|THE INFLUENCE OF THE GLOBAL CRISIS ON GERMAN ECONOMY
Kurschus, Lawyers and Managers of bankruptcies
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Ralph-Jörn Kurschus is a lecturer at the Bank Academy in Frankfurt/Main and at Law Studies in the University of Jena. He has become a lawyer in 1990 and since 1994 has been working as a manager of bankruptcies in the Kurschus, Lawyers and Managers of Bbankruptcies. In 1994 Mr. R.J. Kurschus prepared a variety of expert reports related to the economic situation of the German Small and Medium Enterprises (SMEs) for the German courts. In 1998 he got the title of Lawyer for Labour Law; in 2005 - the title of Lawyer for Bankruptcy Law.
Petras Baršauskas is a Professor, Doctor Habilitus of Social Sciences and Rector at Kaunas University of Technology. Prof. Petras Baršauskas is a member of European Committee of Erasmus, Erasmus Mundus and Tempus programmes, member of the Commission of European CREST Network and the action group of Bologna process supervision, second term member of the Research Council of Lithuania. His key qualifications are in the area of international management and entrepreneurship. He is the author of more than 70 scientific articles, 4 monographs (the latest Doctoral Studies in Europe and Lithuania, 2009) and 1 textbook. He is a regular contributor to the Emerald Baltic Journal of Management.
Vaida Pilinkienė is a Professor and Doctor of Social Sciences, at Economics and International Trade Department in Kaunas University of Technology. Her research is focused on business environment analysis, demand forecasting. Her articles were published in various journals such as: Engineering economics, Baltic Journal of Management, Almanach des praktischen Managements in Mittel und Ost – Europa, etc., and researches were presented in various international conferences.
Abstract: This article analyses the influence of the global crisis on German economy and its sectors. The difficulties in market economy have increased since the real estate market in the USA collapsed and a worldwide economic crisis spread out. The research made by defining and analyzing the main factors of German economy is the basis of the article. The research proved that Germany was influenced by the global economic crisis in 2008 - 2009, resulting in unusually high levels of debt and losing its position in export markets. Whereas, the successful economic recovery was caused by the German government’s financially supporting programmes and new increasing investment of the shareholders in 2010.
Keywords: Global crisis, financial crisis, globalization, Germany.
JEL classification: F23, F41, F59.
In the recent years the global economy crisis and its consequences have become one of the major themes widely discussed in academic writing (Lakštutienė et al, 2009; Breiterytė, Rumšaitė, 2009; Zaharia, Miron, 2010; Belinskaja, Galinienė, 2010; De Bondt, 2010; Moshirian, 2011). The possible consequences of the crisis concern not only the most influential world leaders that make decisions largely determining the course of the crisis and the welfare of the countries, but also the ordinary citizens, that take responsibility for the future of their families, fear the rise of unemployment, and predict financial instability (Kroll, Tagscherer, 2009; Serbanica et al, 2009; Bonciu, 2010; Pakravan, 2011; Wim, 2011).
The first signs of global crisis appeared in the middle of 2007 as the growing default of financial mortgage in the USA. Since the Second World War, the average economic contraction lasted up to ten months (National Bureau of Economic Research, 2008). However, the recent recession went beyond the average, continuing up to nineteen months. In 2008, when 2.8 million people lost their jobs, job losses reached the highest annual level in the USA in 60 years (Goldman, 2009).
The beginning of financial crisis coincided with the structural crisis in the world’s economy (Colander et al., 2009; Stiglitz, 2009). Industries that prospered a rather long time during the rise of the economy and created great surplus capacities did fall into the deep recession when the world’s demand started to decline. The financial crisis coincided with the third stage of the economic cycle i.e. recession, which notably caused a negative effect of the crisis on the world’s economy (Pooran, 2010; Čibinskienė, Kontautienė, 2010).
The collapse of the real estate market in the United States of America was only the beginning of an economic disaster, which rolled over the whole world not reprieving a single country and having a large bearing on several economies, industries and multinational corporations. The Organization for Economic Co-operation and Development reported that the world’s economy appeared in the middle of the biggest recession of our lifetime, caused by a global financial crisis and deepened by a collapse of the world’s trade.
This situation recalls the time of the Great Depression, which was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in 1929 and lasted until the late 1930s or early 1940s. It was the longest, most widespread, and deepest depression of the 20th century. In the 21st century, the Great Depression is commonly used as an example of how far the world's economy can decline. This particular historical analogy is rather dangerous and though not confirmed, does help to understand the current situation, when the years around 1929 and 2009 are being compared. Decreasing share prices, shrinking economies and struggling banks describe and illustrate the global economic crisis in 2009, altogether reminding the situation in 1929.
The worldwide economic crisis affected the real economy in Germany as well, the official GDP declined by 5 percent in 2009 and unemployment increase too. In 2010 a moderate growth of 1,5% of the GDP was expected, however the unemployment increased further (Schneider, 2010). The German banking system was the first to be affected by the economic crisis. Whereas, the American sub prime crisis led to a worldwide financial crisis. Not only in the USA, but in Europe as well the investment banks collapsed and the world financial system threatened to break down. For example, the Hypo Real Estate Bank (HRE) in Germany had considerable difficulties that were solved by 50 billon EUR funding from the state and other banks. In 2009 when the German state owned 90% of HRE, the bank was finally nationalized (Maushagen, 2009). Furthermore, such German multinational companies as BMW, Daimler and Volkswagen were greatly affected by the economic crisis as well. Due to a succession of events people could not afford such cars and premiums. Therefore, the sales decreased worldwide, many car dealers went into bankruptcy and many people lost their jobs (Hawranek 2008).
German government declared of a huge rescue package worth of 500 billon EUR for the Germany's banking and insurance sector that was stricken in 2008. The bail-out, which was endorsed by the cabinet at lunchtime, is considered to be the biggest state intervention in the German economy since the end of the Second World War. It includes 400 billon EUR in guarantees assigned for interbank lending in order to restore liquidity and 100 billon EUR in fresh capital. German government, which had resisted taking stakes in the country's troubled banks, made a considerable change in its politics with the bail-out package marks. However, Berlin has been enforced into a U-turn due to the shortage of liquidity held by German banks, which resulted from the slump in markets and the difficulty in securing short-term lending. The German government declared that package did not help to achieve a balanced budget by 2011 which would have been the first time in years (Connolly, 2008).
The German economy is considered relatively immune to crises in individual markets. Many companies in the machine building, medical and environmental engineering sectors could be considered the undisputed world market leaders in their industries. Therefore, German companies predicted that if sales to the United States or other European countries declined, they could offset the shortfalls by increasing sales to China, India and Russia. However, the current crisis is different; it affects companies in various ways. It is not only a sales volume crisis brought by consumers and other companies ordering fewer products, but also a financing crisis, because customers that are interested in buying goods lack the necessary capital, as the banks have curtailed lending. Furthermore, it is a crisis of confidence, because those who could buy goods are no longer interested in doing so. When consumption drops off, companies must cut additional jobs, the markets decline and a vicious circle of self-fulfilling poor prospects begins. Thus, the financial crisis, which had seemed more like a virtual crisis to ordinary citizens, is becoming a real, palpable drama (Bovensiepen, 2008).
It is obvious, that the financial crisis raised the fear of globalization. On the one hand, suddenly all positive factors of globalization, such as internationalization, networking, cooperation and investing became overshadowed by the breakdown of the whole market economy system. On the other hand globalization could be that force, which will initiate the qualitative leap of the world’s economy as well as country’s economy. Therefore, the aim of the article is to analyse the influence of the global crisis on German economy.
2. Research methodology
In order to analyse the influence of the global crisis on German economy and its sectors the expert evaluation method was used. According to such scholars as S. Makridakis, S.C. Wheelwright, R.J. Hyndman (1998), the employment of this method requires from 10 to 100 experts, depending on the objectives of the research. Furthermore the expert’s degree of competence should be taken into consideration as well. Regarding the objectives of the research and the demands for the experts 20 people were chosen that could be considered experts on the evaluation of the economic situation in Germany due to their qualification and experience (economists, professors of business schools, businessmen).
The experts defined the factors, which caused the global economic crisis and described how the factors arose, developed and which effect they had on the German economy (see figure 1). The following overview, created by the experts, shows the outcome of the discussion and serves as the basis for the article.
Figure 1. The crisis factors influencing German economy
3. Global crisis and German economy: research results
Real estate crisis. Not difficult guidelines by granting loans and a low interest policy of the US Federal reserve led to an oversupply of cheap money in 1999. After the attacks on the Twin Towers at September 11, in 2001 the CEO Alan Greenspan of the American Federal Reserve decreased the prime rate significantly in order to keep the economy in progress. In fact, the banks temporarily were able to refinance themselves with an interest rate of 1%, which made many people’s dream of an owned house possible. Even people with a very low income were able to afford a house. However, the expected increase in value of estates made the risk appear rather low, although interest rates were established only for a short time and might have increased at any time, since the interest rate is variable in the USA. In this case, debtors were not able to pay their instalments. Between the end of the 1990s and the beginning of 2006, real estate prices in the USA doubled, enabling homeowners to borrow new credits for their houses, which were increasing in value (Wissen Media Verlag, 2009).
In 2000 the banks tried to reduce their risk from the estate credits by bundling them to funds and selling them in shares. Rating agencies helped by certificating good reports about the derivatives. In 2004 the USA Federal Reserve was concerned about the high inflation rate and increased the prime rate continuously. This action resulted in a chain reaction because the mortgage interest rates increased due to the variable interest rates. Many house owners were suddenly confronted with a debited interest which they were not able to pay. The situation led to a dramatic increase of compulsory auctions although the estate market experienced a downturn at that time. Thus, the real estate market completely collapsed due to the oversupply.
In 2007 the amount of needy credits increased rapidly. Banks, insurances and investment funds were forced to amortize high amounts of money. Several people with construction finances went bankrupt. Furthermore, the problems spread to Europe (including Germany) due to the collapse of the British major bank Northern Rock. The bank for small and medium-sized businesses (Deutsche Industrie Bank AG) in Germany got into difficulties. Within a few months even more institutions were affected, for example Bear Stearns, Lehman Brothers and the mortgage banks Fanny Mae and Freddy Mac. As a result one bank could not trust another. Even daily credits were refused. Whereas, the central banks tried to preserve money circulation by investing billion worth amounts (Seith, 2008).
The research has showed that the real estate crisis could have been prevented or at least reduced, if in the first place, the USA banks would have been more careful in checking the creditworthiness of debtors. In this case, “toxic credits” could have been prevented. Certainly, then, less people would have been able to take a loan, but the people that could have afford it were reliable in the future. Therefore, less people now would be bankrupted and the market would not be crowded with real estate. Furthermore, worldwide avid bankers should have double checked the security of the credit bundling they had bought. Banks within Germany, for example the Hypo Real Estate, should have been more careful in buying credits from American banks. Instead of anticipating the big business, they should have had the estate credits checked by rating agencies to avoid the risk of buying toxic credits. In this case, the real estate crisis would not have had such a strong effect on the whole world, especially on Germany.
Financial crisis. The American subprime crisis led to a worldwide financial crisis. The American banks bundled bad credits which could not be paid by its owner and sold them as bonds to avid bankers worldwide. This is where the chain reaction started.
The USA Bank IndyMac was nationalized in July of 2008. The Bank of America bought the troubling Investment house Merrill Lynch. The biggest American insurance institution American International Group was nationalized and the biggest USA saving bank Washington Mutual was smashed. Global investment bank the Goldman Sachs Group, Inc. and Morgan Stanley announced their transformation into normal commercial banks. At the same time, the Hypo Real Estate in Germany had considerable difficulties, but was saved by the grants of the state and other banks. The Benelux countries had to stabilize the financial institution Dexia (active in public finance, providing retail and commercial banking services to individuals and SMEs, asset management, financial markets and insurance) and Fortis (active in insurance, banking and investment management) in 2008. The USA commercial bank Wachovia was taken over by its competitor Wells Fargo. Then, after the collapse of the banks in Island the country almost bankrupted.
Due to the spread of default credits, which resulted from the subprime crises in the United States, banks lost reliance in each other, stopped giving loans to other banks and supplying money in form of credits to the companies. Such credit crunch constrained any companies’ businesses, since they could not do any new investment or expand. Additionally, the suppressed money supply led to wage reduction. Daimler CEO Dieter Zetsche stated that in 2009, around 150.000 less cars will be produced. Negotiations with the employees’ organization involved discussions whether the working hours will be reduced to 30 hours with respective wage reduction. “Maybe even more working places must be cut”, announced Mr. D. Zetsche (Hawranek, 2008).
Another reason for the financial crisis was wrong speculation on the stock exchange. The multi-million entrepreneur, Mr. Adolf Merckle, who among others owned the pharmaceutical company “Ratiopharm” and the cement producer “Hedelberg-Cement” was strongly affected by the financial crisis, not only because of economic burden of the company, but also due to the wrong speculation. He lost up to 1 million Euros with his VW shares. At the same time the banks demanded for additional securities for high credits or loans. Unfortunately Mr. A. Merckle was struck by financial problems he could not solve and committed suicide.
As already mentioned above, a double check of the real estate credits would have prevented the global overcrowding of toxic credits. German banks, as well as MNCs would have been in a better condition, if they would have set on a low-risk policy to secure the maintenance of the business. Such low-risk policy includes the MNCs activity on the stock exchange. However, it is not only the policy, which is responsible for the well-being of a bank or the MNC. German institutions have to secure enough equity in order to be prepared and survive such financial and economic disasters. Even if a company is led by a low-risk policy, a shortage of money may occur if the banks do not grant any credits. Therefore, it would rational to have a certain amount of savings.
Import/export. German cars had an unquestionable success during the times of economic boom of globalization. A German car represents a status symbol for winners in China, Russia and India. Furthermore, German machinery was needed, when investments were done in rising countries. Therefore, Germany, as world champion in export profited from the globalisation significantly. And therefore, Germany was hit massively by the world wide economy decrease. Major parts of the export industry stood still because consumers from Western countries were more interested in saving their money instead of spending it (Dettmer et al, 2009).
In fact, the entire export sector was coming under pressure. German exports declined more than two times in 2009 compared to 2006, however, the import changes were not so rapid (see 2 figure). Nevertheless, Germany retained the title of being world champion in export, because Chinese and Japanese exports decreased significantly as well. German economy depends largely on its exports, but the global crises illustrates how risky the trade business is and how badly Germany has been affected when the balance of trade was incorrect.
The decline in German exports, in Germany’s largest market, was the most severe in the European Union. Exports to the bloc fell by 19.1 % in 2009, to 503.5 billion EUR. Exports to countries not in the European Union fell by 17.1 percent to 299.7 billion EUR. In comparison to the USA, former Germany's second largest export partner, exports dropped even over 20 % to 4.6 billion EUR per month in the same period. Deliveries to emerging markets declined as well. Exports to India dropped by 13 %, to Brazil - 29 % and to Russia even in excess of 35% in 2009 compared to 2008. Only exports to China were nearly unchanged during this period.
Moreover, exports to the countries referred to as the "next eleven" (South Korea, Mexico, Turkey, the Philippines, Egypt, Indonesia, Iran, Pakistan, Nigeria, Vietnam and Bangladesh) grew by approx. 12 % annually. Because of their population, exports reached roughly 1.3 billion exports to these countries and had a considerable growth potential. The countries’ huge catch-up potential, particularly in infrastructure and manufacturing, implies that their share in Germany's exports could rise substantially from the current 4.6 % (Schott, 2010).
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