Money Is Not All
PIM of SPAIN | May 28, 2009 at 08:49 amby
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On March 14 last, I wrote ‘How G20 should tackle this economic crisis’, in which is stated: “German Chancellor Angela Merkel said the issue is not to spend more, but to put in place a system that would help prevent similar crises in the future”.
What was not explained, that Chancellor Angela Merkel had good reason not to spend unlimited quantities of money. Germany is the only country in this world that has practical experience spending 2 trillion dollars for the reunification of Germany after the wall came down in 1989.
Nowadays trillions of dollars are thrown around like peanuts for bailouts and stimulus packages. All should listen to Angela Merkel because the Germans are in a position to teach the world an interesting lesson of which politicians and authorities should take heed before spending on bailout and stimulus packages. Consecutively to get aware about the aspects what such largesse precisely can buy. The good news is that 17 million East Germans quickly have been reunified, and many new highways and rail tracks have been built. However too many water-treatment plants and technological estate park centres were established in the drive to create new jobs for the then East Germans in the process of German reunification. There also were new housing developments built in beautiful areas, which still today largely stay empty. Most of Government sponsored job creation programs failed to live up to their intention. New businesses were created that shut down almost overnight, because those were too dependent on government subsidies without having a smart business plan. Among one of the most notorious is a firm that tried to build a modern Zeppelin airship with tens of millions of tax dollars that went bust quicker than the plan was drawn-up. Further many East Germans moved to the west instead of staying in their own region, which created a population drain of over 25%. Now twenty years on, apart from the financial crisis, the joblessness is 14% and rising, although over time they were less export orientated than the west German industry, they consequently became more flexible than other German workers.
In short the Germans have learned that throwing with money at an economic meltdown isn’t a cure for everything. After twenty years of subsidies and stimuli the former East German part is still under-performing compared with the rest of Germany. There live 20% of Germans in the Eastern region but they count for 35% of all unemployed.
Germany has learned a second lesson; those big spending packages don’t work if the underlying policies aren’t well thought and prepared in advance. More to the point the East German people were not trained to match the much higher productivity performance per labourer of those in the west. One of the biggest mistakes is a political one by making the currency exchange rate of Eastern Germany equal to the Western German mark. It turned out to be a crucial error on the way to success, because at the time the true value was 4 eastern marks equal to 1 west mark, that destroyed the Eastern German competiveness of their local economy, while wages were doubling, which turned the revaluation increase by a factor eight. This huge increase cannot be matched by any industry standard, thus causing lager unemployment in the process, which would not have occurred without these currency-labour-price swaps. For example in Poland and the Czech Republic who kept by their own currency-rate, this didn’t occur and that shaped ample time to increase production-performance-standards.
A third lesson is that spending so much money in such a short period of time is bound to be wasteful. With the result that too many wastewater plants were built and technological-industrial centres were established. Further by subsidizing industries that didn’t make business sense and similar more. Industrial policy should have been better coordinated and money invested just in a few promising centres, rather than being showered around across the economic landscape. And now twenty years on: eastern Germany actually is still not able to stand on their own feet.
Lots of money creates high expectations that cannot be fulfilled. Money that was spent on subsidies for old established companies prolonged their struggle for death. Creative destruction lessons were learned the hard way. Governments can play a critical role but still better to leave it to experts than to politicians as now again is demonstrated with the Opel takeover from GM. Taxpayers should be better protected by the Governments, because the danger is that tax-money is spent neither appropriate nor efficiently. The rest of the world should take note of those wise lessons.
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PIM of SPAIN
San Pedro de A, Malaga, Spain
San Pedro de A, Malaga, Spain
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