Keynesianism By Stealth And Symbolic Austerity: German Fiscal Policy And The Post-2007 Economic Crisis

by Mark Vail on January 19, 2011

In the aftermath of the current economic downturn, German policy makers turned to Keynesianism with ambivalence, hesitation, and no small amount of bad faith. Notoriously fearful of debt, government spending, and state power, the German government was among the last in the G-20 to adopt a stimulus package, as one might well have expected. And yet, German stimulus measures were actually more than met the eye and represented one of the more extensive efforts in Europe, though the rhetoric surrounding the debate over the package hewed closely to traditional German narratives about fiscal probity, debt, and inflation. This inconsistency between rhetoric and reality also characterized the German turn to austerity in summer 2009. While excoriating the Greeks for fiscal profligacy and egged on by an unsavory public discourse about southern European work habits, Chancellor Angela Merkel announced plans to cut euro 80 billion from the German federal budget over the next four years. And yet, these cuts amounted to less than they appeared and spared politically powerful groups.

Much of the puzzling aspects of the German response to the crisis can be explained with reference to the ideas that lie at the center of German understandings of the role of the state and a distinctly German variant of liberalism, which I term “corporate liberalism.” This tradition is quite different from the Anglo-American liberal tradition of expansive markets and limited states, but is no less liberal for that. The German variant assumes groups to be integral components of the social and political order and conceives of equality and political responsibility largely in group terms. Its conceptual core rests on the tension between liberty and group responsibility, with each group responsible for the welfare of its members and sharing political responsibility with other groups. The state’s role in this tradition is to establish and maintain the legal and institutional context and to intervene when necessary to support a competitive, fair framework. This tradition grew out of the Ordoliberalism of the inter-war period, which rejected the more atomistic liberalism of Smith and Hayek and was reinterpreted after World War II by the architects of the German Social Market Economy at the dawn of the Economic Miracle.

With the financial meltdown of 2007-2008 and the prolonged downturn that has followed in its wake, German policy makers turned to demand stimulus in order to boost economic growth, though in ways that were true to this tradition. At first glance, Germany’s response indeed seemed to conform to conventional images of a country fearful of inflation and debt, ambivalent about state power, and skeptical about government intervention in the economy. Its stimulus package was adopted much later than most. In November 2008, when the government finally unveiled it, it did so with reluctance and apparently ruling out additional future spending. Merkel stated flatly that Germany would not join other countries “in a senseless race to spend billions,” and Finance Minister Peer Steinbrück claimed that the package was “not a stimulus package of the old style.” So far, so traditional.

As it turned out, this rhetoric was misleading as to both the substance and scope of German efforts. The two measures were more extensive than those of most other European countries, amounting to a full 3.4% of GDP, despite moderate baseline jobless rates, deficits, and levels of debt. The first law, whose wooden moniker Konjunkturpaket I (“Economic Conditions Package I”) revealingly avoided any mention of “stimulus,” provided for a trivial euro 12 billion (0.25% of GDP) of additional spending, which Merkel claimed hopefully would trigger about euro 50 billion in total investment. This apparent reluctance to adopt a robust Keynesian strategy was certainly not dictated by fiscal circumstances in Germany, which was among the few advanced countries with a balanced budget in 2008. In response to widespread criticism, including a surprising push by the country’s five conservative economic “wise men” to expand spending, the government announced a second in February 2009. This legislation provided euro 50 billion in additional spending (about 1.4% of GDP) and included euro 17 billion for infrastructure and a euro 2500-per-person rebate for drivers who trade in old cars for new, more environmentally friendly ones. The bulk of the package consisted of tax cuts for firms, a cut in payroll taxes, a small cut in personal income tax for the poor and increases in tax thresholds. The newly elected center-Right administration enacted a third measure in September 2009, dubbed the “Economic Growth Acceleration Act,” which consisted mostly of tax cuts, including an annual euro 2.4 billion for companies and euro 945 million in hotel VAT, as well as a euro 4.6 billion boost in child benefits.

These measures were informed by German corporate liberalism’s privileging of core constituencies, including industrial workers, families, and small and medium-sized enterprises. One of its key aims was to reduce taxes for the Mittelstand, the traditional backbone of the German economy and a symbol of Germany’s self-image as a hard-working, self-reliant exporter. The majority of the reductions (about 54% of the total) involved an increase in the standard per-child tax exemption coupled with a euro 20 increase in monthly child allowances. Merkel promoted the measure with a narrative of group-based prosperity, which fit well with its other, arguably more effective component: an extension of the Kurzarbeit (“short-time work”) program. Enacted under the previous government, this program provides subsidies for (mostly industrial) workers to compensate for wage reductions resulting from cuts in working hours, thereby limiting firms’ incentives to lay them off. This program was typical of German strategies of protecting jobs and subsidizing existing capital and labor constituencies rather than attempting to create new employment through the force of the state. It was also largely responsible for German firms’ avoidance of mass layoffs in 2008 and 2009, even as the economy shrank by an eye-popping annualized 7% in the last quarter of 2008, resulting in unemployment of only 7.6% in July 2010, compared to 9.6% in the US. This program offered many German workers income support and continued employment during the downturn and thus represented a sort of Keynesian “automatic stabilizer,” but avoided connotations of a profligate state in much the same way as the stimulus packages had focused disproportionately on tax cuts rather than high-profile spending measures.

Germany’s fiscal stimulus measures were thus surprising in their scope but broadly consistent with the German liberal tradition with respect to their composition and political packaging. Despite strong reluctance to boost spending and ambivalence about state intervention, Germany adopted the largest fiscal stimulus of all major European countries and the fifth largest in the G-20. In 2009, Germany’s total stimulus amounted to about $130.4 billion, which was almost six times as large as ostensibly statist France’s ($20.5 billion) in monetary terms and nearly five times as large as a percentage of GDP. This German strategy of “Keynesianism by stealth” prioritized tax cuts, subsidies to firms, and other masked measures that did not attract public criticism of public profligacy.

This past summer, mounting fears of (not to say hysteria about) a so-called European “sovereign debt crisis,” stemming from alarm at Greece’s fiscal situation and growing pressure in bond markets on other (mostly southern) European countries, led Germany to undertake a partial reversal of course. The government unveiled an austerity program that pledged to cut euro 80 billion from the budget by 2014. It proposed small cuts to pension contributions for the poor and cuts in heating subsidies and child benefits for some welfare recipients. However, the so-called Sparpaket sheltered the same groups (largely families and SMEs) that had been favored by the stimulus measures. The cuts were as much an exercise in symbolic politics as they were evidence of a commitment to fiscal rectitude. They left unemployment benefits untouched and continued funding of the Kurzarbeit program, as well as the child benefits and other targeted subsidies contained in the original stimulus packages. They largely spared the families and middle-class households who constitute the primary constituencies of Germany’s employment-based welfare state. In this sense, the SPD’s claim that the measure represents a “continuation of clientelistic politics” rings true. Just as Germany’s original stimulus was much more extensive than it appeared, the subsequent reversal was less dramatic than it appeared.

Germany’s response to the post-2007 crisis has thus been puzzling in a number of respects. It was among the last advanced industrial countries to turn to Keynesian demand stimulus but did so more extensively (but much less explicitly) than most other nations. Under the mantle of aggressive fiscal rectitude, it then enacted a series of budget cuts that were as much an exercise in symbolic politics as they were an embrace of fiscal austerity and which left most politically powerful constituencies relatively untouched. In both cases, there were significant discrepancies between rhetoric and reality. This fact alone is perhaps not surprising—this is politics, after all. What is surprising is the extent of these discrepancies and the coherence of an economic strategy couched in significantly inconsistent rhetoric.

Clearly, institutions—in this case automatic stabilizers such as the Kurzarbeit program, collaborative arrangements for cooperation between labor and capital, and the legally enshrined principle of self-administration by capital and labor—sheds light on some aspects of the German response (such as the reluctance to engage in aggressive industrial policy and the need to mask state efforts to revive the economy). To understand the contradictions and tensions within this response, however, we must also pay attention to ideas, as manifested in elite interpretations of the crisis and public expectations of government. Recent German experience reminds us that politics operates on both substantive and symbolic levels and that liberalism comes in many flavors, many of which taste remarkably different than the typical American recipe.

{ 7 comments }

1

IM 01.19.11 at 10:16 pm

A small quibble:

The first law, whose wooden moniker Konjunkturpaket I (“Economic Conditions Package I”) revealingly avoided any mention of “stimulus,

But then we never say stimulus. The german equivalent is Konjunkturprogramm; Konjunkturpaket is reasonably close and should be loosely translated as: a bundle of measures to stimulate the economy. That this was indeed a stimulus was not in doubt.

I think Germany was lucky in the type of the crisis. This crisis in Germany was mostly a sharp drop in demand for goods. So it did fit the traditional German response and the traditional German institutions, build around (exporting) industry very well. The old Germany of the seventies with it’s coordination between employers, unions and government resurfaced and it was exactly the right response to this crisis in this country.

Now some people in Germany want to export this response to the rest of the world, but it doesn’t fit, except perhaps in the Netherlands.

2

Detlef 01.20.11 at 12:48 am

Tiny nitpick allowed?

Germany’s response to the post-2007 crisis has thus been puzzling in a number of respects. It was among the last advanced industrial countries to turn to Keynesian demand stimulus but did so more extensively (but much less explicitly) than most other nations.

IIRC up to November 2008 the German economy was still creating new jobs. One of the “last advanced industrial countries ” to enter the recession.
It is a bit hard for any politician (regardless of country) to justify a stimulus program based on additional debt if your economy is still creating jobs?
That might have been myopic while still explaining the first weak response in Germany?

Germany just entered the recession later than the USA. So of course the response started later. Simple common sense. :)

And what IM said.

3

Mark Vail 01.20.11 at 7:49 pm

Fair points. But in response to IM’s observation, Germany’s economic contraction was a lot sharper than that of most of its trading partners, and it still hemmed and hawed and obscured. One can have stimulus and still maintain a competitive export economy, particularly when one competes on quality rather than price. And the terminology is still quite evasive (what are the relevant “economic conditions,” after all? It begs the question).

And in response to the second point, I basically agree, though it’s worth pointing out that German officials thought the hit to employment was going to be much worse than it was.

4

IM 01.20.11 at 8:58 pm

Konjunktur may be technically economic conditions, but is colloquially used in Germany like “the economy” in other countries. Then they use stimulate the economy, we use stimulate the Konjunktur.

>Germany’s economic contraction was a lot sharper than that of most of its trading partners<

Germany's contraction in 2009 was a lot sharper. The crisis in Germany was more concentrated in the year 2009 then in other countries. If you compare Germany in Q4 2007 and now, gdp developed like in most other countries. Only in employment Germany was truly different.

5

Detlef 01.20.11 at 9:56 pm

Mark Vail,

And in response to the second point, I basically agree, though it’s worth pointing out that German officials thought the hit to employment was going to be much worse than it was.

No disagreement here. I remember reading newspaper articles in 2009 citing experts forecasting a much higher unemployment rate.
What saved us was probably the short-time work program (Kurzarbeit). But even there, when it was introduced in 2009, it was mentioned that it could act as a “buffer” for maybe 12-18 months at most. After that – in case of no economic improvement – employers would have to fire people.

Now one other nitpick and an additional information for US readers.
Hopefully Mark Vail can tell that by only mentioning a few nitpicks, this German at least agrees with the main points of his paper. :)

Nitpick:
…resulting in unemployment of only 7.6% in July 2010, compared to 9.6% in the US.

Could it be that you were using the national unemployment rates here?
The OECD report (harmonized unemployment rates) for July 2010 reports a 6.9% rate for Germany and 9.5% for the USA.
The German national unemployment rate uses a definition quite different from the US one. And one which tends to raise the number.

I´ve been know to write the odd email to some NYT or WaPo business reporter (before 2008) when they used the German numbers to describe the horrible situation in “old, socialist Germany”. :)

And the additional information:
(Probably not needed for regular readers here.)

The newly elected center-Right administration enacted a third measure in September 2009…

This is center-right by European standards. In the USA that would be centrist, center-left. Maybe the left-wing of the Democratic party?

6

piglet 01.23.11 at 7:40 pm

I second Detlef’s and IM’s points here and while these commenters are too humble to make a big fuss about it, I have to say it is frustrating to realize that the author is apparently not familiar with basic German terminology (but still feels qualified to comment on its “wooden” sound).

Another quibble:
“But in response to IM’s observation, Germany’s economic contraction was a lot sharper than that of most of its trading partners”

Measured how? The answer is probably GDP but do you realize that GDP may not be the most appropriate metric?

7

Mark Vail 01.25.11 at 4:13 am

To Piglet:

Thanks for your comment. My point about “basic German terminology,” with which, as a fluent speaker, I am actually thoroughly familiar, was the semantic differences are hard to translate directly and that we can learn a lot from the idiomatic connotations of expressions in different linguistic contexts. I am sorry to have caused you “frustration” but fear that it resulted from your literalistic interpretation rather than my lack of “familiarity.” I suppose that this confirms my basic point–that words carry freight and need to be chosen carefully. If I can help explain further, please let me know.

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