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Explaining Germany

The Economist is hosting an interesting roundtable on Germany's economic recovery -- what's behind it and whether it's sustainable. There's a lot of discussion over all the usual suspects: The decline in the Euro which supercharged Germany's exports, the country's fiscal conservatism, and so on. But I'd point you to Carmen Reinhart's take: Germany, she says, wasn't part of the credit boom, and so it follows that they're not suffering from the credit bust.

Germany was a notable outlier in the now-notorious credit and debt boom of the decade prior to the onset of the subprime crisis. Credit relative to nominal GDP fell about 11 percentage points during 1997-2007; during the same period, credit/GDP rose 80 percentage points for most of the advanced economies. Germany’s gross external debt/GDP fell about 5 percentage points during 2003-2007, while that ratio climbed by about 50% for other advanced economies. Germany’s property market cannot even be loosely characterised as part of the global bubble. In fact, real house prices fell 11% from 1997 to 2007. Unlike Japan, which was the other notable outlier during the credit boom, it did not have the burden of a high public debt. As a consequence, despite rapid increases in government debt since the crisis, Germany does not have a private or public debt overhang of the historic proportions confronting most other advanced economies. It follows that a long and painful deleveraging is not on the horizon.

In this regard, Germany is the advanced economy counterpart to emerging markets in Asia and Latin America. Those economies also deleveraged during the tranquil booming years (as discussed in Reinhart and Rogoff, 2010). These emerging markets are not only recovering robustly — some are showing signs of overheating.

Huh. I went back to Reinhart's recent paper(pdf) on the credit boom to look into this in more detail. Table 4 has a useful measure that combines the change in domestic credit and in external debt in the run-up to the crisis -- and sure enough, Germany is a notable outlier. Check it out:


Insofar as this is a crisis in deleveraging, Germany simply isn't deleveraging, because they never leveraged up in the first place. That's not to say their economy doesn't have its own problems -- as Beatrice Weder points out, their growth rate is estimated at only 1 percent to 1.5 percent over the medium term -- but the basic condition is very different.

By Ezra Klein  |  September 1, 2010; 10:48 AM ET
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Yes, it seems many "socialist" countries with national health care programs and job saving investment programs and regulated banking and business policies, and where corporations are not given personhood status) are doing much better than supply-side, laissez faire countries that have in recent decades gone radical restructuring under the guidance of Ronald Reagan and his followers (the two Bushes, Clinton and Obama).

Posted by: lauren2010 | September 1, 2010 11:17 AM | Report abuse

Germany's low medium term growth expectations are a reminder of where we would likely be even without the financial crisis. If there had been no housing and credit bubble, we presumably would have had a lost decade of paltry growth in the 2000s. So the question is: what will drive future growth? And this would be the question even if there had been no crisis.

Posted by: jduptonma | September 1, 2010 11:18 AM | Report abuse

This makes sense. Germany's recession was long and deep because a large chunk of their economy is oriented towards exporting to the credit boom nations. If you have a large trade surplus during a period when global trade is plummeting, your GDP is likely to get whacked. When trade is recovering, GDP is likely to recover swiftly. Paul Krugman has noted that Germany had a rougher output recession than the U.S. and despite the second quarter numbers it is still below where the U.S. is if you set 2007Q4 as the base quarter for both economies.

You can see this pattern in Japan as well.

Posted by: justin84 | September 1, 2010 11:19 AM | Report abuse

They did not lever up because they are fiscally conservative.

Posted by: bigless55 | September 1, 2010 11:23 AM | Report abuse

Yeah, but if you look at the chart, Greece had increases in debt leverage similar to Denmark, and Denmark didn't have a credit boom and bust. No, there is a structural imbalance in the Eurozone, and it will never be solved. Check this blog out for a more nuanced view:

Posted by: nickthap | September 1, 2010 11:36 AM | Report abuse

I should have added "... and it will never be solved with the current regime in place."

Posted by: nickthap | September 1, 2010 11:47 AM | Report abuse

Its a little misleading to talk about German "growth" in terms of GDP given that german GDP fell much farther in the initial stages of the crisis. The "growth" in the last couple of quarters gets it back to the US baseline (see Krugman and Munchau for details). It is probably a lot more useful to observe that german unemployment has remained much lower than US unemployment.

We should also make a distinction between levels and growth of debt over the last decade. In terms of absolute levels of debt/GDP Germany is not exactly a clear candidate for the "fiscal conservative" award. In 2008 total debt/gdp was estimated at 274% for Germany and 290% for the US (McKinsey Global Institute numbers). Compare that to China at 159% for a real distinction.

Posted by: splittorff | September 1, 2010 11:48 AM | Report abuse

And it's important to not that Germany did do more to ensure that fewer workers lost jobs initially rather than focusing on finding new jobs for people unemployed by the crisis. It's a lot harder to create new jobs than save current jobs, and the new jobs are almost always lower paying.

Posted by: MosBen | September 1, 2010 11:58 AM | Report abuse

MosBen, I agree with you. Workers have a higher priority in Germany than in the US. Probably the main unifying concept amongst Nordic nations is that they place more value on human capital than we do. We have yet to really understand the relationship between low/stagnant wages and or jobloss (due to recession, outsourcing, etc.) and a steady decline in our overall standard of living (due to lower tax revenue and expendable REAL income--not credit).

Posted by: nickthap | September 1, 2010 12:53 PM | Report abuse

The one factor behind that chart that isn't mentioned, but should be, is the yen carry trade - borrow money at rock bottom interest rates in Japan, invest in high yielding currencies like Europe, Iceland, and the UK, and pray the Bank of Japan intervenes enough to keep the yen from appreciating.

The yen carry trade was what blew up Iceland, and funded a lot of the property speculation in places like Spain and Ireland.

For a long time, whenever the markets were having a terrible day, you would almost always see the yen advancing strongly vs the euro.

Now that interest rates are so low in the US and our government has zero interest in seeing the dollar rise, I would expect to see a similar dynamic here - excess demand for credit, which goes overseas where interest rates are higher, leaving US businesses starved for capital. Hope it doesn't happen, but I am worried we are following the Japanese playbook to the letter

Posted by: sold2u | September 1, 2010 2:47 PM | Report abuse

I find the juxtaposition of the "Germany..." and "Where the Job Losses Are" posts most interesting.

Germany realized close to no GDP growth from 1999 through mid-2005, while the US economy appeared to be experiencing a real expansion. Most basic economic indicators suggest that in the absence of the credit bubble, the US would have experienced a German-like slow-down starting in early 2004. I do not think the data suggests that the credit bubble generated economic recession. I think the data suggests that the US entered into recession in 2004, but that reality was hidden by the credit bubble.

Because Germany's real recession was not masked by a credit bubble, the economy adjusted. But it was a long and painful adjustment--5 years of 10% to 12% unemployment.

The critical and scary difference between Germany and the US now relates to "goods producing jobs" counts, where "goods producing" includes farming, forestry, fishing, manufacturing, mining, energy production and construction. Private sector service jobs depend on the spending and investment of goods producers and public sector employees. At this time each German employed in the goods producing sectors carries 0.9 public sector/taxpayer-financed jobs. But each US goods producer is now carrying almost 1.3 public sector jobs. Looking at the situation this way, it is the US economy that is the more "socialist" in the comparison.

And this is one of the key reasons recovery is so hard for the US. There are not enough goods producers in the US to carry the private service and public sectors on their backs. But cutting the public sector to address this imbalance will lead to short and medium turn economic contraction. It is essential that the US return the public sector-to-goods producing jobs ratio to a sustainable level. Unfortunately, addressing this challenge will likely prove as painful in the US's future as addressing it proved to be for Germany over the 1999 through 2005 period.

Posted by: aldyen8888 | September 1, 2010 3:03 PM | Report abuse

aldyen8888, I totally agree that the credit bubble here masked our economic realities. The fact is, real wages in the "goods producing sector" (i.e., private industry--if I read that correctly) have stagnated. Of course, the only sector where wages have kept pace with inflation (real inflation, not "box of goods" inflation or whatever it's called) is the federal government (your "public sector"). I also agree, something's got to give. I just don't see anyone really cutting back government. And please don't lets talk about entitlements

Posted by: nickthap | September 1, 2010 3:32 PM | Report abuse

any mention of german financing bank Hypo Real Estate, which was nationalized? depfa has huge problems in Ireland.

Posted by: fiorehoffmann | September 1, 2010 4:30 PM | Report abuse

But German banks simply joined the party elsewhere.

Posted by: JamesWimberley | September 2, 2010 4:58 AM | Report abuse

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