Three factors stand out in explaining the German recovery. First, active and coordinated
policy measures taken across the globe were crucial in preventing a free fall and fostering a
resumption of growth. Eichengreen and O’Rourke (2010) highlight the fact that the initial
output collapse in what was subsequently dubbed the Great Recession was, in fact, more
severe than in the Great Depression of the 1930s. They attribute the more rapid pace of
recovery this time around to a keener perception
of the danger of inaction. With the G-20
economies acting in a rare moment of policy
coordination to support the global economy, the
significantly greater monetary and financial
stimulus on this occasion prevented another
Great Depression. There was equally a major
effort to backstop the financial sector in order to
prevent its meltdown. Germany played its role
in the coordinated action, through both its
financial sector operations and its fiscal stance.
In the financial sector, lifelines were provided
to banks through the newly constituted SoFFin.
Although there were some initial concerns
that the German authorities might be reluctant to use fiscal stimulus, the German stimulus
between 2009 and 2011 was above the average of that in the advanced G-20 economies and
only modestly less than that in the United States or Japan (Figure 23). Indeed, as Krugman
(2010) pointed out, German government consumption between 2007:Q4 and 2010:Q2 rose at
a significantly faster clip than in the United States. It may well be that such expansion of
consumption had a greater multiplier effect than the tax cuts did in the United States.