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Past consolidation has allowed the automatic stabilisers operate fully during the crisis. Further fiscal easing in late 2008 and early 2009 contributed to a markedly widening fiscal deficit in 2010.
Unemployment has fallen significantly prior to the crisis, not least due to past labour market reforms, and has remained surprisingly stable during this recession – both relative to past experience and vis à vis other OECD countries.
As the German economy is emerging from a severe recession the main challenges are to adjust labour market policy, restore fiscal sustainability, ensure stability in the banking sector and broaden growth beyond exports.
The potential growth rate of the economy has been low for a long time and the crisis has had a further adverse impact.
Eine auf Innovation, Bildung und mehr Wettbewerb im Binnenmarkt gestützte Wirtschaftspolitik kann Deutschland zu einer stärkeren und ausgeglicheneren Wirtschaft führen. Die Arbeitsmarktpolitik sollte nun den Weg für nötige Strukturanpassungen bereiten, die Fiskalpolitik braucht eine spezifische Exit-Strategie und muss sich in den kommenden Jahren auf die Konsolidierung der öffentlichen Haushalte konzentrieren.
The German job market has weathered the crisis well, said OECD Secretary-General Angel Gurría. Presenting the Economic Survey of Germany in Berlin, he said structural reforms were needed to ensure the sustainability of public finances and of long term growth. Stimulating domestic investment would help reduce the current account surplus, he added.
After a sharp fall during the recession, real GDP growth has picked up, but the recovery is expected to be relatively slow. The global crisis has hit the economy mainly through the collapse of world trade, the driving force behind the boom period before the crisis.
The German banking system came under pressure during the financial crisis, not least due to its significant exposure to toxic assets which originated in the US.
Many propositions have been made to explain the increase in the German household saving rate since the year 2000 from an individual country perspective but most of them focus on partial aspects, as discussed in this working paper.
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This note is taken from Chapter 3 of Economic Policy Reforms: Going for Growth 2010.