1. Introduction
The global financial crisis that became obvious in the summer of 2007, led to a severe economic crisis about one year later. It was mainly caused by the bankruptcy of “Lehman Brothers”, one of the largest US investment banks, which was forced to file for liquidation after suffering huge losses in the mortgage market and resulted in millions of additional unemployed all over the world, in both developing as well as highly developed countries. Within weeks the Dow Jones Index fell from over 11,000 to below 7,000 points while the German stock market index, DAX, fell from 7,500 to below 4,000 points.
The apparent helplessness of economists at that time forced the German government to implement strong interventions in the economic market. This paper deals with the risks and benefits of interventionism during the 2007- 2009 financial crisis, using the example of Germany.
Table of Contents
1. Introduction
1.1 General explanation of the term “economic interventionism”
1.2 Reasons for economic interventionism during a financial crisis
2. Types of economic interventions during a financial crisis
2.1 Soft protectionism through trade and investment policy measures
2.2 Fiscal policies
2.3 Financial policies
3. Risks and benefits of selected federal interventions in Germany
3.1 Risks and benefits of soft protectionism through trade and investment policy measures
3.2 Risks and benefits of fiscal policies
3.3 Risks and benefits of financial policies
4. Effects of the economic interventionism
4.1 National and international market reactions
4.2 Consequences of interventions for international markets and trade
5. Summary
Objectives and Topics
This academic paper examines the extent, risks, and benefits of government interventionism within the German economy during the global financial crisis of 2007–2009, analyzing how specific stimulus measures impacted national stability and international trade relations.
- Theoretical definitions of economic interventionism and the mixed economy model.
- Categorization of interventionist measures: soft protectionism, fiscal stimulus, and financial policies.
- Evaluation of federal intervention strategies, specifically focusing on the German labor market and banking sector.
- Analysis of market reactions and the long-term implications for fiscal discipline and governance.
Excerpt from the book
3.1. Risks and benefits of soft protectionism through trade and investment policy measures
As mentioned in 2.1 above, the German government under Chancellor Merkel has made it clear on more than one occasion that it will not pursue a protectionist approach to support and help the German economy. Nevertheless, examining the political steps taken by Germany’s government to combat this crisis, it becomes quite obvious that indirect protectionist measures were considered and eventually approved. These measures ultimately helped to obtain the same goals as classical protectionism would have done, but in a less direct and obvious way.
Promoted by the German government, a number of German companies chose to (temporarily) reduce their employees’ weekly work time to reduce (personnel) costs in a sluggish economy, without having to fire these workers. As a result, wages had to be reduced, often by 10 to 20%. Car manufacturer Daimler in Sindelfingen proves to be a case in point: Many employees saw their work week cut down to three or four days and their wages drop down to 80%16. Many car makers suffered from huge losses during the economic crisis and were forced to reduce their costs significantly. The approach of short-term reductions in work time may prevent a mass firing of workers in various industries and preserve the workforce for a post-crisis increase in production. On the other hand though, many working people now have less income to spend which could slow economic growth and may result in a serious deflation.
Chapter Summaries
1. Introduction: Defines the scope of the paper by providing context on the 2007-2009 financial crisis and defining the core terminology of economic interventionism.
2. Types of economic interventions during a financial crisis: Outlines the various policy instruments used by governments, including fiscal stimulus, financial policy adjustments, and soft protectionist measures.
3. Risks and benefits of selected federal interventions in Germany: Critically analyzes the specific German responses, evaluating the trade-offs between stabilizing industries and the long-term risks to taxpayers and the economy.
4. Effects of the economic interventionism: Discusses the empirical outcomes of the implemented measures on the domestic labor market and international market confidence.
5. Summary: Concludes the analysis by synthesizing the lessons learned and evaluating the sustainability of the government's interventionist strategies.
Keywords
Economic Interventionism, Financial Crisis, Stimulus Programs, Fiscal Policy, Soft Protectionism, Keynesian Theory, Germany, Labor Market, Short-time Work, Banking Crisis, Debt Brake, Market Regulation, Financial Stability, Economic Growth, Sovereign Debt.
Frequently Asked Questions
What is the primary subject of this paper?
This paper explores the role of the German government during the 2007-2009 financial crisis, specifically focusing on the application of interventionist economic policies and the resulting risks and benefits.
Which specific policy instruments are discussed?
The author discusses soft protectionist measures, fiscal expansionary policies (stimulus packages), and financial policies, including bank rescues and credit guarantees through the KfW.
What is the core research question?
The research evaluates whether government interventionism effectively stabilized the German economy during the crisis and at what long-term cost to the national budget and market dynamics.
Which economic theory supports the actions taken by the government?
The German government's response was largely influenced by Keynesian theory, which advocates for active public sector policy responses to combat recessions and unemployment.
What is the central focus of the analysis in the main body?
The main body examines the practical implementation of stimulus measures, such as the "scrap premium" and the "short-time work" (Kurzarbeit) program, and their respective impacts on industry and employment.
How is the term "economic interventionism" defined in the text?
It is defined as efforts taken by the government to influence the country's economy, assuming that the state and its economy are inherently separate, and thus most applicable to capitalist or mixed economies.
What is the "debt brake" and why is it significant?
The debt brake is a constitutional provision implemented in Germany in 2009 to limit government borrowing, intended to ensure long-term fiscal sustainability and restore investor confidence.
What is the "bad bank" approach and how does it relate to the crisis?
The "bad bank" approach involves separating toxic, non-performing assets from a bank's balance sheet into a separate entity to facilitate recovery; the text contrasts this with the government's actual strategy for Hypo Real Estate.
- Citation du texte
- Nadin Hirsch (Auteur), 2011, Risks and benefits of economic interventionism by the German government during the 2007-2009 financial crisis, Munich, GRIN Verlag, https://www.grin.com/document/179509
