The Post Crisis Performance of the German Economy
Overall Evaluation of the Efficiency of the Crisis Management Measures Implementation
Germany stands out in the Eurozone as having cheated the crisis by its unusually quick recovery and the popular assumption is that the country applied the classical theory of reducing wages to keep the economy afloat (Schild, 2013). This assumption may have credible roots but it is wrong in the context that the reduced wages did not make the country a better export partner or a foreign investment magnet. Reduction in wages actually leads to a further deterioration of the economy since it reduces people’s purchasing power and in the end kills the domestic demand that otherwise drives the economy. In the absence of other considerations, reduction in wages only worsens an economic crisis. There are a number of crisis prevention and management risks that can be observed from the German experience; the major ones include wage reduction, economic stimulation, having diverse international trade partners and investing in a stable industry.
Instead of just reducing wages, Germany sought to keep the labor market consistent by avoiding increase in unemployment. This was especially made possible by the reduction in wages so that companies could afford to keep their workers despite the difficult economic times. The idea of reducing wages in this case was not motivated by making the country cheaper for foreign markets but rather making the labor market sustainable for the manufacturers within the economy. The wages had been reduced by a small percentage so that the local demand was not badly affected. People could thus still afford the basics and most businesses remained afloat (Panico & Purificato, 2013).
The welfare state stabilizers and bailouts also worked quite impressively. The government not only helped the banks out but also reached out to the struggling companies that would otherwise have collapsed. This ensured that the country’s business environment was healthy at a time when the country`s neighbors were grappling with intense fear that was causing stagnation in their business sector. By bailing out the businesses in Germany, the government ensured that the investors remained calm and continued trusting the businesses. Thus, rather than pulling out, they continued to support the country’s business sector. This is why, while Spain and France were losing serious businesses owing to the anxiety within the Eurozone, Germany was actually doing business confidently with its partners across the globe.
Generally, Germany has the right export products and destinations. The country especially deals in technology and automobiles and these are products that are constantly in demand across the world. This means that while the French were unable to export their expensive perfumes, jewelry and agricultural products among other things, the Germans were still selling their cars and technological equipment to Russia, China and other countries of the world. By focusing on a market that has consistent demand, the country managed to maintain its sales volumes and thus GDP income as its neighbors remained without a market (Lane, 2012). The country`s choice of destinations is also mostly lucrative markets that were in this case unharmed by the Eurozone crisis. This measure, while being a long-term strategy, managed to keep the country safe from the problem of a falling market demand that could have rendered the businesses without an income for some time. The government also stimulated the economy by offering car owners money in exchange for their old cars so that they could buy new ones and promote the automobile manufacturers.
Another crisis management measure that must be appreciated in Germany’s case is relative inelasticity of employment with respect to GDP. This can be attributed to the economic stimulus package that saw companies continuing with operations despite the financial constraints that were causing meltdowns in other parts of Europe. By keeping the businesses afloat, the country managed to save a lot of people from unemployment. In return, the small businesses within the country continued to make a profit as people continued to afford their daily utilities. This worked quite well for the Germans considering that the country was the first one to come out of the Eurozone crisis. The other European nations reduced wages with the hope of making their products cheaper for the international markets but this did not work. The right motivation in this case seems to have taken Germany further in the overall outcomes of its crisis management measures.
Crisis Prevention and Risk Management Practices
This concept is highly disputed in some circles of economists owing to its ability to entirely debase the economy. If wage reductions are not thought through and implemented carefully, they can cause chaos in the country and negatively affect the overall business environment. This is because of the impact that a wage reduction actually has on the local demand for a nation’s production. The trick here is to use wage reduction as an economic stimulus, in that the employees agree to a small pay cut that will enable them to keep their jobs during the recession. It can be also appreciated that if the pay cut is kept to a bare minimum, the workers will be able to continue with their usual buying trends thus keeping the local businesses afloat. In the event that a wage reduction is implemented for other purposes, the purchasing power parity of a nation will drop and the economy will have to suffer especially if the national GDP is more dependent on the domestic markets (Lane, 2012).
Economic Stimulation and Bailouts
This is an evasive concept that does not always guarantee recovery from an economic crisis. Economic stimulation implies seeking programs that will boost the economy and in the case of Germany, the car grants given in exchange for old cars worked quite well. The bailouts are, on the other hand, about injecting money into failing banks and businesses in the hope that they will be able to remain operational until the crisis passes (Young & Semmler, 2011). This is rather a gamble especially if the economy is generally not conducive to the business in question. Governments thus need to be careful when offering bailouts as a way out of an economic crisis since not all businesses can recover in a bad economic climate.
Diverse International Trade Partners
The Eurozone crisis engulfed an entire region, thus confirming the significance of diversification when it comes to choosing trade partners. Since economic crises are often encountered in entire trading blocks, one major crisis prevention practice would be to reach out to distant trade partners. In the case of Germany, Russia and China were the most dependable trade partners who offered the country a stable demand for the technological products (Liadze & Weale, 2010). If Germany had depended on its partners within the Eurozone, the country would have ultimately remained in the crisis with the rest of the region.
The technology and automobile industries are consistent from a global perspective. By investing in these industries, the Germans are able to manage their economic risks since the country’s manufacturers are assured of a consistent foreign market demand even when the internal demand dwindles. Germany produces some of the complex products in the world and its global market share in this category is over 18% (Siebert, 2014). This implies that as a nation, the Germans are well mitigated against the risk of a regional economic recession. Their products are needed in almost each part of the world and they have a steady market demand to ensure that they are constantly in business.
It can be stated that after the fast recovery from the Eurozone crisis, Germany has been able to regain the investors` confidence. With such comprehensive financial policies and neo-liberal concepts as conservatism and management of the labor market, Germany has been able to create an investment climate that is currently unrivaled within the Eurozone. It can be appreciated that among other things, the German economy is seen as robust and all indications are pointing at an upward trend in its growth levels. This has had a number of implications for the country’s investors. First, more and more investments are being directed towards the stable technology industry that drives the nation’s export earnings. Having established that the exports are the strongest earners, more investors are looking to strengthen the nation’s financial position by growing the exporting sector significantly.
The domestic markets have not been neglected either. Having experienced the effects of the nation’s crisis management strategies, the domestic investors are more willing to keep their products for the domestic demand. This means that other investors continue to be attracted to products that are produced and consumed locally like basic consumer goods among other things. The idea here is that the country has secured its economy through various long-term policies along with the international trade partnerships. The local market demand is thus a consistent factor since the national economy will always be shielded. Others are even building an import business owing to their trust in the German economy. This generally implies that within Germany, the post-crisis era is a very promising one for the investors.