What are economic policies of Germany to recover economy?

What are economic policies of Germany to recover economy?

There are two types of economic policies that a government can implement to influence an economy. They are supply side economic policies and demand side economic policies. Among them, to minimize the bad effect of the COVID 19 pandemic on the economy, Federal government of Germany has majorly implemented demand side economic policies. We can identify two major types of demand side economic policies and they are fiscal policy and monetary policy. Let’s consider about them.

Fiscal policy

Fiscal policy means influence an economy by changing the government expenditure level and tax income. To read more about the fiscal policy, kindly click here

There are two major types of fiscal policies. They are expansionary fiscal policy and contractionary fiscal policy. When an economy is in a recession, government applies the expansionary fiscal policy with the intention of growing the economy and increasing employment. Expansionary fiscal policy means increasing government expenditure and decreasing the tax. So, federal government of Germany has implemented three major economic stimulus packages by applying expansionary fiscal policy.

They are €156 billion (4.7 percent of GDP) in March 2020, €130 billion (3.9 percent of GDP) in June 2020, and €60 billion (1.7 percent of GDP) in March 2021. In addition to these economic stimulus packages, many local governments have introduced economic stimulus packages that equals to €141 billion of direct support and roughly €70bn in state-level loan guarantees (IMF, 2021).

Federal government and local governments of Germany has spent their money and cut the taxes on the following areas.

1. Spent money to buy hospital equipment, medicines and to construct the hospitals.

The government has spent considerable amount of money to vaccine the people.  Up to now, more than 60 percent of the population has vaccinated. This is really helpful to control the COVID-19 pandemic and stimulate the future economic growth of the country.

2. SMEs, self-employed employees, companies, and freelancers were given financial subsidies.

KfW programs provided subsidies for self-employed employees, companies, freelancers who need financial assistance. Under this programme, offered loans for the people specially offer instant loans. Also, provided money for the small businesses and startups that need more capital for their operations. As examples we can say, in the spring of 2020, small and medium sized enterprises and self-employed people were given funds as grants to remove the bad effect of the COVID 19 pandemic. In addition to that startups were offered €2bn of venture capital funding (IMF, 2021)

3. Financial benefits to some of the special sectors that are seriously beaten by the COVID 19 pandemic.

As we know, some of the industries such as restaurants, tourism and hospitality and so on have lost significant amount of businesses as a result of the restrictions for people gathering and travel restrictions. As examples we can say hospitality, tourism, and entertainment related businesses and so on. In Germany, these kinds of businesses were given financial support which valued €25bn from June to August under the programme of “bridging help. For the event management companies, restaurants and hotels that have lost their income more than 70 percent than when compared with the previous year were given money to reimburse their fixed cost up to 80 percent (BBC News, 2020).

4. Actions to stimulate the private consumption

Households who are in financial disabilities are given financial support to fulfill their household requirements. Government has provided short time allowances, short time loans for the households to stimulate the private consumption.  The volume of support measures that have been paid out by the end of August 2021 stands at over €120 billion or 3.5% of GDP with the majority of funds being used for direct transfers and guaranteed loans (Buch and Regensburg, 2021). Government has provided a one-time transfer of €300 for each child as a financial relief to their parents. Also, consumers who wish to buy an electrical vehicle were given a rebate at €6,000.to encourage the using of cleaning vehicles (BBC News, 2020).

But, some components in the economic stimulus packages were insufficient to boost the economy to stimulating demand side. As examples we can say, government provided temporary VAT cut from 19 percent to 16 percent which have a € 20 bn value within the period between 1 July to 31 December of 2020 (BBC News, 2020). It is not clear that how far these amount of money has stimulate the private consumption. Also, pull-forward effects for durable consumer goods will be forwarded next consumption years (Boysen-Hogrefe, 2020).

As mentioned in above ways, federal government of Germany has implemented fiscal policy by spending considerable money. Beyond that, federal government of Germany and the Deutsche Bundesbank (central bank of the Germany) have implemented the monetary tools also to recover the German economy.

Monetary policy

Monetary policy means influence an economy by influencing the money supply. To read more about the monetary policy, kindly click here

There are two major types of monetary policies. They are expansionary monetary policy and contractionary monetary policy. When an economy is in a recession, government applies the expansionary money policy. Expansionary monetary policy means increasing money supply to stimulate the demand.

So, federal government of Germany and the Deutsche Bundesbank (central bank of the Germany) have taken actions to increase the money supply. Because they hoped that when Bundesbank increase the money supply in an economy, people will use these money to demand goods and services in the country which stimulate the demand side of the economy.

Expansionary monetary policy of Bundesbank

The Bundesbank’s core business area is monetary policy. Usually Bundesbank takes actions to maintain the price stability with the cooperation of European Central Bank (ECB) and the other central banks in the euro area. Because Bundesbank knows that a stable currency can protect the savers and income earners, improve the employment which is the foundation of a healthy economy (Bundesbank.de, 2010). But as we discussed in the above section, unemployment of Germany has increased very fast and price stability of the country has been violated as results of the COVID 19 pandemic. So, monetary policy has implanted in Germany as follows.

There are three major tools that many central banks use when they are implementing the monetary policy. They are statutory reserve requirement ratio (SRR ratio), overnight policy rate (OPR), sell or buy government bonds. But when we consider about the situation of Germany, they have maintained 1 percent of SRR for a long time, they have maintained 0 percent of OPR for a long time and they are less interested on selling or buying government bonds.

So, to reduce the bad effect of COVID 19 pandemic, government and Bundesbank did not use above monetary policies but they have used policies such as release of the countercyclical capital buffer for banks from 0.25 percent to zero, follow the structure of the former Financial Stabilization Fund by allocating €100 billion within the WSF to directly acquire equity of larger affected companies and strengthen their capital position and do on.

How German economy will be recovered?

As I mentioned above, both monetary policy and fiscal policy can be considered as demand side economic policies. Demand side economic policies mean the economic policies which are used to demand of aggregate demand of an economy. Demand side economic policies are short time economic policies which can influence only for short term price and output level of the economy. We know that there are four components of the aggregate demand. They are private consumption, private investment, government expenditure and net exports. So, in demand side economic policies, these four factors are affected (increased or decreased).

Graphical presentation of expansionary demand side policies

Federal government of Germany and the Deutsche Bundesbank have used the expansionary demand policy using fiscal policy and monetary policy as mentioned above to increase the aggregate demand. We can graphically present it as follows.

Implementation of the expansionary demand side economic policies
Figure 6: Implementation of the expansionary demand side economic policies

Assume that AD1 curve presents aggregate demand of the Germany after COVID 19 pandemic and before implement the expansionary demand side economic policies. So, then equilibrium market price was equals to P1 and equilibrium output level was equal to Y1.

After that, as mentioned in above, several fiscal and monetary policies were implemented by the Federal government of Germany and the Deutsche Bundesbank. After that demand for goods and services has increased. As examples, demand for private investment has been stimulated as a result of the government has given financial subsidies to SMEs, self-employed employees, companies, and freelancers. Like this, aggregate demand has been stimulated by many factors as mentioned in above. Then the aggregate demand curve has shifted from AD1 to AD2. Now equilibrium price is equals to P2 and equilibrium quantity is equal to Q2.

In this situation, both equilibrium price and equilibrium quantity are higher than previous situation. In other words, now both employment and inflation is higher than earlier.

When we concern about the employment and inflation statistics of the Germany, this theory can be proved. Both inflation and employment has increased after implanting economic stimulus packages and central bank policy changes. So, we can identify higher inflation, as the main drawback of the demand side economic policies. The very famous economist, John Maynard Keynes also confirmed that theory. To read more about Keynesian theory, kindly click here.

Suggestions for German economy : Supply side economic policies

To recover the German economy, federal government of Germany and the Deutsche Bundesbank have used the expansionary demand policy by implementing fiscal policy and monetary policy. After that, demand for goods and services have increased and both employment and inflation increased. So, we can identify higher inflation, as the main drawback of the demand side economic policies.

To expand the economy of Germany, government can apply supply side economic policies with minimum inflation. There are supply side policies and mainly country can apply free-market supply-side policies and interventionist supply-side policies for maintaining unemployment and inflation. To read more, kindly click here

Free market supply side policies

Free market supply side policies aim to boost productivity and competitiveness in the market. Few examples for free market supply side policies are Privatization, deregulation, lower income tax rates, and trade union influence.  Giving government assets to the private industry is known as privatization. Among of that, it is thought that the private industry is far more productive at operating businesses since it has a monetary motivation to minimize expenses and enhance operations. Results of that, it provides more job opportunities for society. 

On the other hand, it also can decline the inflation. Deregulation entitle to remove barriers and enable new businesses to enter the market. Result of that, the marketplace will become more competitive. According to that policy, any country can decrease the unemployment rate and inflation. Low-income tax rates encourage people to work harder, resulting in higher labor supply and productivity. Likewise, Firms can permit to manage more profit and invest by reducing corporate taxes.  On the other hand, reducing trade union powers, and liberalize labour market are the other free market supply policies. So, we can suggest that kind of free market supply policies to maintain the unemployment and inflation in Germany.

Interventionist supply-side policies

In order to maintain unemployment and inflation Germany can use supply policy of interventionist. Interventionist supply-side policies are utilized by the government to combat market failure. Expanded government expenditure on transportation, educational, and telecommunications are examples for that. Germany can use some of interventionist supply side policies in order to decline the inflation and unemployment. While also increasing employment levels as quality education can raise. Due to the market failure, education is frequently under-provided in a free market. In order to fill job openings, the government may have to sponsor appropriate training and education programs. If Germany increase the education and training, definitely it will affect to decline the unemployment rate. 

There is nearly always some level of market failure in transportation – pollution and congestion. Alleviate traffic jams and address this market failing can be assisted by government funding on better transportation linkages. Advantages of Better transport infrastructure are lowers transportation costs and encourages businesses to invest. Another one is developing low-cost advice may find it easier to relocate and find work. in those areas, minimizing regional unemployment which employees who live in high-cost areas. Where housing has grown too costly firms may face joblessness in places. Due to illness, time cost can cost a company a lot of money.

Health-care enhances a country’s wellbeing and it can increase labor productivity. One’s health might also increase one’s health. by discouragement of unhealthy habits.  Expenditures of health care related intoxication, obesity, and unhealthy environment can help to minimize the taxes on cigarettes, alcohol, and sugar. So, above mentioned interventionist supply side policies can suggest the Germany economy other than the fiscal and monetary policies.  

A lower inflation rate will result by shifting as to the right. Minimizing cost-push inflation by making the country more effective when using supply-side policies. As a result of enhanced efficiency, privatization may result in lower prices. Supply-side strategies can assist to decrease the natural rate of unemployment by eliminating systemic, marginal, and nominal wage unemployment.

Reference list

BBC News (2020). German stimulus package hands families €300 for each child. BBC News. [online] 4 Jun. Available at: https://www.bbc.com/news/business-52920516 [Accessed 26 Mar. 2021].

Boysen-Hogrefe, J. (2020). Fiscal policy response during COVID-19 in Germany | Baltic Rim Economies. [online] sites.utu.fi. Available at: https://sites.utu.fi/bre/fiscal-policy-response-during-covid-19-in-germany/.

Bundesbank.de. (2010). Monetary policy. [online] Available at: https://www.bundesbank.de/en/tasks/monetary-policy/monetary-policy-625914.

IMF. (2021). Policy Responses to COVID19. [online] Available at: https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#G.

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