Responses to the financial crisis in Europe were similar to that of the United States. The European Central Bank lowered interest rates and European countries implemented stimulus packages to stop the recession and grow their economies. There are two levels of responses to the crisis to address in Europe: first) the European Union's (EU) response and second) the responses of individual European countries.
In April 2010, The US Department of Labor published a United Nations report on the European Union's response to the financial crisis. The EU responded with a stimulus package funded in part by the European Social Fund (ESF) and the European Globalization Adjustment Fund (EGF). The intent of the ESF was to essentially support unemployed laborers in acquiring new skill sets and with job placement. The EGF was established to assist workers displaced directly by shifts in global trade. In addition to the funds, the EU announced that it will invest in green economy initiatives. Does this sound familiar? The EU's stimulus has produced lackluster results as the report states, "The EU is recovering from recession, but the recovery is proving slow and fragile…unemployment is only likely to begin declining in the course of 2011." Does this also sound familiar?
In both the US and Europe central government stimuli have failed to create the speedy recovery that leftist leaders promised. Many in the US understand and many are realizing in Europe that Keynesian theory doesn't work when it's applied to real problems. Thus, it is pertinent to note that the country which took the most conservative, non-Keynesian path to recovery has recovered far better than the others.
EU member countries responded with stimuli that one would expect of European countries, save Germany. Although Germany also responded with a stimulus package, it differed from typical European stimuli.
Germany and France are perhaps the two most influential countries in the EU. They have a contentious history that has been subdued over the past several decades, but tension remains and their respective fiscal policies differ. Although France has shifted to the right over the past decade, it is still well on the left by US standards and it supported a Keynesian response. Germany has also shifted to the right and responded to the crisis with relative fiscal restraint. A May 4, 2010 New York Times article illustrated some of the differences between Germany and France. One striking difference was that Germany managed to keep its deficit to 3.3 percent of gross domestic product (GDP) while France had a 7.5 percent deficit.
An August 13, 2010 article in the New York Times provided an excellent overview of Germany's moderate response to the financial crisis and subsequent strong economic health relative to other EU members and the US. The EU—particularly countries on the verge of economic collapse such as Greece, Spain, Portugal and Ireland -- are relying heavily on Germany to rebound from the crisis. Germany, however, has been reluctant to give the EU everything it requests because Chancellor Angela Merkel warned EU members that their economic recovery policies wouldn't work. Germany resisted bailing out Greece until the bitter end because Greece maintained its Democratic-Socialist status quo. Eventually, Germany supported the bailout to ensure the stability of the Euro.
Germany's stimulus package differed from other EU member stimuli in that Germany worked with corporations and small businesses to keep unemployment down. Germany's stimulus package injected money into corporations and small businesses to help prevent layoffs. Other EU members and the US provided monetary assistance to laborers after they were laid off, and they often demonized corporations. As the EU and the US are dealing with now, providing unemployment benefits after one was laid off generally extends the time one is unemployed as unemployment benefits decrease the incentive to search for jobs.
Germany also took difficult short-term measures in the years prior to the financial crisis that produced long-term stabilizing benefits. The more Conservative governments under Chancellor Merkel and former Chancellor Gerhard Schröder worked with unions to ease rules for hiring and firing and keep wages under control so Germany could increase exports of products such as automobiles. Germany also trimmed unemployment benefits.
Germany's reforms prior to and fiscal restraint during the financial crisis led to a 2.2 percent quarter-to-quarter GDP growth rate whereas France and Spain grew at a paltry 0.6 percent and 0.2 percent, respectively, according to the August 2010 New York Times article. Similar growth disparities persist today as Germany is enjoying its strongest economic growth since reunification while France and other EU members are struggling.
How should US fiscal policy react considering Germany's success?
The US should follow Merkel and other EU leaders' calls for fiscal restraint. The Republican-controlled House of Representatives must utilize the momentum from the November 2, 2010 elections to curb federal spending. Republicans must field candidates who can foster a national discourse that will educate people about the perils of deficit spending, big government, and over-regulating and taxing the private sector.
Democrats in the US could learn from Germany's reforms prior to the financial crisis and response to the crisis.
