“You Never Want a Serious Crisis to Go to Waste"
By Dr. Stephen Silvia

The 2008 financial crisis has been by no means Germany's finest hour. To be sure, it is understandable why Germans would view the crisis with considerable anger and frustration, because it is not of their making. Germany was not responsible for the regulatory neglect that permitted housing bubbles to inflate throughout much of the affluent world. House prices in Germany have stagnated since the mid 1990s. Over the years, German politicians from across the political spectrum have warned of the risks involved in the excesses of "Anglo-Saxon" capitalism. As a result, the temptation is understandably great simply to strike a self-righteous pose while all those who bought everything "auf Pump" get their deserved comeuppance. Unfortunately, indignant inaction will only make the crisis worse for all, including Germany. Perhaps this is not fair, but it is so.

Why has Germany been so hesitant to develop and to participate in a rescue package of the order needed to address adequately the financial crisis? At least one reason is that neo-monetarism is deeply ingrained in the German body politic. The great inflation of the 1920s, the creation of the deutsche Mark, legacy of the Bundesbank, and Germany's superior economic performance during the oil crises of the 1970s on the one hand, and the disappointing record of Willy Brandt's "Concerted Action" tripartite forum, the misfiring of the late 1970s stimulus package, and the rapid boom and bust as a result of German unification on the other are all milestones that resonate with the same message to most Germans: neo-monetarism is to be preferred over Keynesianism. Yet, if there ever has been a Keynesian moment in the postwar era, this is it. German politicians need to rise above the strictures of normal times. A second reason for German hesitancy is to be found in the dynamics of European politics. Over five decades of European integration, other countries have repeatedly floated schemes that amounted to Germany spending money to solve others' problems. German politicians have developed a reflexive negative reaction to proposals emanating from London, Paris, or Brussels that have German disbursements as a centerpiece. German policy-makers need to recognize, however, that fiscal stimulus as a proposed solution to the 2008 financial crisis is not simply yet another attempt to rifle through Germany's pockets, but an urgent and necessary response to collapsing demand.

Last month, the soon-to-be White House Chief of Staff Rahm Emanuel made the astute observation, "You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before." Taking Mr. Emanuel's advice to heart would be far preferable to the German Chancellor's current approach, which amounts to too little, too late. Germans need to think not just carefully, but creatively about how to spend in order to fortify their economy for the long run. The proposal currently under discussion to distribute 500 Euros to each taxpayer may be tempting in the run-up to a federal election, but is not the most efficacious approach, if recent U.S. experience is any guide. The rebate checks paid out to most U.S. citizens in 2008 had at best a short-term impact and did not leave any lasting improvement to the U.S. economic infrastructure. Investing in areas that will provide economic dividends for many years to come is a superior approach. An obvious area is energy efficiency and alternative energy sources. To be sure, Germany is already a leader in this area. The crisis provides an opportunity to take still bigger steps. Education is another area of neglect that would benefit from the investment of greater resources.

Above all else, German policy-makers should use the 2008 financial crisis is an opportunity to advance the consolidation of the German banking sector. In November, the German savings bank associations (Sparkassenverbände) released a proposal that included a comprehensive restructuring of the system of Landesbanken, which would reduce their number to three, and the expansion of the authority of the federal government to buy up bad instruments from savings banks. It is worth noting that the proposal was very light on regulatory reform of the savings banks themselves and that representatives of Landesbanken responded with a vigorous rejection of this proposal from the savings bank associations. The German government should recapitalize German banks and extract as a quid pro quo a comprehensive restructuring and reregulation of both the public and private banking systems that would once and for all remove the persistent inefficiency and cronyism that has plagued the German banking and compromised the efficient deployment of German capital.

Dr. Stephen J. Silvia is an Associate Professor and Director of Doctoral Studies at the School of International Service, American University, Washington, DC, and a regular participant in AICGS programs and events.

This essay appeared in the December 5, 2008, AICGS Advisor and is part of a greater collection of essays and articles surrounding the global financial crisis - click here to access this collection.