Monday, August 2, 2010

Is the German Economy Booming? No...

The Globe and Mail reports:

While the rest of Europe is just beginning to crawl out of crisis and into the first tentative rays of growth and recovery, Germany is positively booming. Export sales are up dramatically, spurred especially by Chinese sales; consumer spending has returned sharply; banks and housing markets are unscathed – and, most significantly, while the rest of the continent and the United States experienced harsh job losses, Germany has actually seen unemployment fall this year to 7 per cent, below Spain’s boom-time level.
How? By bailing out workers with a unique plan that has short-term implications that aren't all that different than what is done in the U.S.:
In a system known as kurzarbeit, or “short-time work,” the German government pays up to two-thirds of the salary of employees who would otherwise be laid off, as long as they remain employed. The employer is expected to cover any hours actually worked and to keep up their pension and benefit payments.
Similar to U.S. unemployment benefits when you think about it... workers only receive government aid if they are not working (though they are not counted as unemployed even if they are working 2 days a week), but with unique long term differences.

The good? Corporations have an incentive to keep people on the payroll even if they are not needed; should the economy rebound, these individuals will be there.

The bad? Corporations have an incentive to keep people on the payroll even if they are not needed (i.e. the same thing); over the long run this may pose a structural headwind to future growth as it will prevent new companies from emerging post-recession; one of the sole benefits of recessions historically has been the new ventures that emerge (excess workers for entrepreneurs + no opportunity cost for unemployed workers = ripe recipe for new companies).

As for the quote that the German economy is "positively booming" (note German Q2 GDP has not yet been released).

Not so much when compared to the U.S., even though the U.S. recession started first.

Source: BEA


getyourselfconnected said...

It amazes me what "booming" or "rebounding" mean in our time of much lowered expectations.

Richard said...

Good to point out the discrepancy in growth rates. Possibly the beter US 'recovery' is due to greater artificial stimulus and will not be as sustainable.

I inferred from the article that the the government pays the firm. Isn't this better than unemployment benefits which go directly to the individual. There is a greater sense of being employed and this has psychological benefits.

One major benefit is the workers sense of job security. He is not faced with the psychologically depressing prospect of looking for work in a time of economic uncertainty! Does the US system of benefits cover 2/3rds of a workers salary and health care costs?

You make some interesting observations but I think you miss important aspects of the German program which are not easily quantifiable.

Jake said...

"One major benefit is the workers sense of job security. He is not faced with the psychologically depressing prospect of looking for work in a time of economic uncertainty!"

No question, but it is the argument of public vs. private workforce as well. Lots more security in public (i.e. government) jobs historically, but I think it would be a tough argument to make to say they are more productive.

Richard said...

I have been waiting for the German GDP report. Here is the link from the BBC site:

"Such quarter-on-quarter growth has never been recorded before in reunified Germany,"

Now that the figures are in can one say that 'booming' is an appropriate adjective for the German economy?

Anonymous said...

Now adjust to per capita. The US has a population growth rate of about 1% p.a. versus 0 for Germany. That means the US needs to grow 1% faster just to stay even and keep its standard of living (roughly speaking).

Include 2010 GDP estimates (which Deutsche Bank today revised upwards to 3.5% for Germany) and German per capita GDP comes out ahead by roughly 3 percentage points over the cycle 2008-2010, despite the significantly deeper trough. Or plus 6 percent if you start in 2006.

The only problem is that most of that growth comes from Germany's export surplus, which Germans never see because their banks plough the proceeds into toxic assets, Greek bonds, and Spanish/Irish/US construction loans. So in a sense it's paper GDP.

Lorne Marr said...

I think that there's still little opportunity cost for workers on Kurzarbeit, because they are free to find a new job at any point. If I'm on Kurzarbeit and I believe my new employer will give me better conditions and a growth prospect (such as is common in entrepreneurial ventures), I will gladly switch, wouldn't you?

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