2008-11-05 | Sebastian Płóciennik

Germany responded to the global financial crisis almost in the same way as other Western countries. The government rushed to the aid of banks which had sustained losses due to engagement in high-risk financial operations. However, the process of preparing the rescue plan, the related discussion and its form per se indicate that Germans have deeply revised their economic views; after long-lasting liberalisation, they want the state to be more engaged in the economy.

The crisis in Germany

Germany clearly sensed the impact of the global financial crisis and the economic slowdown worldwide it entailed. Some financial institutions, which had invested in high-risk securities (for example Hypo Real Estate and IKB) faced bankruptcy. According to the latest estimates, German GDP in 2008 will grow by 1.8% at most against the previously forecasted 2.1%, and stagnation is expected next year (data from IMF), Kieler Institut für Wirtschaft and the European Commission).

As in other countries, the German government decided to support the economy. Rules for bank bailouts were developed, and a stimulus package for the economy was announced in November.

The inconvenient bank bailout conditions

German actions were based on a special stabilisation fund which could use 400 billion euros and take over risky obligations. Another 80 billion euros was to be allocated for buying out shares in endangered financial institutions by the state. Unlike in the USA, where funds were offered to all major banks indiscriminately, regardless of their respective conditions, in Germany only those banks which had reported problems would receive bailout. This caused a dilemma for banks because even a rumour regarding negotiations with representatives of the fund could be received by the stock exchange as a sign of the bank's weakness and lead to massive sales of the bank's shares. This happened to Commerzbank, the first private bank whose shares lost in value after it had sought assistance. Money was available, yet reaching out for it posed a serious risk of reputation loss to banks. Moreover, other conditions were imposed; institutions which wanted to receive bailout would have to cut managers' wages to 500,000 euros annually and to submit to the fund's supervision. Eventually, many banks refrained from applying for aid.

The budget is the top priority

There was an important reason behind Angela Merkel's government's decision to choose exactly this scenario of action regardless of the risk of deepening problems on the inter-bank loan market and the ensuing inaccessibility of loans to the economy.

The top priority for the CDU/CSU/SPD coalition was to achieve a balanced budget in 2011. Thus Germany would finally close the period of breaching the Eurozone's Stability and Growth Pact and would additionally regain the capability of conducting an active fiscal policy. This goal would be unattainable if the government was forced to allocate huge funds for rescuing banks. However, facing economic slowdown, the German government concluded that if the restoration of public finances had to be sacrificed it would only be for the benefit of a stimulus programme which would offer direct benefits to enterprises, private organisations and local administration units alike. The programme was passed at the beginning of November (see Appendix) although many economists believed it was too small (total investments would reach 50 billion euros) to reverse the negative trend in the German economy.

Expectations of economic change

Berlin's decisions regarding the financial crisis should also be perceived in the broader context of the possible modification of the previous economic policy. Governments, including those led by the Social Democrats, have been carrying out liberal reforms for at least two decades. They have not always been appreciated by the general public, who are rather sceptical about the free market idea. People were especially distrustful of the capital market liberalisation, fearing that financial institutions, having adopted new rules, would no longer respect the pro-social nature of German capitalism. The present crisis has strengthened those who criticise free market rules by proving that the economy cannot do without state-imposed regulations. This problem will certainly be pivotal in the approaching campaign before the parliamentary elections in 2009. If left-wing parties win the election, German economic policy will be revised and will swing towards stronger interventionism.

Consequences for Poland

The expected economic slowdown in Germany may make life more difficult for Polish exporters, one third of whose production depends on the German market. Another challenge appears in the context of the European Union's transfer policy; Germany, the largest net contributor to the EU budget, will definitely be less willing to make concessions to beneficiary countries, such as Poland, when its own economic condition is poor.

The overall consequences may be even worse if a Germany inclined towards stronger interventionism starts forcing through ideas to block fiscal competitiveness or impose standardised rules on the EU labour market on the European Union's forum. If any of these were accepted, the competitiveness of the Polish economy would be undermined.

 
Appendix

The government's stimulus package, an outline

Guidelines: in 2009 and 2010, the package is expected to trigger a growth in investments and orders to enterprises, private institutions and local administration units to a total amount of 50 billion euros. The goal is to be achieved by creating financial incentives, worth in total 5 billion euros, the most important of which will be subsidies on interest, loan guarantees and tax breaks.

Key elements: · A programme for granting preference loans by Kreditanstalt für Wiederaufbau (KfW) bank for building overhauls aimed at reducing CO2 emissions. It will cover first of all schools, kindergartens and big housing estates. The loans in 2009-2011 will reach in total 3 billion euros, and the only cost the government will incur is the interest subsidy.

· More beneficial deductions of modernisation and maintenance service costs from taxes.

· Increasing the value of preference loans for the improvement of infrastructure in those communes which have structural problems by 3 billion euros.

· The KfW bank group will allocate 15 billion euros on making loans more available to small and medium-sized enterprises. The government will give guarantees for the loans.

· Introducing the option of biannual degressive tax depreciation of fixed assets at 30%.

· Investments in roads and railroads will be accelerated and backed with an additional 2 billion euros.

· New cars will be exempt from the car tax (Kfz-Steuer) for two years.

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