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    The Financial Crisis: A View of Germany’s Recovery

    By: Paul Aaron Mikols


     *Painting by: Caspar David Friedrich: Wanderer über dem Nebelmeer, um 1817

    Introduction:
    Germany is often referred to the economic heart of Europe and has a major role to play in its overall economic wellbeing. According to the International Monetary Fund (IMF), Germany is currently the world’s 4th largest economy based on GDP (exhibit #1). 

    When the global economic crisis reached Europe in 2008, Germany was not immune to its devastating impact. However, in contrast to the majority of the G8 members, Germany was able to exit the economic crisis as quickly as it entered it. The scope of this paper will identify the factors that led to Germany’s strong economic recovery and draw from my experiences while participating in the Hamburg Study Tour.

    Wirtschaftswunder II?
    The incredible recovery that Germany experienced after World War II is commonly referred to as the Wirtschaftswunder, which translates into English as the ‘economic miracle.’ The ‘economic miracle’ in the 1950s led West Germany to a leading position among the world’s economic powers.

    From my point of view, it is inappropriate to attribute Germany’s economic success to the simplicity of a miracle occurring. The Wirtschaftswunder was a product of successful reforms made by Ludwig Erhard. The Erhard reforms that took place in June 1948 had 3 key components:

    • A currency reform which reduced stocks of money and financial assets by between 10:1 and 15:1, replacing the Reichsmark (RM) with the Deutschemark (DM).
    • A neutral or regressive tax reform aimed at stimulating savings, investment and overtime labour.
    • Elimination of most price controls, except on primary products and basic consumer expenditures.
    Similarities can be drawn between the original Wirtschaftswunder and Germany’s economic recovery from the global financial crisis. It is my opinion that Germany’s successful recovery following the global financial crisis could justifiably be classified as the Wirtschaftswunder II. This statement is based on the parallels with the original Wirtschaftswunder when considering the rapid recovery and similar reform changes that were made by the German government. The speed of the recovery will be assessed in the next section using economic indicators, and then governmental policy changes will be explained in the section thereafter.

    Germany’s Quick Recovery:
    Germany exited out of the global economic crisis at an astonishing rate. Economic indicators that illustrate the quick recovery are: the increase in Germany’s GDP, the rebound of the DAX stock index and rising inflation rates.

    At the onset of the financial crisis, Germany experienced a rapid decline in GDP that took place in the fourth quarter of 2008. The decline continued and resulted in Germany’s GDP growth rate to become negative in 2009, however it showed signs of drastic improvement in the third quarter. The improvements gained momentum and the swift increase that occurred in the first quarter of 2010 led to a positive GDP growth rate (exhibit #2). The decline and improvement of Germany’s GDP resembles a ‘V’ shape, which accurately depicts the fact that Germany entered and exited its recession at similar rates. It is also important to note that Germany’s GDP has actually reached a higher level in comparison to the GDP prior to the economic crisis.

    The DAX (Deutscher Aktien IndeX) is a blue chip stock market index of the Deutsche Börse that consists of the 30 major German companies that trade on the Frankfurt Stock Exchange. Similar to Germany’s GDP, the DAX decreased substantially in the last quarter of 2008 and continued to decline in the first quarter of 2009. The improvement of the DAX differed from Germany’s GDP recovery as it had its drastic rebound in 2009 and the current performance level of the DAX has still not reached pre-crisis figures. Evidence of the changes in the DAX can be seen in Exhibit #3.  

    Increasing inflation rates are used as an indicator for the purposes of detecting economic recovery. Interest rates in Germany are an extremely sensitive issue as it brings back memories of the hyperinflation that took place in the 1920s. The hyperinflation that Germany experienced in the 1920s was due to other factors and was therefore not a proxy of economic recovery in the circumstance.  Germany experienced a gradual increase in inflation at the halfway point in 2009, which suggested an indication of economic recovery (exhibit #4). It is important to note that since Germany accepted the Euro as its official currency, methods to influence inflation are limited to fiscal policies as the European Union is responsible for monetary policy. It is also expected that inflation will continue to rise in Germany because of Europe's one-size-fits-all monetary policy.

    Germany’s Reform/Policy Changes:
    Germany’s success in recovering from the crisis was due to reforms that were similar to the Erhard reforms made in the 1950s; however different reforms were needed in 2008.  Factors that caused the financial crisis and different economic realities that existed in Europe in 2008 required that the German government create new policies that diverged from Erhard’s reforms. Germany’s rapid recovery is accredited to changes in the economic environment and governmental reforms which will be outlined in the following areas of this report:
    • German Exports
    • Hamburg’s Harbour
    • Tax Policies and Labour Reforms

    German Exports:
    The German economy is primarily export-driven as its exports yield approximately 30-48% of Germany’s GDP over the last 10 years. In addition, there has also been an increasing percentage of GDP derived from export suggesting an increased reliance on exports in recent years (exhibit #5). Germany has been extremely successful in managing and supporting its export industry after the financial crisis, which resulted in increased demand for German exports from 2009 to 2010 (exhibit #6). The success of Germany’s exports can be seen in the 2010 world rankings for exports where Germany ranked second with $1.3 trillion dollars following China with $1.5 trillion dollars (exhibit #7).  Therefore it is clear that Germany has a major role of supplying vast amounts of imports for countries across the world. 

    During the economic crisis there was a decrease in demand for German exports which contributed to the sharp decline in Germany’s GDP in 2009. Given that Germany is a nation with heavy reliance on exports, it poses the question what caused the GDP to recover? 

    The simple answer to this question is that there was a change in the destination of German exports. While demand stayed low for German exports in the G8 countries, most notably the U.S., there was an increase in demand in the developing nations (exhibit #8). Traditionally the U.S. is one of Germany’s major trading partners (exhibit #9) and therefore any decrease in purchases made by the U.S. has a large negative impact on Germany’s GDP. Fortunately, China and the BRIC countries increased their purchase of German exports, which counterbalanced the decline from the U.S. In addition, China became Germany’s largest non-European customer at the end of last year.

    Hamburg’s Harbour:
    During the Hamburg Study Tour, I met with representatives from Hapag‐Lloyd, which is one of the largest container shipping companies in the world. The representatives introduced an interesting concept suggesting that the true symbol of globalization is the shipping container. This symbol is accurate, since with increased globalization there will opportunities for expanding international trade and business. During the presentation made by the representatives, I was astonished how inexpensive shipping by sea costs. 

    Surprisingly Germany does not have the largest shipping port in Europe, even though the wealth of the country is heavily dependent on its exports. The largest European port resides in Rotterdam, which is located in the Netherlands. Germany does however have the second and fourth largest ports located in Hamburg and Bremen respectively (exhibit #10). 

    Competition for both shipping and receiving goods to and from Asia is becoming fiercer since the economic crisis. To date, Germany is outperforming its European competitors in the race to harness Chinese growth. Greater reliance on trade between China and Germany was welcomed due to the loss of trade with the U.S.; however trade with China has led to new issues and difficulties. 

    A recent issue is the German government’s plan of upgrading the Hamburg Harbour to support the new mega container ships from China. Due to the massive size of the container ships that have draughts of up to 15.50 metres, deepening of the Elbe River is required. The Elbe River is the connecting route that links the Port of Hamburg with the North Sea, and thus has an important role of supporting all of the shipping traffic in and out of the port. Currently the ports in Rotterdam and Antwerp can support these large ships, thus the concern of the German government is maintaining the competitiveness of Hamburg`s harbour.

    This contentious topic was discussed during my study tour, which involved the following controversies associated with the project: 1) protecting and maintaining the natural conditions of the Elbe environment, 2) keeping the morphological changes of the river on the lowest possible level, as they have an impact on flooding, and 3) maintaining competitiveness with other European ports.  

    Advocates supporting the deepening of the Elbe justify the project due to China having the highest level of seaport traffic for the Hamburg Harbour (exhibit #11).  Since China has a significant allotment of seaport traffic, deepening the Elbe River would be a strong indication of future commitment to trade between the two countries. It is important for the German government to acknowledge the environmental concerns when proceeding with the project as well.  

    Tax Policies and Labour Reforms:
    The German government made a critical tax reform in 2009 to assist recovery from the financial crisis. The reform was a substantial reduction in the corporate tax rate from approximately 50 percent in 1999 to 30 percent in 2009, constituting a decrease of nearly 40 percent (exhibit #12). Historically, Germany had one of the highest corporate tax rates in Europe, which has been relatively stable over the last eight year time period (exhibits #12 & #13). 

    Germany's tax rate reduction goal was used to establish a more competitive businesses environment with its European rivals. The major economies in Europe, namely the UK, France, Italy and Spain also followed suit and made cuts to their corporate tax rates, however the cuts were not as drastic as the ones Germany imposed (exhibit #12). Therefore a major contributor to Germany’s strong economic recovery was the federal government’s implementation of corporate tax rates in an effort to increase their competitiveness and promote corporate business within Germany. 

    Germany’s highly skilled labour force is influential in supporting the primary exports of machinery, vehicles, chemicals and household equipment. With the high cost of labour in the western world it is difficult to fathom how Germany continues to remain competitive with other exporting nations. An explanation of how Germany maintains competitiveness against lower wage countries is the low unit labour cost that exists in the German labour market. Exhibit #14 illustrates Germany’s low unit labour cost in comparison to other EU nations.

    Since the late 90s the Federal government in Germany instituted labour reforms that involved the concept of work-sharing. Germany’s work-sharing reform mandate was focusing on increasing the flexibility of the work force, as well as reducing the unemployment rate. The work-sharing reform allowed the employed to work fewer hours at their same hourly wage when the business was slow, however involved increasing the work week from 35 to 40 hours per week when the demand increased”. Changes in standard working time and the reduced usage of overtime pay were implemented at the company-level and allowed for the unemployment rate to remain low during the economic crisis, which assisted in Germany’s recovery process.

    Future Concerns:
    Germany faces significant demographic challenges to the sustained long-term growth generated after the financial crisis. Low fertility rates and immigration have caused a decrease in the population of Germany over the past 6 years (exhibit #15), which necessitates structural reforms. Future reforms will be needed to address increasing immigration rates and promoting efforts to increase fertility rates.

    Also as mentioned earlier, the German government will also need to effectively manage their increased inflation using fiscal policies due to the one-size-fits-all Euro monetary policy.

    Conclusion:
    The rapid economic recovery of Germany after the global economic crisis was not a miracle. Rather, the recovery was to due to government reforms and changes in economic realities. Governmental reforms involved the lowering of the corporate tax rate and policies aimed at increasing the flexibility of the German work force. The discussed changes in the economic realities after the financial crisis involved a decrease in German exports to the U.S. and an increase to China. Germany`s ultimate success after the global economic crisis was due to outperforming other countries in supplying exports to fuel China`s growth. Based on the evidence presented, Germany’s performance after the crisis can be described as the Wirtschaftswunder II.

    Epilogue:
    When I visited the Hamburg Art Gallery, I came across a painting by Caspar David Friedrich titled Wanderer über dem Nebelmeer, which translates as Wanderer Above the Mist. The painting depicts a man standing in front of a turbulent sea. Across the horizon a thick fog stretches out and becomes practically indistinguishable from the cloud-filled sky. A commentary of the Wanderer painting claims that the painting represents a metaphor for an unknown future. The commentary of the painting relates to the global economic crisis where the future of Germany was uncertain.

    My personal view of this artwork is more of an emphasis on what is presented on the horizon. It appears that Friedrich has painted a relative calmness in the distance, which suggests hope. On the title page of this report I have added a photo that mimics Friedrich’s Wanderer painting; however in the distance there are shipping terminals, which represent the calm after the storm. It is my strong affirmation that the major successes of Germany’s economic recovery, as well as Germany’s future, are directly linked to its exports.   

    Exhibit 1:
    Ranking of economies based on GDP

    Exhibit 2:
    Germany GDP Annual Growth Rate
     
    Exhibit 3:
    DAX performance-index ($DE:DAX)
     

    Exhibit 4:
    Germany Inflation Rate
     

    Exhibit 5:
    German exports as a percentage of GDP

    Exhibit 6:
    German Foreign Trade
     

    Exhibit 7:
    Country Comparisons on Exports
     
    Exhibit 8:
    Percentage of German Exports sent to U.S., China and BRIC Countries

    Exhibit 9:
    Germany's Major Trading Partners, 2010
     

    Exhibit 10:
    Largest Ports in Europe

    Exhibit 11:
    Port of Hamburg: Top 10 – Seaborne Container Traffic

    Exhibit 12:
    Select European Corporate Tax Rates 1999 and 2009
     

    Exhibit 13:
    Germany - Highest Marginal Tax Rate
     
    Exhibit 14:
    Nominal unit labour cost (national currency:  2000 = 100)

    Exhibit 15:
     
    References:
    Wirtschaftswunder. Britannica Encyclopaedia. 

    Henderson, David. German Economic Miracle. The Concise Encyclopaedia of Economics. 

    DAX. Deutsche Boerse Exchange Website. 

    The Nightmare German Inflation. USAGold Website.

    Elger, Katrin. German Boom Fuels Inflation Angst. Der Spiegel Website. 
    Black, Jeff.  Germany’s Future Rising in East as Exports to China Eclipse U.S. Bloomberg Website. 
    Black, Jeff.  Germany’s Future Rising in East as Exports to China Eclipse U.S. Bloomberg Website. 
    Germany Deepening of Elbe River Would Contribute to Larger Extent of Transport. Dredging Today Website. 
    Presentation made by Stefan Matz, Director International Business, HWF Hamburg Business Development Corporation (attended at the Hamburg Chamber of Commerce on May 5, 2011).

    Leal, Walter. The River Elbe in Hamburg: A description of the issues surrounding the dredging of the River Elbe and possible means of conflict resolution. Coastman: Coastal Zone Management in the Baltic Sea.

    Germany Info. Central Intelligence Agency. 
    Hunt, J. (1999). Has work-sharing worked in Germany? Quarterly Journal of Economics, 114, pp 117-48.

    Gaddis, John Lewis (2004). The Landscape of History. Oxford University Press US. pp. 1–2.

    Dembo, Ron S.; Andrew Freeman (2001). The Rules of Risk. John Wiley and Sons. p. 10.

    The World’s Largest Economies. IMF October 2010. 
    Germany Annual GDP Growth Rate. Trading Economics Website. 
    DAX Performance. MSN Money Website. 
    Germany Inflation Rate. Trading Economics Website. 
    Country Comparison: Exports. Central Intelligence Agency. 
    Exports of goods and services (% of GDP). The World Bank. 
    Foreign Trade. Statistisches Bundesamt Deutschland. 
    External and intra-European Union trade Data 2004–09. Eurostat. 

    Germany’s most important trading partners 2010. Statistisches Bundesamt Deutschland. 
    World Port Rankings. American Association of Port Authorities. 
    Presentation made by Stefan Matz, Director International Business, HWF Hamburg Business Development Corporation (attended at the Hamburg Chamber of Commerce on May 5, 2011).

    KPMG's Corporate and Indirect Tax Rate Survey 2009. KPMG Website. 
    Germany Highest Marginal Corporate Tax Rate. Trading Economics Website. 
    Nominal Unit Labour Cost. Eurostat. 
    German Population. Trading Economics Website. 

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