Economic Policy in Germany: Was There a Turnaround?

Abstract

Germany under Kohl Martin Hellwig and Manfred Neumann Chancellor Kohl came to power when Germany was suffering its greatest post-war confidence crisis. Output was stagnant, the trade balance deteriorating, unemployment rising, and inflation uncomfortably high. Immediate priority was given to fiscal consolidation to bring the growing budget deficit under control. The authors argue that, in this instance, fiscal contraction sufficiently boosted private sector confidence that overall demand was actually stimulated. Together, fiscal rectitude by the Federal Government and monetary austerity by the Bundesbank made possible sustained output growth against a background of falling inflation. Lower deficits also crowd in private investment in the longer run. Thus the authors judge Kohl's macroeconomic policy a considerable success. However, unemployment has remained stubbornly high; the authors attribute this to supply-side failures. The German labour market remains subject to many distortions, which the Kohl government has done little to remove. Nor has it seriously pursued deregulation of product markets. German unemployment is likely to remain high, at least until favourable demographic changes take effect in the 1990s.