Perspective on the Eurobounce

There’s been quite a lot of reporting on the eurobounce — the surprising early return to growth in Germany and France. It’s important, however, to keep some perspective. Here’s real GDP in Germany and the United States, with 2nd quarter 2008=100:

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Source: Eurostat.

Yes, Germany grew in the second quarter — but this was after suffering a much deeper slump than the US, despite the fact that Germany didn’t have a housing bubble.

So you don’t want to jump to the conclusion that Germany responded well to the crisis.

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Mario Jodoin August 15, 2009 · 10:37 am

But, professor Krugman, is it possible that part of the slower decline in the US GDP is a consequence of the “false” gain in productivity in the financial sector, as you explained in your April post Reconsidering a miracle, (//krugman.blogs.nytimes.com/2009/04/16/reconsidering-a-miracle/) ? The recent surge in US productivity and huge profits in the financial sector seem to go in that direction…

Owe_Jessen August 15, 2009 · 10:47 am

I’d beg to differ in the conclusion: The reason for the large slump was the export-dependency of the German economy, therefore the larger drop was a result of decisions far earlier than the crisis. The earlier rebound is as well a consequence of a stronger current account and to a lesser part of raise in private and government consumption.

Eieiei August 15, 2009 · 10:51 am

Sure Germany had no Housing market crash. But Germany has much more industries that are more effect by a worldwide economic downturn. The banking situation in Germany is also unclear. Maybe things are worse there than in the US as ridiculous as that might sound. Germanys trend growth is also lower. So many mixed factors, hard to extract the crisis response as deciding factor in any direction.

Brendan August 15, 2009 · 11:23 am

Spot on again professor! The simple fact here is that should you a higher than average decline, then year-on-year you could end up with an higher than average “increase”. This is a lot like corporate earnings which were battered for the last 2 years and are now “recovering”.

Yamakazi August 15, 2009 · 11:40 am

The German stimulus package was much too small and to ineffective to unfold a big impact on the German economy. Furthermore Germany’s economy is very dependent on its exports which slumped a lot since July 2008 (//www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Statistiken/Zeitreihen/WirtschaftAktuell/Aussenhandel/Content100/kah613x12.psml). The current growth is based on the German “Abwrackprämie” (equal to “Cash for Clunkers”), the German Kurzarbeitergeld (short time compensation) and, furthermore, decreased the German imports much more than the German exports (see link above). So the current growth is just a change of the trade balance and some straw fire.

John August 15, 2009 · 12:04 pm

Sour grapes, right?

Joseph O’Shaughnessy August 15, 2009 · 12:04 pm

I am not surprised at the bounce in Germany nor would I be surprised at an overall rapid European recovery.

One of the reasons Europeans immigrate to the United States is opportunity. The kind of opportunity here is much different from that in Europe. There are no cowboys in Europe, real or imagined.

The far more managed and traditional European economies and the stability of society–though it has been challenged heavily in the last 20 years–means that the positive effects of coordinated policy can take hold much more rapidly. Managers do not challenge the need to pull the oars in unison, and they don’t allow cigarette boats to run along side churning up their wake.

In this case, it may simply be the fact that they have held on to more of their essential revenue-generating business and they know better how to get it moving again.

Intelligent engineering does not obviate intelligent managing. For too long in this country, we have been more like the Scarecrow, seeking certification, rather than knowledge. Knowing how to cheat the system does not require that you totally understand the system.

I see a U.S. government moving more smoothly now than could have been imagined, particularly given the circumstances.

But I also see a formerly powerful U.S. economic engine sputtering.

Bruce August 15, 2009 · 12:12 pm

While Germany might not have responded with sufficient force to preserve its GDP, it is worth remembering that their so-called “socialist” policies mean that even this slump would have had a lesser impact on the people on the ground.

Joe Hill August 15, 2009 · 12:12 pm

In other words, we need to continue trying to convince ourselves that the massive “stimulus” package is having a beneficial effect!

Michal Penkala August 15, 2009 · 12:41 pm

Could You please also include France in Your chart? I believe GDP decline in France has been somewhat smaller than in both: Germany and the US. Could it be possible that France is doing better than the US??!!

Robert Athay August 15, 2009 · 12:42 pm

Interesting; what about the confidence intervals? If we measure a 1% drop in GDP from one quarter to the next, is that 1% + / – .01% or 1% +/- .5%?

(I’m not trying to be difficult; statistical noise matters when we’re trying to estimate trends.)

Mike Corcoran August 15, 2009 · 12:46 pm

Sorry Paul, your attempt to downgrade the German response to the recession by putting up NO stimulus dollars won’t work.

The proof is in the pudding. Angela Merkel wins the day by refusing to put the German taxpayer in debt and to work for a real economic recovery based on fundamentals.

Good for Angela – not good for the Oracle of New Jersey

ndk August 15, 2009 · 1:08 pm

Germany is also the world’s largest exporter, and exporters were disproportionately hit by the contraction in demand. I think this is a disingenuous comparison.

Why not show France too, where they’ve done better than either Germany or the US?

David August 15, 2009 · 1:31 pm

I thought you were taught not to be partial when selecting data. What if you had substituted France for Germany?

Sundar Srinivasan August 15, 2009 · 2:05 pm

Germany’s deeper slump was because of the huge current account surplus they held. Germany apparently had a strong export-oriented economy and a very weak domestic market. So normally during the recession it fell down fast. This explains the slump. Response to the crisis however is measured in terms of the comeback after the recession and not how much they went down. In that perspective, I think Germany’s progress is appreciated.

//sunnyeves.blogspot.com/

Frank August 15, 2009 · 2:15 pm

Just wait for Q3 when cash for clunkers ends and unemployment rate rises. I think GDP will slump again.

Florence Echtman August 15, 2009 · 2:44 pm

How does the situation in France compare to that of Germany and the US?

Robin Prior August 15, 2009 · 2:54 pm

The French economy lifted a little too last quarter, and as any Brit will tell you, it is very unwise to underestimate the Germans. After all, they are the world’s biggest exporter.

Thomas August 15, 2009 · 2:55 pm

I’m curious as to how economic expectations differ in Germany as opposed to the US. German citizens, with a much wider and more effective social safety net, have less to fear from unemployment, inflation etc. National economic issues aren’t as critical to the day to day lifestyles of Germans as they are to Americans. How does this affect the German economy as opposed to the US, spending, saving, investment and expectations?

Jason August 15, 2009 · 2:58 pm

I find it interesting that Paul should choose to make Germany rather than France the example: the French had a far shallower slump than the Germans, and are beginning a recovery. This isn’t anecdotal: it might actually prompt useful discussion about differences within the “Euro” model and more broadly the focus on all-or-nothing panaceas (export- vs. private consumption-led, manufacturing- vs. finance-dominated, over- vs. under-regulated, economies, and so on). The Germans have been touted (usually vs. the Spanish, whose economy only shrank by HALF as much as the Germans in the past year) as the model of prudence, etc., but it turns out that the problem everywhere may be overdependence on any one solution in what has long been an effectively globalized world, where exports (for instance) need to be bought by someone to boost income. On this score (diversification), the French already, and the Spanish (once they have shaken off the effects of the housing bubble and begin to reap more fully the effects of a major rise in spending on R&D over the past 4 years), may turn out to be more the prudent.

Earl Killian August 15, 2009 · 3:21 pm

Wasn’t Germany’s problem that it depended heavily on exports, and the Great Recession hit all international trade hard?

RON August 15, 2009 · 3:59 pm

Interesting, but in statistical trend lines past is not prologue.

Derek August 15, 2009 · 4:16 pm

Interesting. However, my understanding is that Germany has so far protected relatively more jobs and the unemployed received more generous benefits than the US. The human cost may be higher in the US than Germany despite Germany’s deeper decline in GDP. (One can argue that Germany’s generous benefits promote higher structural unemployment than in the US.)

Christiaan August 15, 2009 · 4:57 pm

This may be true for Germany. But I’m curious about France, which with a GDP at about 98 relative to 2008Q02 did significantly better than the US, while it showed an ever bigger increase in the last quarter than Germany did. Perhaps you have some insight as to what Germany did wrong and what France did right. My guess is that while Germany long opposed a strong stimulus program, France seemed to embrace that option, while the US got a stimulus program that was sizable but too small. Could that explain the data? It would show that you have been absolutely correct about the size of the stimulus bill.

Jeff McDougal August 15, 2009 · 6:15 pm

What’s interesting about Germany is that the population did not suffer the dramatic decline in employment that Americans have seen. The ability to protect the people against the ravages of the business cycle is an attractive feature of Germany’s social market variant of free market capitalism.

Of course there is a price for this protection – Germany never realizes its full potential when times are good, due to its rigid labor laws.