The influence of the global crisis on german economy

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.

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.