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Germany
Yale Model Government Europe || November 26-29
The German Cabinet
“Spectres of the Financial Crisis”
Chaired by Lily Engbith
[email protected]
Germany and the Financial Crisis
respect and power under the empire.
Unified Germany quickly industrialized. By the turn
of the century, only a fifth of its population worked as
For much of its history, Germany has not been united. peasants. Germany’s economic output rivaled that of
Collections of disparate tribes arrived, lived in and left Great Britain. In 1888, Wilhelm II took power. He began
the land we currently know as Germany. The Germanic to expand Germany’s navy and search for colonies. He
tribes saw a brief stint of unity around AD 800 under reversed Bismarck’s trend of seeking European alliances
Frankish Emperor Charlemagne, although his empire and instead emphasized imperialism. Meanwhile, other
political parties, most notably the Social Democratic
didn’t survive longer than a few generations.
Party, emerged as a strong voice of opposition to the
In AD 843, Charlemagne’s empire was divided. Its Kaiser’s rule.
eastern portion became the Holy Roman Empire,
which existed until the 18th century. Only in name, A tragic phase of German history began. The Great War
however, did the Holy Roman Empire exist following devastated Europe. Following its defeat in this bloody
the death of Emperor Frederick II in AD 1250; after conflict, Germany was forced to accept responsibility
his death, the empire’s central authority collapsed and for the war, and pay reparations in land, finances
it slid into a collection of independent princely states. (equivalent of $440 billion) and a diminished military;
The princely states often fought. The Thirty Years’ the treaty establishing these reparations was signed in
War, in part a result of religious diversity in Germany 1919 at the same Palace of Versailles where Bismarck
following the Protestant Reformation, stands out as created the German Empire. Germans rebelled. Kaiser
a particularly devastating war. Lasting from 1618 to Wilhelm II and all German princes in power abdicated,
creating the Weimar Republic.
1648, it eliminated 30% of the German people.
A Brief Overview of German History
From 1740, the Kingdom of Prussia and the Austrian
Habsburg Empire—the largest of the hundreds of
principalities that comprised the Holy Roman Empire—
fought for dominance. After a brief stint of Napoleonic
rule which left a Germany with 40 principalities instead
of hundreds, Prussia and the Habsburg together
defeated him in 1813, but soon returned to their
dualistic rivalry. Following 1814’s Congress of Vienna,
pressures for pan-German unification grew, until
the Revolutions of 1848 occurred and Prussia’s King
Friedrich IV was offered the title of Emperor, which he
rejected.
Friedrich IV’s successor, King Wilhelm I, appointed
Otto von Bismarck as the Minister President of Prussia
in 1862. Bismarck defeated Denmark, and then in 1866
Austria, creating the North German Confederation and
establishing the German Parliament, the Reichstag.
Bismarck then defeated France in war; this created
at Versailles in 1871 the unified German Empire,
which included all parts of Germany except Austria.
Wilhelm I became Kaiser (Emperor); Bismarck became
Chancellor of Germany. The German Empire provided
universal male suffrage to elect members of to the
Reichstag, but supreme power rested with the Kaiser
and his ministers. The military enjoyed tremendous
The reparations, Great Depression of 1929 and a series
of unstable governments crippled this new federal
republic. Meanwhile, a right- wing stab-in-the-back
legend, which argued that Germany lost the Great
War because of those who wanted to overthrow the
government to create the Weimar Republic, further
weakened this government. In the 1932 elections, the
Nazi Party led by Adolf Hitler, gained the largest share
of the popular vote and Hitler became Chancellor. He
soon became a dictator—the Fuhrer—and established
the Third Reich. He promised to reverse the political
and economic failures of the German Empire and the
Weimar Republic.
Hitler drove the Axis Powers into the Second World War
and led the Holocaust, ending in disaster for Germany
and Europe. Following the end of the War, Germany
and Berlin were divided into East and West. The West
unified in 1949 to become the Federal Republic of
Germany, and grew economically. The East, in the
meantime, turned into a Soviet-style closely controlled
state, with the support of the Stasi, its secret service.
In 1989, the Berlin Wall fell and soon East and West
united to yield the Germany that exists today.
Today, Germany has the fourth largest economy in the
world, following the United States, China and Japan,
and ranks fifth on the Human Development Index. It is
the largest net exporter in the world. Less quantifiable
are Germany’s impact on the world through its actions,
culture and intellectual exports. Many argue that it
leads the European Union.
must have inflation rates no higher than 1.5 percentage
points greater than the average of the three EU member
states with the lowest inflation rates.
Government finance: Yearly government budget
deficits must not exceed 3% of the GDP of the previous
fiscal year. Additionally, gross government debt must
not be greater than 60% of the member states’ GDP.
The Cabinet of Germany, or the Bundeskabinett, is
Exchange rate: Member states must have joined
the executive branch of the government of the Federal the exchange-rate mechanism under the European
Republic of Germany, as specified by Chapter 6 of the Monetary System for at least two consecutive years.
Basic Law for the Federal Republic of Germany, or Long-term interest rates: Countries wishing to adopt
the German constitution. The Cabinet consists of 15 the euro must have long-term interest rates no higher
Federal Ministers, and is headed by a Federal Chancellor than 2 percentage points greater than the average of the
(Chapter 6, Article 62).
three EU member states with the lowest inflation rates.
The Chancellor is the Head of State, analogous to
the position of Prime Minister in other parliamentary
democracies. The modern role of the Chancellor was
set by the constitution when Germany became a Federal
Republic in 1949. Chancellors are first nominated by
the President, a figurehead with ceremonial duties, then
confirmed by the Federal Parliament, or the Bundestag,
and finally approved by the President (Chapter 6, Article
63). Ministers are first nominated by the Chancellor,
and then approved by the President (Chapter 6,
Article 64). The Ministers work independently within
boundaries set by the Chancellor to carry out the
political goals of the Cabinet, which meets weekly.
The German Chancellor’s directives are legally binding
(Chapter 6, Article 65).
At the time of writing, Angela Merkel serves as the
eighth Chancellor of Germany. Her tenure as Chancellor
has raised questions of immigration, pensions and
healthcare management, which we will together discuss
in the German Cabinet.
In 1992, only eleven countries (consisting of Germany,
Spain, Italy, France, Austria, Belgium, Finland, Ireland,
Luxembourg, Netherlands, and Portugal) met the
Maastricht criteria, together forming the European
Monetary Union. Most notably, Greece was not one of
them.
After years of anxious planning, the euro was adopted
as a common currency in 1999. Leaders declared the
event a diplomatic and economic success—never had
so many states been unified under a single monetary
system. (Note that, unbeknownst to most, similar
attempts of unifying European currencies had been
made on a smaller scale in the past. All had failed within
a decade). The economic unification of Europe would
serve two purposes:
1) It would strengthen Europe against the United
States. European economists had high hopes for the
euro in overtaking the American dollar as the default
currency, allowing Europe to reap massive benefits as
more and more countries began to invest in the euro.
History of the Crisis
2) It would promote trade within Europe by removing
The Birth of the Euro
pesky exchange rates. As Europeans seamlessly burned
their old currencies and adopted the euro, it seemed
On February 7, 1992, European leaders signed the that, for the time being, these two goals might actually
Maastricht Treaty, effectively establishing the European reach their fruition.
Union and, most consequently, a common currency
known as the euro. Unknown to the general public,
The German Economy
the terms of the treaty limited adoption of the euro to
member states that met the Maastricht criteria (also Before this topic guide discusses the recent events
known as the euro convergence criteria). A summary of of the crisis, it is important to touch on the history
the criteria is as follows:
of Germany, and its role in the creation of the euro.
Inflation rate: Countries wishing to adopt the euro Following World War II, Germany was a country
engulfed in shame. The rise of Hitler, the division of
Germany, and the remnants of the Holocaust had
effectively killed German nationalism. Unlike any state
that came before it, German citizens identified more
with the European continent than their own nation.
During the later half of the 20th century, however, the
German economy began to rebuild itself in a unique
way. The Bundesbank adopted conservative fiscal
policy that avoided debt and long-term inflation while
other countries became engaged with unsustainable
monetary policy that spurred the short-term economy.
While Europeans and American economies saw the
rapid emergence of hedge funds and investment banks,
German socialism focused on real production through
science and engineering export-based industries.
It was only through sentiments of post-war shame that
Germans came to agree to the terms of the Maastricht
treaty in the first place. With a thriving deutschmark,
the country didn’t stand to benefit from the euro as
much as other countries in the Eurozone. In fact, it
stood to lose: At 21 percent, Germany is the biggest
contributor to the EU budget, but only receives 11.4
percent of the EU expenditure. Thus, in Eurozone cost
(i.e. a bailout), Germany pays the bills.
As the German economy began to grow and a new
generation of Germans came to power—best exemplified
by German Chancellor Angela Merkel, who was born
nine years after World War II—German nationalism
grew as well. The shame of the past was forgotten.
With reinvigorated nationalism, the lopsided setup has
been a source of resentment amongst Germans, who—
after years of disciplined austerity—are unwilling to
pick up the tab for the less fiscally responsible Eurozone
countries.
Current Situation
In the mid-2000s, the euro still looked promising.
Economies were expanding and production was
growing—or so it seemed. In retrospect, we understand
that this period of economic prosperity masked many
underlying factors that would trigger the upcoming
crisis. In the midst of the housing bubble, many
countries were incurring exorbitant levels of debt and
building up a massive trade deficit. For example, Spain’s
GDP during the 2000s was growing at unprecedented
rate; however, an IMF report shows that the this GDP
per capita growth was actually a result of an increasing
occupation rate, when women began entering the labor
force instead of solely engaging in domestic labor.
Taking this into account, Spain’s GDP was only growing
at 0.2 percent per year—as opposed to 0.8 percent in
Germany and 1.3 percent in France—and was, in fact,
falling behind its EU neighbors. Ireland also reflected a
time of false prosperity. From 1994 to 1997, its Finance
Minister Ruairi Quinn decreased corporate tax rates in
Ireland to a mere 12.5—less than half of the standard
rate charged in the EU. As a result, businesses flocked
to Dublin, dramatically increasing its GDP. However,
this gilded the fact that Ireland’s gross governmental
deficit was doubling to more than 700 percent of GDP
by 2008. Thus, factors creating false optimism in the
Eurozone countries cast a veneer over the underlying
issues that would cause the inevitable crisis.
In 2007, a hedge fund managed by the French bank
BNP Paribas was the first to experience the credit
crunch. Then, in 2008, Lehman Brothers in the United
States failed. The credit crunch had hit the global
economy.
From this point on, the events of the crisis can be
summarized in two points: 1) The credit crunch began
because of debt. From individual credit card debt to
mortgages to corporate to sovereign debt, it became
clear that too much debt had been incurred in attempts
to stimulate the economy. This made the global
economy appear to be moving faster than it really was
and, at some point, some party was going to lose a lot
of money. 2) The international community has tried
to fix the crisis with even more debt. The questions
that remain are: How much debt are governments
and international lending agencies—most commonly
known as the troika, The International Monetary Fund
(IMF), the European Central Bank (ECB), and the
European Union—willing to incur in order to save the
euro? And what new terms must be demanded of Greece
and the rest of Europe in exchange for these bailouts?
Germany is one of the world’s largest and most stable
economies, bringing in a trade surplus of over $285
billion dollars, however, it is still vulnerable to changes
in the global economy and is currently facing economic
issues that could become more severe if not addressed.
Though the immediate threats of the global financial
crisis have diminished in the last seven years, the
economy of Europe is still at risk and needs to make
structural changes in order to create a stable future for
both national economies and the Eurozone as a whole.
Though Germany has one of the strongest economies 2001
in the Eurozone it is not immune to the economic · Greece joins the euro.
challenges that continue to plague Europe, especially as
manufacturers have taken a hit in recent months.
2002
· On 1 January, euro notes and coins are introduced.
Germany, along with other countries, is taking a hit
as the world experiences the lowest rate of economic 2008
growth since the financial crisis. The German economy · Malta and Cyprus join the euro, following Slovenia
relies heavily on exports and a decrease in global markets the previous year.
has consequently weakened Germany’s economy. In ·
In December, EU leaders agree on a 200bn-euro
August, manufacturing orders fell 1.8% despite a stimulus plan to help boost European growth following
prediction that they would grow by 0.3%. This drop the global financial crisis.
was largely fueled by a decrease in orders from outside
the Eurozone, pointing to the role of global financial 2009
instability in Germany’s economic trouble. In the same · Slovakia joins the euro.
month, it was reported that exports had fallen by 5.2%, ·
Estonia, Denmark, Latvia and Lithuania join the
the steepest monthly decline seen since the financial Exchange Rate Mechanism to bring their currencies and
crisis. In October, Deutsche Bank AG reported that it monetary policy into line with the euro in preparation
expects to lose more than six billion dollars in the third for joining.
quarter. This record-breaking loss came as a surprise to ·
In April, the EU orders France, Spain, the Irish
analysts who had expected that the bank would make a Republic and Greece to reduce their budget deficits one billion dollar profit.
the difference between their spending and tax receipts.
· In October, amid much anger towards the previous
As a result of this financial uncertainty, German government over corruption and spending, George
stocks have entered a period of heightened volatility. Papandreou’s Socialists win an emphatic snap general
The DAX, an index that monitors the thirty largest election victory in Greece.
companies in Germany, dropped 30% from April. This ·
In November, concerns about some EU member
negative turn is particularly surprising as it follows a states’ debts start to grow following the Dubai sovereign
period from January to April in which German stocks debt crisis.
rose 23% and the DAX reached record highs.
·
In December, Greece admits that its debts have
reached 300bn euros - the highest in modern history.
Many recent events, and ongoing situations have Greece is burdened with debt amounting to 113%
contributed to the current state of Germany’s economy of GDP - nearly double the Eurozone limit of 60%.
and pose a risk to the continued stability of the nation. Ratings agencies start to downgrade Greek bank and
The following section summarizes the events of the government debt. Mr. Papandreou insists that his
financial crisis and then summarizes some of the key country is “not about to default on its debts”.
issues that have recently begun to complicate Europe,
and specifically Germany’s recovery.
2010
·
In January, an EU report condemns “severe
Timeline of The Financial Crisis
irregularities” in Greek accounting procedures. Greece’s
budget deficit in 2009 is revised upwards to 12.7%,
In order to avoid a normative narrative of the crisis, from 3.7%, and more than four times the maximum
we will use the following timeline, taken from BBC allowed by EU rules.
news[14], to outline its major events:
·
The European Central Bank dismisses speculation
that Greece will have to leave the EU.
·
In February, Greece unveils a series of austerity
1999
measures aimed at curbing the deficit.
·
On 1 January, the currency officially comes into · Concern starts to build about all the heavily indebted
existence.
countries in Europe - Portugal, Ireland, Greece and
Spain.
· On 11 February, the EU promises to act over Greek
debts and tells Greece to make further spending cuts.
The austerity plans spark strikes and riots in the streets.
·
In March, Mr. Papandreou continues to insist that
no bailout is needed. The euro continues to fall against
the dollar and the pound.
·
The Eurozone and IMF agree a safety net of 22bn
euros to help Greece - but no loans.
· In April, following worsening financial markets and
more protests, Eurozone countries agree to provide up
to 30bn euros in emergency loans.
·
Greek borrowing costs reach yet further record
highs. The EU announces that the Greek deficit is
even worse than thought after reviewing its accounts 13.6% of GDP, not 12.7%.
·
Finally, on 2 May, the Eurozone members and the
IMF agree a 110bn-euro bailout package to rescue
Greece.
·
The euro continues to fall and other EU member
state debt starts to come under scrutiny, starting with
the Republic of Ireland.
·
In November, the EU and IMF agree to a bailout
package to the Irish Republic totaling 85bn euros. The
Irish Republic soon passes the toughest budget in the
country’s history.
·
Amid growing speculation, the EU denies that
Portugal will be next for a bailout.
2011
·
On 1 January, Estonia joins the euro, taking the
number of countries with the single currency to 17.
·
In February, Eurozone finance ministers set up a
permanent bailout fund, called the European Stability
Mechanism, worth about 500bn euros.
·
In April, Portugal admits it cannot deal with its
finances itself and asks the EU for help.
·
In May, the Eurozone and the IMF approved a
78bn-euro bailout for Portugal.
· In June, Eurozone ministers say Greece must impose
new austerity measures before it gets the next tranche
of its loan, without which the country will probably
default on its enormous debts.
· Talk abounds that Greece will be forced to become
the first country to leave the Eurozone.
· In July, the Greek parliament votes in favor of a fresh
round of drastic austerity measures, the EU approves
the latest tranche of the Greek loan, worth 12bn euros.
· A second bailout for Greece is agreed. The Eurozone
agrees a comprehensive 109bn-euro ($155bn;
£96.3bn) package designed to resolve the Greek
crisis and prevent contagion among other European
economies.
·
In August, European Commission President Jose
Manuel Barroso warns that the sovereign debt crisis is
spreading beyond the periphery of the Eurozone.
·
The yields on government bonds from Spain and
Italy rise sharply - and Germany’s falls to record lows as investors demand huge returns to borrow.
·
On 7 August, the European Central Bank says it
will buy Italian and Spanish government bonds to try
to bring down their borrowing costs, as concern grows
that the debt crisis may spread to the larger economies
of Italy and Spain.
· The G7 group of countries also says it is “determined
to react in a coordinated manner,” in an attempt to
reassure investors in the wake of massive falls on global
stock markets.
·
During September, Spain passes a constitutional
amendment to add in a “golden rule,” keeping future
budget deficits to a strict limit.
·
Italy passes a 50bn-euro austerity budget to
balance the budget by 2013 after weeks of haggling
in parliament. There is fierce public opposition to the
measures - and several key measures were watered
down.
· The European Commission predicts that economic
growth in the Eurozone will come “to a virtual
standstill” in the second half of 2011, growing just
0.2% and putting more pressure on countries’ budgets.
·
Greek Finance Minister Evangelos Venizelos says
his country has been “blackmailed and humiliated” and
a “scapegoat” for the EU’s incompetence.
·
On 19 September, Greece holds “productive and
substantive” talks with its international supporters, the
European Central Bank, European Commission and
IMF.
·
The following day, Italy has its debt rating cut by
Standard & Poor’s, to A from A+. Italy says the move
was influenced by “political considerations”.
· That same day, in its World Economic Outlook, the
IMF cuts growth forecasts and warns that countries are
entering a ‘dangerous new phase’.
·
The gloomy mood continues on 22 September,
with data showing that growth in the eurozone’s private
sector shrank for the first time in two years.
· The sense of urgency is heightened on 23 September,
when IMF head Christine Lagarde urges countries to
“act now and act together” to keep the path to economic
recovery on track.
· On the same day, UK Prime Minister David Cameron
calls for swift action on the debt crisis.
·
The next day US Treasury Secretary Timothy
Geithner tells Europe to create a “firewall” around its
problems to stop the crisis spreading.
· A meeting of finance ministers and central bankers
in Washington on 24 September leads to more calls for
urgent action, but a lack of concrete proposals sparks
further falls in share markets.
·
After days of intense speculation that Greece will
fail to meet its budget cut targets, there are signs of a
Eurozone rescue plan emerging to write down Greek
debt and increase the size of the bloc’s bailout fund.
·
But when, on 28 September, European Union
head Jose Manuel Barroso warns that the EU “faces its
greatest challenge”, there is a widespread view that the
latest efforts to thrash out a deal have failed.
· The sense that events are spinning out of control are
underlined by Foreign Secretary William Hague, who
calls the euro a “burning building with no exits”.
·
On 4 October, Eurozone finance ministers delay a
decision on giving Greece its next installment of bailout
cash, sending European shares down sharply.
·
Speculation intensifies that European leaders are
working on plans to recapitalize the banking system.
· On 6 October the Bank of England injects a further
£75bn into the UK economy through quantitative
easing, while the European Central Bank unveils
emergency loans measures to help banks.
· Financial markets are bolstered by news on 8 October
that the leaders of Germany and France have reached
an accord on measures to help resolve the debt crisis.
But without publication of any details, nervousness
remains.
· Relief in the markets that the authorities will help the
banking sector grows on 10 October, when struggling
Franco-Belgian bank Dexia receives a huge bailout.
·
On 10 October, an EU summit on the debt crisis
is delayed by a week so that ministers can finalize plans
that would allow Greece its next bailout money and
bolster debt-laden banks.
· On 14 October G20 finance ministers meet in Paris
to continue efforts to find a solution to the debt crisis in
the Eurozone.
· On 21 October Eurozone finance ministers approve
the next, 8bn euro ($11bn; £7bn), tranche of Greek
bailout loans, potentially saving the country from
default.
·
On 26 October European leaders reach a “threepronged” agreement described as vital to solve the
region’s huge debt crisis.
·
After marathon talks in Brussels, the leaders say
some private banks holding Greek debt have accepted
a loss of 50%. Banks must also raise more capital to
protect them against losses resulting from any future
government defaults.
·
On 9 December, after another round of talks in
Brussels going through much of the night, French
President Nicolas Sarkozy announces that Eurozone
countries and others will press ahead with an
intergovernmental treaty enshrining new budgetary
rules to tackle the crisis.
·
Attempts to get all 27 EU countries to agree to
treaty changes fail due to the objections of the UK and
Hungary. The new accord is to be agreed by March
2012, Mr. Sarkozy says.
2012
·
On 13 January, credit rating agency Standard &
Poor’s downgrades France and eight other Eurozone
countries, blaming the failure of Eurozone leaders to
deal with the debt crisis.
· Three days later, the agency also downgrades the EU
bailout fund, the European Financial Stability Facility.
·
Also on 13 January, talks between Greece and its
private creditors over a debt write-off deal stall. The
deal is necessary if Greece is to receive the bailout funds
it needs to repay billions of euros of debt in March. The
talks resume on 18 January.
·
The “fiscal pact” agreed by the EU in December is
signed at the end of January. The UK abstains, as does
the Czech Republic, but the other 25 members sign up
to new rules that make it harder to break budget deficits.
· Weeks of negotiations ensue between Greece, private
lenders and the “troika” of the European Commission,
the European Central Bank and the IMF, as Greece tries
to get a debt write-off and make even more spending
cuts to get its second bailout.
·
On 10 February, Greece’s coalition government
finally agrees to pass the demands made of it by
international lenders. This leads to a new round of
protests.
·
But the Eurozone effectively casts doubt on the
Greeks’ figures, saying Athens must find a further
325m euros in budget cuts to get the aid.
·
On 12 February, Greece passes the unpopular
austerity bill in parliament - two months before a
general election.
· Coalition parties expelled more than 40 deputies for
failing to back the bill.
·
On February 22, a Markit survey reports that
the Eurozone service sector has shrunk unexpectedly,
raising fears of a recession.
·
The next day the European Commission predicts
that the Eurozone economy will contract by 0.3% in
2012.
·
March begins with the news that the Eurozone
jobless rate has hit a new high.
·
However, the economic news takes a turn for the
better just days later with official figures showing that
the Eurozone’s retail sales increased unexpectedly in
January by 0.3%, and the OECD reports its view that
the region is showing tentative signs of recovery.
· On 13 March, the Eurozone finally backs a second
Greek bailout of 130bn euros. IMF backing was also
required and was later given.
·
The month ends with a call from the OECD for
the Eurozone rescue fund to be doubled to 1tn euros.
The German chancellor, Angela Merkel says she would
favor only a temporary boost to its firepower.
·
On 12 April, Italian borrowing costs increase in
a sign of fresh concerns among investors about the
country’s ability to reduce its high levels of debt.
·
In an auction of three-year bonds, Italy pays an
interest rate of 3.89%, up from 2.76% in a sale of
similar bonds the previous month.
· Attention shifted to Spain the next day, with shares
hit by worries over the country’s economy and the
Spanish government’s 10-year cost of borrowing rose
back towards 6% - a sign of fear over the country’s
creditworthiness.
· On 18 April, the Italian government cut its growth
forecast for the economy in 2012. It was previously
predicting that the economy would shrink by 0.4%, but
is now forecasting a 1.2% contraction.
·
On 19 April, there was some relief for Spain after
it saw strong demand at an auction of its debt, even
though some borrowing costs rose.
· The 10-year bonds were sold at a yield of 5.743%,
up from 5.403% when the bonds were last sold in
February.
·
On 6 May, a majority of Greeks vote in a general
election for parties that reject the country’s bailout
agreement with the EU and International Monetary
Fund.
· On 16 May, Greece announces new elections for 17
June after attempts to form a coalition government fail.
·
On 25 May, Spain’s fourth largest bank, Bankia,
says it has asked the government for a bailout worth
19bn euros ($24bn; £15bn).
· On 9 June, after emergency talks Spain’s Economy
Minister Luis de Guindos says that the country will
shortly make a formal request for up to 100bn euros
($125bn; £80bn) in loans from Eurozone funds to try
to help shore up its banks.
·
On 12 June, optimism over the bank bailout
evaporates as Spain’s borrowing costs rise to the highest
rate since the launch of the euro in 1999.
· On 15 June, former UK chancellor of the exchequer
Gordon Brown underlined fears of contagion with a
warning that France and Italy may need a bailout.
·
On 17 June, Greeks went to the polls, with the
pro-austerity party New Democracy getting most
votes., allaying fears the country was about to leave the
eurozone.
·
On 30 June, Greece became the first developed
country to default on a loan from the IMF
·
On July ___, Greece calls a referendum to the
terms of an agreement offered by Eurogroup. 61%
of Greek citizens vote “no,” thus supporting the
Syriza government platform. Finance Minister Yanis
Varoufakis resigns the next day.
· On July 12, Greek Prime Minister Tsipras proposes
a new three-year bailout plan, with additional austerity
measures, to the Greek Parliament. Greek citizens riot
once again in Syntagma Square at Tsipras’ disregard of
the referendum result.
Complicating Factors
Volkswagen Emissions Scandal
The revelation that Volkswagen had designed
cars to cheat on emissions tests shocked the global
community. The effects for the company may be
disastrous but the company’s scandal may have broader
effects on the German economy because of the large role
that the automotive industry plays. The company was
able to cheat the test by designing the cars to recognize
when they were being placed under test conditions and
to employ emissions reducing measures only when
under those conditions. When the cars were later roadtested by an independent agency they were found to
produce emissions at forty times the legal limit for
certain fumes. The discrepancy between road test data
and the controlled test format of typical emissions tests
was found it was reported to the EPA which found that
Volkswagen had intentionally manipulated the cars to
cheat the tests. Volkswagen has now recalled all affected
cars in the United States and actions are also expected
elsewhere. Volkswagen has also budgeted more than six
billion euros for fines, compensation and fixes to the
problem. However, some speculate that costs will be far
higher and that the company may be devastated by the
scandal. More importantly, the scandal may weaken the
image of quality associated with German automotive
manufacturing. There is also a risk that other German
car manufacturers are involved in similar practices,
which could have far reaching implications for the
German auto industry.
To understand why the actions of one company
could have such far-reaching effects for the economy
of Germany as a whole, it is important to consider the
position that Volkswagen holds in the market and in
Germany’s overall economic structure. The automotive
industry in Germany is huge, accounting for 2.7% of
GDP and approximately 20% of Germany’s exports
consist of vehicles and automotive parts. In 2014 alone,
domestic auto sales accounted for 368 billion euros
most of which is accounted for by Volkswagen’s revenue
(202 billion euros). Additionally, Volkswagen employs
more than a third of Germany’s automotive workforce,
which is made up of almost 800,000 people, not
even accounting for those who work for Volkswagen’s
suppliers. As a result, even if the scandal is limited to
Volkswagen, a serious downturn in the company may
result in job losses and an overall reduction in Germany’s
exports. Since a large portion of the German economy
is dependent upon exports this loss is not insignificant.
Additionally, were Volkswagen to collapse it would
leave hundreds of thousands of Germans out of work
in what is still a recovery economy. Compounded with
other social issues such as the influx in refugees and the
continued frustration of the Eurozone debt crisis, it is
likely that an increase in unemployment would have
serious negative consequences for Germany’s stability.
Others worry that Volkswagen’s actions could lead
to a general distrust of Germany’s products leading
to further cuts in exports for the country as a whole,
even in industries unrelated to automotive production.
Others caution that these claims are exaggerated and
that consumers are not connecting Volkswagen’s actions
to Germany as a whole.
country. The current refugee crisis will have varied long
and short-term effects on the economy and society at
large. In the short-term, the influx of refugees has proven
to be a strain on the German economy. The government
has budgeted six billion euros for the refugee situation
but some estimate that the cost could be far greater.
Many worry that refugees will become eligible for social
services before they begin contributing to the economy,
putting a strain on an already weakened economy.
In the long-term however, Germany may ultimately
benefit from the addition of a mostly young, workingage population. Germany has a lower birth rate than
is necessary to sustain its economy as the workforce
ages and the number of retirees increases. Immigration
is necessary to fill the gap, especially in positions for
skilled workers. It is unclear how exactly the current
refugee population will fit into Germany’s overall
economic development. Economists speculate that the
ultimate outcome will depend on the skills that these
migrants are able to bring and the positions that they
are able to fill within the workplace. Many worry that
the current pool of refugees is relatively unskilled or
otherwise ill-equipped to enter the German workforce
and it will take a great deal of effort on Germany’s part
to ensure that a place is found for them.
Chinese Slowdown
A reduction in the rate at which the Chinese economy
is growing has had economic implications for countries
around the world. Though Germany’s relative stability
has helped provide resilience against the Chinese
market slowdown the effects have still been felt due to
the strong relationship between China and Germany
as trading partners. Though exports may not collapse
altogether, a long-term Chinese slowdown could
have marked effects on Germany’s exporters. German
manufacturing has continued to slow in October,
showing the lowest rates of growth in five months. In
addition, the purchasing manager’s index which shows
the health of the manufacturing markets in Germany
fell from 52.3 to 51.6 in September, which may lead
to a reduction in output from companies that have
become dependent on Chinese markets in recent years.
The slowdown has also led to a reduction in the number
Refugee Crisis
of manufacturing jobs available, problematic at a time
when Germany’s population is rapidly expanding to
As refugees from the Middle East pour into Germany, accommodate refugee populations. Other economies
it has become clear that Germany will definitely be in the Eurozone have also been impacted by China’s
impacted by the influx of foreign nationals into the slowdown, particularly those whose economies are less
stable than Germany’s. The instability created by this
situation has led the European Central Bank to suggest
that another stimulus could be used to strengthen the
economies of suffering European countries. However,
the situation is further complicated by tensions over
the refugee crisis in Europe and the continued issues
surrounding the Greek debt crisis.
Questions to Consider
(1) Consider Germany’s role in the reaction to the
Eurozone Debt Crisis. What has been the impact of
Germany’s actions on domestic conditions? What has
been the impact on other countries and on Germany’s
standing in the Eurozone?
(2) Does the Volkswagen scandal pose a threat to
German manufacturing or the automobile industry
as a whole? In what ways might it have longer lasting
effects?
(3) What steps, if any, should Germany take to
minimize the effects that the Volkswagen scandal has
on the health of Germany’s automobile industry and its
economy as a whole?
(4) What do you think the long-term impacts of the
large increase in the number of refugees will be in
Germany?
(5) What steps can be taken to integrate the refugees
into Germany’s economy? What should be done in the
short-term to ensure stability? What can be done to
prepare for long-term stability and economic success
for refugees?
(6) What are the current threats to German exports
and manufacturing? How can these issues be resolved?
(7) How can Germany maintain manufacturing jobs
and exports in the face of economic slowdowns in other
countries?