Crisis and Macroeconomic Policies

The German type of development prior to the crisis can be characterised as export-led mercantilist. This German type of development determined the channels of transmission of the crisis to Germany. The foreign trade channel became effective, because the openness of the German economy had rapidly increased since the mid-1990s, and aggregate demand had been driven considerably by net exports. Rising current account surpluses and the respective accumulation of net foreign assets, as well as increasing integration into the world financial markets made the financial sector, and commercial banks in particular, vulnerable for the financial market channel of crisis transmission. Regarding policy reactions towards the crisis, the immediate bailout of the financial sector detained the financial crisis in Germany. Economic recovery was initially mainly driven by German exports in the course of the recovery of the world economy, and it was strongly supported by expansionary fiscal policies in 2009 and 2010. However, this German type of recovery suffers from two major drawbacks. First, to the extent that it was driven by net exports, it had to rely on the neo-mercantilist type of development that had contributed considerably to world and regional imbalances and to the severity of the crisis in Germany in the first place. Second, as a political precondition for the German stimulus packages, the so-called ‘debt brake’ was introduced into the German constitution and enforced on the Euro area member countries, which will limit the room of manoeuvre for German and Euro area fiscal policies in the future.