Germany bows to Keynes, again

Say it quietly, but Germany has learnt the lessons of Keynes. Would that others had done so too.

The hallmark of Germany’s Wirtschaftswunder since World War II has been the unwavering pursuit of price stability, underwritten by an independent central bank—first the Bundesbank and then the European Central Bank. Control of inflation was considered paramount, an understandable priority in view of Germany’s disastrous bout of hyperinflation following the first world war.

Less understandable was Germany’s postwar aversion to Keynesian stabilisation, as practised in France, Italy, the United Kingdom, the United States and elsewhere.

This aversion, partly ideological, was to prove inconsequential, at least domestically. Germany’s dynamic, export-driven economy performed well by several measures—even if since 1990 its unemployment rate has fluctuated more than in France, Italy, the UK and the US, as assessed by the standard deviation. German austerity proved more consequential abroad, though, as Greece was to discover after the financial crisis of 2007-09.

Domestically, Germany managed that crisis remarkably well, experiencing a much smaller drop in output than the above four comparators. Unemployment fell gradually from 11 per cent in 2005 to 3 per cent in 2019, with only a minor uptick in 2009.

How did Germany do this? Through fiscal stimulus, with encouragement from the International Monetary Fund. John Maynard Keynes had arrived in Germany.

At the same time, ideological opposition to fiscal stimulus from Conservatives in the UK (as with Republicans in the US) bent on austerity wrought a much larger decline in output than on the European continent, as well as increased unemployment. They had turned their backs on Keynes.

History repeating itself

History is repeating itself. With brute force, the pandemic has brought home a basic economic law: Ivan’s expenditure is Olga’s income. As incomes have collapsed, unemployment has risen (Table 1). In Germany, as well as in France and Italy, the increase in unemployment has been modest, while in the US the unemployment rate has more than doubled—doubling too in my native Iceland.

Table 1: unemployment rates (% of labour force)

	2019	2020
Germany	3.1	4.3
France	8.5	8.9
Italy	9.9	11
UK	3.8	5.4
US	3.7	8.9
Iceland	3.6	7.2

How did this happen? Germany resorted again to aggressive, well-targeted fiscal stimulus—enough to keep unemployment rising by no more than one percentage point, from 3 to 4 per cent, compared with an unemployment rate of 7 per cent on average since 1990. At the beginning of the pandemic last March, the German authorities launched an ambitious rescue operation (Soforthilfe), designed to safeguard public health, jobs, firms and social cohesion.

To finance the stimulus, the German government would borrow nearly €300 billion, equivalent to close to 10 per cent of German gross domestic product and €3,600 per capita. Keynes would have been impressed.

Output, not input

This rescue operation—the most ambitious in German history—needs to be assessed not in terms of the magnitude of the fiscal and financial injection of public funds into private hands but rather in its overall economic effectiveness. The output is what matters, not the input.

The monies offered by the German authorities reached the intended recipients promptly. Self-employed persons—artists, for example—and businesses with up to five employees received up to €9,000 and self-employed persons and businesses with up to ten employees received up to €15,000, to cover the first three months of the pandemic and keep impatient creditors and landlords at bay. The payments were made without time-consuming means-testing.

France launched its own rescue plan, at a cost of €235 billion in fiscal outlays, augmented by nearly €330 billion in public loan guarantees. Italy’s rescue plan has thus far cost about €110 billion plus €400 billion in loan guarantees. All three countries have also benefited from a loosening of the ECB’s monetary-policy stance.

Complex cocktail

In late March, the US Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a complex cocktail of fiscal and financial measures with a $2.3 trillion price tag. This was supplemented by loans from the Federal Reserve of a similar amount to assist households and firms.

The US Treasury Department however subsequently sought to terminate the help. And at time of writing, Congress and the outgoing president, Donald Trump, were still at loggerheads on a further stimulus.

The US experience thus far exposes a glaring discrepancy between the fiscal and financial input and the jump in unemployment—with tens of millions of US wage-earners losing their employer-sponsored health insurance as well as their livelihoods.

This is hardly surprising, however. The governments of oligarchies, such as the US under Trump, have tangibly different priorities than those of well-functioning, democratic, social-market economies, such as Germany, France and Italy.

Not alone

The US is not alone. With unemployment doubling from 2019 to 2020, Iceland’s bungled reaction to the pandemic is more akin to Trump’s America than to Europe. Artists and other self-employed persons in Iceland whose incomes collapsed had to wait for months on end for belated public assistance.

And there is more in common. In the US, Republicans engaged in an attempted coup d’état to undo the outcome of the presidential election. In Iceland, the government—subservient to oligarchs enriched by fishing quotas issued to them for a fraction of full market price—persists in disregarding the unequivocal result of a democratic constitutional referendum in 2012. The new constitution, if ratified by parliament, would sever the umbilical cord tying politicians to oligarchs.

When democracy is under threat, economic and social policies suffer too.