Thursday, September 1, 2011

WSJ: Germany's Socialist Tendencies Stimulate Economic Growth

In previous posts I have been arguing that there are structural reasons Germany has fared so well in the global recession, and that the U.S. has a lot to learn from this Old Europe political economy.  Still, I was surprised to read today's Wall Street Journal article "Germany's Resiliency Buoys Europe," whose authors praise the country's "cozy labor relations" and a "government program that compensated workers on short hours for their lost wages" for their role in fostering sustained growth over the long haul. 

Indeed, the "co-determination" system in which labor is well represented up to the board level in companies and the "kurzarbeit" program that subsides reduced hours and wages in slowdowns to prevent layoffs have, both of which looked a bit daft to many Americans ten years ago, proved a powerful inoculation in the downturn.

Another key factor has been Germany's staid, and quasi-public, internal banking system (see posts below about the Sparkasse and Landesbank structure).  This was the subject of an odd profile by Michael Lewis in last month's Vanity Fair.  He takes a strange scatological angle on the whole affair, based on reading Allan Dundes Life is Like a Chicken Coop Ladder, a book of folklore I have actually used in class before.  But if we can leave all the shit behind, Lewis offers a sharp analysis of the German banking involvement in the exotic instruments that led up to the 2008 crisis: there was no such lucrative market at home (just old fashioned collateralized lending), and so a few adventurous banks invested heavily to get the returns their American peers were reaping.  As Lewis paints it, the German bankers were seen as as gullible (at best) by the slick U.S. investment bankers who sold then CDOs and other high return instruments.  And they got hit hard, but on the domestic front credit tighten up a bit for a while, but things more or less continued as the conservative pace of before.  

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