Great Recession In Germany

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Great Recession in Germany

In the period between 2000 and 2010, many countries around the world experienced a

major economic downturn that threatened the collapse of many industries. The Great Recession

introduced new challenges in the operations of various organizations that continue to affect their

existence. In fact, some of them have never recovered fully from the effects of the economic

decline. The recession began in the United States and later spread to other continents. The crisis

rapidly spread to Europe and affected many countries such as Germany, Ireland, and Greece.

Notably, the effects of this phenomenon had spread through Europe by the end of February 2009,

bringing major economic setbacks. A comprehensive review of Germany before and after the

crisis reveals a dramatic and an interesting turn of events that made the country emerge as an

economic giant.

Great Recession in Germany

Interestingly, fiscal officials and financial analysts had forewarned that Germany’s economy was

on the verge of contraction. They had projected a fall of about 1.5 percent in the second quarter

due to a decline in exports. The economy of the country substantially contracted both in the third

and fourth quarters of 2009 (Reisenbichler and Kimberly 550). This uncertainty placed Germany

in a technical economic downturn. During this period, the country’s industrial output dropped to

2.4 percent, which was the most severe decline in Germany for a decade. According to Goldstein

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et al. (86), export orders greatly reduced for a period of six months in a row, which was the worst

experience since 1990.

Employment agencies warned of over 200,000 job losses between May and December

2009. In June, the country’s retail sales decreased by 1.4 percent, which was contrary to the

expectations of many people who projected a 1% decline. Germany’s GDP dropped by 0.5

percent in the second quarter of 2009. Such statistics necessitated state intervention to address

the issue. The German government approved a rescue fund of 50 billion euros to protect the

economy from further decline (Dohmen, Hartmut and Norberto 185). Such an amount was the

biggest to be released in Western Europe region with the aim of rescuing a particular country

from the adverse effects of the crisis.

German Economy Before and After the Crisis

For one to understand the situation that Germany underwent during the economic recession, it is

crucial to review its economy before and after the crisis. Notably, Germany enjoyed decades of

economic stability due to increased number of exported goods (Reisenbichler and Kimberly

550). Political tranquility had prevailed in the country, and this attracted both local and

international investors. The booming business positioned the country as a major exporter in the

entire European region. Again, before the economic recession, Germany gained spectacularly

competitiveness in the business realm (Figure1). The country experienced periods of robust

economic growth before the crisis. For example, between 1998 and 2005, Germany’s economy

grew at an average of 1.2 percent yearly (Goldstein et al. 90). However, towards the recession, it

started to drop significantly.

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Figure 1. Evolution of Competition-Weighted Relative Unit Labor Costs, Selected Countries

1994-2012. Adapted from “Trade and the Global Recession” by Eaton, Jonathan, et al., 2016,

The American Economic Review vol. 106 no. 11, 2016, p. 3421. Adapted with permission.

On the other hand, after the economic downturn, Germany emerged stronger than it was

before the crisis. After the government’s intervention to lower the effects of the crisis though

funding, the number of unemployed people decreased from five million to three million between

2005 and 2009 (Eaton et al. 3410). The period after the crisis was characterized by an almost

zero rate of unemployment. Additionally, in 2011, Germany recorded the highest exports that

amounted to USD 1.73 trillion. This amount was almost half of the country’s Gross Domestic

Product. Surprisingly, the exports were about 7.5 percent of the entire world exports (Dohmen et

al. 189). The inflation rates that had skyrocketed during the crisis started falling steadily.

Factors that Can Ameliorate or Exacerbate the Effects of the Crisis

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As far as I am concerned, several factors that can improve or aggravate the effects of the Great

Recession. First, diversification could have greatly reduced the effects of the economic downturn

in Germany. Such a strategy could have ensured that most manufacturing industries remained

operational even during the crisis. Notably, since Germany was and is still more of an export

economy, companies could have broadened their modes of operation to direct their sales to the

countries that were least affected by the recession. Secondly, the government could have adopted

the pro-cyclical policy by reducing taxes on manufacturing industries in order to increase public

spending. This way, both could have benefited from the effects of the crisis. On the other hand, I

believe that the government’s approach to increasing taxes during the recession played a

fundamental role towards increasing the effects (Eaton et al. 3420). Therefore, local and

international consumption substantially reduced, further decreasing the sales.

Government and Central Bank’s Interventions

In response to the Great Recession, the German government, in collaboration with the Central

Bank, released a substantial amount of money to help the country overcome the adverse effects

of the crisis. In particular, the congress approved a disbursement of 50 billion euros (Dohmen et

al. 190). The money was used to protect the country’s economy from collapsing as a result of the

economic downturn. Again, the Central Bank substantially lowered the interest rates. Notably, by

early 2009, benchmark rates were almost zero as they were 0.2 percent on average. Most people

argued that the financial regulator ought to reduce them to below zero. However, financial

analysts advised that setting them at a negative rate would not help. Doing so would have

encouraged depositors to withdraw their savings from banks and keep them as cash.

Finally, the government acted on time by resorting to non-standard liquidity operations

with the aim of providing the country’s financial system with cash that it needed to run its major

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operations. Such a strategy provided the Central Bank with sufficient money to divert to

organizations and industries. Additionally, the government extended the maturity period for the

liquidity to six months (Reisenbichler and Kimberly 563). At the same time, it announced several

measures such as the sale of the Eurosystem to enhance credit support through various banks in

the country.

Government’s and Banks intervention to reduce the Effects of the Crisis

The German government can undertake a crucial measure to ameliorate some of the effects of

the Great Recession. It can adopt a strategy to employ the remaining people that were rendered

jobless during and after the crisis. Although unemployment in Germany hardly increased during

the recession, there are some few cases of people who lost jobs during the crisis (Dohmen et al.

192). Again the rates of employment are still low compared to the high number of people

seeking jobs. To solve this problem, the state can establish community or public projects to

provide employment to such people. It can also implement other programs such improving

infrastructure to provide further employment.

Conclusion

Germany was one of the European countries that were adversely affected by the Great

Recession. Even though the crisis lasted for short time in the country compared to other nations,

it let to several challenges. Notably, exports substantially reduced to levels the country had only

experienced in a decade. Germany’s gross domestic product grew sluggishly during the crisis.

However, the situation normalized after the government intervened and released 50 billion euros

to prevent further collapse of the economy. After the recession, the country emerged as an

economic giant with a substantial reduction of the unemployment rate from 5 to 3 three million

in a span of 3 years. Again, Germany’s exports increased to USD1.73 trillion by 2011.

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Works Cited

Dohmen, Thomas , et al. “Time-Varying Individual Risk Attitudes over the Great Recession:

A comparison of Germany and Ukraine.” Journal of Comparative Economics, vol. 44 no.

1, 2016, pp. 182-200.

Eaton, Jonathan, et al. “Trade and the Global Recession.” The American Economic Review, vol.

106 no. 11, 2016, pp. 3401-3438.

Goldstein, Joshua, et al. “Fertility Reactions to the “Great Recession” in Europe: Recent

Evidence from Order-Specific Data.” Demographic Research, vol. 29, 2013, pp. 85-104.

Reisenbichler, Alexander, and Kimberly J. Morgan. “From “Sick Man” to “Miracle” Explaining

the Robustness of the German Labor Market During and after the Financial Crisis 2008

09.” Politics & Society, vol. 40 no. 4, 2012, pp. 549-579.

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