MacroScope

Germany’s economic policy gamble

April 16, 2009

At first glance, Germany appears to be feeling the global economic downturn harder than many of its European peers: Industrial output fell by nearly a quarter on the year in February — taking a bigger hit than Britain, France and even Italy — and economists expect the economy to contract by as much as 7 percent this year.

Yet two government policy measures are helping insulate ‘Otto Normalverbraucher’ (Joe Public) from the full impact of the downturn: ‘Kurzarbeit’, or short-term work, and the ‘Abwrackpraemie’ — a ‘cash-for clunkers’ car subsidy plan.

By taking advantage of legislation that promotes shortened hours, many German firms have avoided lay-offs, helping limit a rise in the unemployment rate, which now stands at 8.1 percent. And the car subsidy has given a boost to the auto sector, to which close to one in five jobs are linked in Germany.

Both are short-term measures that can only stave off the worst of the economic downturn for so long — employers can use the shortened-hours facility for up to 18 months and the car subsidy will expire by the end of 2009. But the measures represent a policy gamble that might just pay off for Germany: just as they fade out, global demand could start to take off — a scenario that is shaping up well. The VDMA engineering sector association says Germany’s plant and equipment industry is seeing early signs of stabilisation, and Bundesbank President Axel Weber expects the economy to make a gradual recovery next year.

“So far it looks like everything is running according to plan,” said DekaBank economist Sebastian Wanke. Yet there was a risk global demand would not take off in time, he added.

“The question is will the global economy stabilise again and help us, via our exports. Or will it remain subdued, meaning we’ll see a sustained weak phase? In which case, at some point these measures won’t work any more… It’s a tightrope walk, without an alternative.”

With a federal election due in September, the new government will have a mess to clean up if the gamble doesn’t pay off.

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