Posted by: Dirk | May 2, 2009

Social unrest in Germany

To erase this extra two points of unemployment, the stimulus has to reach two four percent of GDP. Above we have noticed that it reaches only one percent. The output gap cannot be closed by the stimulus then. Some extra unemployment will exist, and this is the direct result of economic policy. (A hard sell in an election year, I suppose.) Let’s hope for the best.

I wrote the paragraph above in mid-January 2009 after the announcement of the German stimulus. Now the discussion about the consequences of saving banks but failing to adequately save jobs become apparent. Unions have warned of social unrest, and in reply chancellor Angela Merkel has called for muting all talk about social unrest, according to Der Spiegel. According to the government, the economy will rebound by mid-summer and show positive growth in 2010. This, as an economist, I can hardly believe.

The fact remains that the government’s economic policy response was inadequate. While banks were bailed out with the SoFFin, which was drawn up with consultation of finance experts and with no voive of unions or other parts of society, the looming rise of unemployment was not fought with adequate force. Footed with the bill now (the prospect of social unrest) it seems like wishful thinking has replaced earnest analysis of what went wrong and how the economy can be made whole again.

This reminds me of Spain, where Zapatero’s government has tried to ignore the depth of the crisis until after the elections. (To his credit, the crisis was not his fault.) Elections in Germany are in September, and until then mass unemployment might become a major problem. Never mind that pensions have been given a rise to buy off the old folks in a move that might come out of an development economics textbook (fiscal policy and the election cycle, like Miguel Braun on Latin America here [pdf]).

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