“What were Germany’s fiscal policies during the 2007-2010 Global Financial Crisis, and did the common monetary policy adapt sufficiently to the needs of the German economy?”

Charles de Lusignan

4th March 2010

Part 2: The monetary and fiscal policies followed during 2008 and 2009 in the context of and in relation to the economic crisis. For the Euro-area countries, the analysis of monetary policy will look at whether the common monetary policy was adapted to the needs of the country

Introduction

The Prelude

Economic Background

Exports

German Banking Sector

Bank Failures and Bailouts

We’re All Crass Keynesians Now

ECB Monetary Policy and How it Fit Germany

Greeced Lighting

Conclusion

Annex

Bibliography

Introduction

As the economic powerhouse of Europe, The Federal Republic of Germany holds a very special place in the economy of the European Union and of the world; being the globe’s second largest exporter. Holding the purse strings, Germany is also the foundation of both the development and the stability of the European Monetary union. This crucial position means that the country has been at the forefront of the European union’s strategy to avert meltdown in the financial crisis that really began to hit Europe in 2007. Germany entered a confirmed recession in the second quarter of 2008. There were a number of different effects, including potential bank defaults, rising unemployment and a sharp decline in exports, the consistent growth of which Germany had been heavily reliant.

There were many differences of opinion as to what should be done to avoid economic collapse, but ultimately Germany has turned inwards [1] , engaged in a significant stimulus program designed to protect jobs, encourage consumption and avoid systemic bank failures. This paper will, within a theoretical framework, explain the causes, effects and responses to the crisis during 2008 to 2009. Given that Germany is playing a major role in the emerging Greek crisis, I will also touch on this, despite it being beyond the scope of the essay question: the crisis not yet over, and the reaction to the continuing threat of Greek default is relevant in the context of the actions that preceded it. Implicitly, the nature of the Global Financial Crisis affected (and continues to influence) more than one country. It is thus hard to simply discuss Germany purely in isolation. This essay will consequently occasionally venture onto topics beyond the Bundesrepublik.