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Learning from Germany

BRUSSELS – Ten years ago, Germany was considered the sick man of Europe. Its economy was mired in recession, while the rest of Europe was recovering; its unemployment rate was higher than the eurozone average; it was violating the European budget rules by running excessive deficits; and its financial system was in crisis. A decade later, Germany is considered a role model for everyone else. But should it be?

In considering which lessons of Germany’s turnaround should be applied to other eurozone countries, one must distinguish between what government can do and what remains the responsibility of business, workers, and society at large.

The one area in which government clearly is in charge is public finance. In 2003, Germany ran a fiscal deficit that was close to 4% of GDP – perhaps not high by today’s standards, but higher than the EU average at the time. Today, Germany has a balanced budget, whereas most other eurozone countries are running deficits that are higher than Germany’s ten years ago.

The turnaround in Germany’s public finances was due mostly to a reduction in expenditure. In 2003, general government expenditure amounted to 48.5% of GDP, above the eurozone average. But expenditure was cut by five percentage points of GDP during the next five years. As a result, on the eve of the Great Recession that began in 2008, Germany had one of the lowest expenditure ratios in Europe.