Front Matter

Front Matter

Ashoka Mody
Published Date:
April 2013
    • ShareShare
    Show Summary Details

    Germany in an Interconnected World Economy


    Ashoka Mody


    © 2013 International Monetary Fund

    Cataloging-in-Publication Data

    Joint Bank-Fund Library

    Germany in an interconnected world economy / editor, Ashoka Mody. – Washington, D.C. : International Monetary Fund, 2013.

    p. : ill. ; cm.

    Includes bibliographical references.

    1. Germany – Economic conditions. 2. Economic development – Germany. 3. Germany – Foreign economic relations. 4. Financial crises – Germany. 5. Labor market – Germany. I. Mody, Ashoka. II. International Monetary Fund.

    HC286.G47 2013

    Disclaimer: The views in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its members.

    ISBN: 978-1-61635-424-4 (paper)

    ISBN: 978-1-47558-239-0 (ePub)

    ISBN: 978-1-47552-249-5 (Mobipocket)

    ISBN: 978-1-47551-671-5 (Web PDF)

    Please send orders to:

    International Monetary Fund, Publication Services

    P.O. Box 92780, Washington, D.C. 20090, U.S.A.

    Tel: (202) 623-7430 Fax: (202) 623-7201





    Germany in its postwar history has a remarkable economic story to tell, not just about success but also about failure, about ground won and lost. The successful post-war recovery, although driven by a clear free-market confession, has also been part of the German policy approach of Ordnungspolitik, which includes a clear commitment to economic fairness, social safety nets, independent wage negotiations between employers and employees, and strong regulations preventing the misuse of economic power in the most economically relevant areas.

    Then we saw a first slump, starting in the mid-1960s, due to global developments, such as the crises in the coal and steel industries and the loss of the Bretton Woods currency regime at the end of the decade. The slump was prolonged by home-made problems, not least when trying to keep non-competitive sectors alive with high subsidies. Today coal is still active in Germany despite high production costs, and nobody knows if all plants really will be shut down as planned at the end of this decade. Renewables, also heavily subsidized, might not do the trick alone after the closing of all nuclear power plants soon after the Fukushima event.

    The 1970s brought more trouble with the oil and wage shocks, and they saw the failure of an anti-cyclic macro policy that was also (mis-)used as a tool for goodies of all kind; the cyclical deficits were never paid back in the good times. Last but not least, the decade saw the huge build-up of an over-generous social safety net, at first supported by high growth and stable population figures but soon becoming fragile as birth rates and potential growth rates began shrinking—something that has continued to this day. And the issue hasn’t left us to this day: the question of how to push potential growth is still the most relevant.

    The 1970s also, as a result, had to manage a level of deficit never seen until the late 1960s, driven by following the new gross investment “(‘golden’) fiscal deficit rule”: that is, the Keynesian-motivated new debt rule, which replaced the old conservative rule that required any deficit to be repaid by revenues created through investment. The new, weakened focus of indirect repayment through growth and taxes, while it may not be completely wrong in economic terms, proved to be a seed of failure. It too could easily be misused, not only as an instrument of political compromise of any incoming new term of legislation but also during economic downturns, when cyclically short-term-communicated deficits “surprisingly” turned out to be structural—the classic TTT (timely, temporary, targeted) mistake mentioned in every economic textbook.

    The 1980s started with stagflation and debt that had already accumulated quite high and grew further in spite of the changing tide of economic thinking in the direction of neoclassical/monetarist concepts (Phillips-Curve and rational expectations) which—at least in communication—were reflected in the political economy, where non-Keynesian/Ricardian effects were heralded, culminating in statements like, “The economics driven by rational behavior needs no macro.”

    Nevertheless, despite the strong wording, Germany did not really take up the supply-side economy concept and almost completely missed the structural/social reform period of the 1980s that many other European countries entered, such as the Netherlands and Scandinavia. One cushion Germany had at that time was the relatively favorable export side of its economy, even though the deutsche mark slowly but steadily appreciated, taxing away part of gained competitiveness and making structural reforms even more pressing.

    Before the situation grew too serious, unification brought a big boom. It was construction-driven, and while it did not lead to a general bubble it led to huge overcapacities, which lowered growth in the second half of the decade. The boom wiped the structural reform agenda off the political Top Ten list. Because of its complex and sophisticated system of (federal) checks and balances, therefore politically somewhat “slow,” Germany’s federal government had to spend its limited available political capital on unification, leaving no room for other issues.

    Seen from outside, it might have been possible to use unification as a catalyst for reform, but the political economy could never deliver. Political capacity was bound by and led to short-term solutions based on already endangered social systems and even higher debt, instead of fundamental reforms and a tax-based financing of unification.

    The mid-1990s saw Germany taking over Europe’s “red lantern” on economic indicators. The “German Disease” was on the front pages of tabloids and The Economist.

    The late 1990s brought changes: wage developments were continuously moderated, both specialized SMEs and big industries cleared their books, and profits went up. The supply side won, the demand side lost. The nucleus of the next export boom was born, as German SMEs became the little champions offering emerging markets the technology they needed. Adding to that were Social Security and labor market reforms, tax relief for corporates, and a whole program for renovating Germany, even if, as measured against the bold proposals of economists, the program didn’t look so convincing and was heavily blurred by political compromise at the time of design.

    But time would show that it was not just the German overperformance but also the underperformance of competing countries (and therefore a no-longer-appreciating currency) that did the trick for the new German economic (export) miracle. For the average German, the crisis of 2008 and the years following—the worst world crisis since the 1930s—was and still is something he would watch with some surprise on television, but it never came closer. And this time Germany was lucky, with a well designed macro-strategy that also delivered on the psychological side and was firmly anchored by the new fiscal rule, the so-called “debt brake.” It was quite a new experience, too, one never seen in the decades before, when the typically pessimistic but now optimistic (over-optimistic?) Germans kick-started lagging internal demand and consumption at the height of the crisis.

    This book on Germany by Ashoka Mody and current and former IMF and internationally regarded experts is one of the most detailed reviews of recent German economic history. It not only offers an excellent empirical analysis based on long-term developments but frames that analysis in the context of our actual post-crisis, globalized world. It points clearly at Germany’s successes, but it also points out the remaining weaknesses as well as those upcoming if the reform momentum is lost.

    Germany has a role to play, not just in Europe but in the interconnected global economy. This should not be forgotten. And that role is not only for its national economy but for the whole region, its trading partners, and its export/ import markets. Germany’s macro- and microeconomic policy does matter, even if measurable spillovers are small. So there is a point in sustaining its reform momentum and not getting lost again on the macro-, structural, supply-and-demand, and all underlying (micro-) factors.

    Germany indeed should push the structural reform agenda, for example through public investment, reforming the health and service sectors, removing existing market barriers, speeding up research and development, and bridging the existing market gap in founding new-tech companies. It should also adopt family-and birth-friendly policies together with better approaches to migration. Last but not least, Germany should engage in a full renovation of its education system, while keeping its already well working instruments (“dual education”) that prevent youth unemployment.

    And, of course, there is the issue of debt and deficit. The new German debt brake, which now is also enshrined in the European fiscal compact, might move the countries concerned to an adequate soundness of public finance and foster long-term sustainability and the quality and efficiency of public finance as necessary complements.

    The reader might use this book to build up his own picture of Germany. The description and analysis are valuable for rethinking different policy approaches, and for reaching the best solutions (or perhaps the second- or third-best, as politicians of all stripes will most naturally and legitimately ensure) to current and upcoming problems, including the next “black swan” problems, in a world that is interconnected and leveraged.

    It is my hope that the authors of this book keep an open-minded eye on Germany and continue to offer analyses and advice, since in Germany as with other medium and large sized countries a more inward look sometimes tends to become dominant. This is no longer affordable in a globalized, interconnected world. Nobody can do better alone, not with the real and monetary market world and not with the public sector. Maybe this is one of the main crisis lessons. All the more, then, do we have to strive for credible, convincing, and communicable—but most of all problem-solving—economic concepts and strategies, not just on a national but on an international scale.

    Christian Kastrop

    Deputy Director-General, Economics Department, and Director of Public Finance, Macroeconomics and Research Directorate German Federal Ministry of Finance


    The papers in this volume were written by IMF staff. But at all stages, this was a collaborative enterprise with the German authorities. Early versions of the papers were discussed at the Bundesbank, where critical comments and alternative viewpoints were offered. That consultative process culminated in a major—and unprecedented—conference at the Federal Ministry of Finance during the 2011 Article IV Consultation with Germany. Christian Kastrop made that event possible. For that initiative and for the many vigorous conversations, even on controversial issues, I am most grateful to the German authorities.

    At the conference, a number of senior German scholars joined the discussions as commentators and session chairs. Their comments are included as part of this book. Thanks are due in particular to the session chairs, Christoph Schmidt, Klaus Eckhardt, Ansgar Belke, and Beatrice Weder di Mauro, who kindly took time to moderate the exchange following the papers.

    The conference closed with a lively panel discussion. Juha Kähkönen, then Deputy Director in the IMF’s European Department, moderated that discussion. The distinguished participants included Markus Kerber, then Head of Department of Fiscal and Economic Policy at the Federal Ministry of Finance (now CEO and Director General of Federation of German Industry, BDI), Thomas Mayer, Deutsche Bank Research, and André Sapir, University of Brussels and Bruegel.

    Finally, I must acknowledge with much gratitude the contributions of Fabian Bornhorst in making this volume possible. He was legitimately a co-editor but his modesty has prevented him from agreeing to share that credit with me. I also recall with great affection my many colleagues who joined this venture and many other such intellectual and operational adventures.

    Ashoka Mody

      You are not logged in and do not have access to this content. Please login or, to subscribe to IMF eLibrary, please click here

      Other Resources Citing This Publication