In Germany's Case, Up Means Down

Thursday, 16 September 2010 09:20 By Paul Krugman, Krugman & Co. | name.

In Germany
Unlike the US, Germany has avoided massive lay-offs.(Photo: Ronan_tlv)

Many people are pointing to the German economy's recent upturn as solid proof that austerity measures work.

But this is a foolish argument.

The austerity policies will not come into effect until 2011 — at the moment, economic policy is actually quite Keynesian.

Let's look at the German economy's actual performance to date. The graphic on this page charts the country's real gross domestic product over time.

Germany's Percentage Change in GDP.

Many commentators and economists have focused on the uptick at the end.

Since the economy has yet to recover to its pre-crisis G.D.P. level, I'm not willing to declare that an economic miracle has occurred.

Here's a simplified version of the story: Germany did not experience a housing bubble, so it was not directly affected by the bust. But its economy is very export-oriented, with a focus on durable manufactured goods.

Demand for these goods plunged in the early stages of the crisis — so much that, remarkably, Germany experienced a bigger decline in G.D.P. than most of the bubble economies — but has bounced back since summer 2009.

This has pulled the German economy back up, mainly because exports to China have done especially well.

Simply put, growth has not been great for the past two years, one quarter notwithstanding. But that is not the whole story.

Even when the economy was slumping badly, Germany avoided the mass layoffs seen in the United States, as shown by the employment-comparison graphic at right. This is partly due to the kurzarbeit program of work-sharing — a system in which the government subsidizes most of a worker's salary if his hours are cut.

Last modified on Thursday, 16 September 2010 09:20