country’s deepest economic crisis since the second world war. This recovery package \It’s a tailored economic growth package, not a classic stimulus program\ according to its Minister of Economy.

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