Monday, May 28, 2012

Germany's Keynesian experiment

Saturday's New York Times:
Though regularly lectured by their colleagues across the Atlantic about the need for stimulus measures to reverse the sagging fortunes of countries like Greece and Portugal, German experts believe they have a lot more experience trying to revive uncompetitive economies locked in currency regimes after nearly 23 years of dealing with the former East Germany. 

“We performed a real-life experiment,” said Hans-Werner Sinn, president of the Ifo Institute for Economic Research here. 

While unemployment in the former West Germany is 6 percent, it remains stubbornly higher, at 11.2 percent, in the east. In 2010 gross domestic product per capita was more than $40,000 in the former West and just under $30,000 in the former East, compared with 1991 figures of $27,500 in the West and about $12,000 in the East. But much of the narrowing in the gaps between east and west, experts say, is attributed to the migration of job seekers westward as much as to any significant improvement in the east. 

There have been success stories in the revival of cities like Dresden and Leipzig, and some regions, especially on the southern edge of the former East Germany, are doing better. But the eastern part of the country today is known for perfectly rebuilt town squares that sit empty for much of the day and new stretches of autobahn with few drivers on them. 

“Germany made huge investments in infrastructure in East Germany,” said Klaus Adam, a professor of economics at the University of Mannheim. “The hope that the rest would follow has not been fulfilled. You need to get the productivity figures up.”
Listening to Keynesian voices, one could be forgiven for believing that the antidote to economic stagnation lies in huge levels of government spending -- aka "stimulus" -- particularly on infrastructure. In the German experience, however, over $1 trillion was transferred from the West from 1991-2003 to be spent rebuilding the East -- much of it on providing a first-class infrastructure -- but has failed to turn the region into an economic dynamo. As the University of Mannheim professor notes, it's the underlying productivity that determines prosperity, not simply the spending of money.

Related: Previous commentary on the lessons of German reunification here

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