VARIATIONS ON POLICY RESPONSES TO RECESSION IN SOME DANUBE AREA COUNTRIES – GERMANY, HUNGARY, SERBIA

DR. PÉTER NOVOSZÁTH 1

Összefoglalás: A világ fejlett országainak többsége 2008-2009-ben mély gazdasági recesszióba esett. Kezdetben az európai országok, a kamatlábak csökkentésével, a háztartások részére nyújtott adókedvezményekkel és az adórendszer reformjával, egyes ágazatok, mint az épít őipar támogatásával igyekeztek reagálni a válságra. Azt követ ően 2008 szeptemberét ől, hogy a válság komolyan elérte a gazdaságot sok ország különféle intézkedés csomagokat jelentett be a válsága leküzdésére. El őadásomban arra keresem a választ néhány Dunamenti ország gyakorlatát tanulmányozva, hogy melyek a jelenlegi válságra adott legfontosabb nemzeti válaszok.

Kulcs szavak : a válság hatásai, eset tanulmányok, gazdasági válság, globális válaszok a válságra, nemzeti tervek a válságból való kibontakozásra

Abstract: In 2008-2009 much of the industrialized world entered into a deep recession. At begining in European countries responses to the economic crisis mainly consisted in low-rates monetary policy and the measures were dedicated to households (tax rebates) reform of taxation system to support specific sectors such as housing. From September, as the crisis began to affect seriously the economy, many countries announced specific measures. In my investigation I would like to answer some of the critical questions of delivering most important national responses to the crisis on practise of some Danube Area countries.

Keywords : case studies, economic crisis, effects of crisis, global responses to crisis, national plans to crisis.

In 2008-2009 much of the industrialized world entered into a deep recession, labeled as the „Great Recession” [1]. Around the world many large and well established investment and commercial banks suffered massive losses and even faced bankruptcy. It has been argued that huge increases in commodity and asset prices came as a consequence of an extended period of easily aviable credit and that the primary cause of the downturn was exceptionally financial. This has led to increased unemployment, and other signs of contemporaneous economic downturns in major economies of the world. The recession is the worst since the Great Depression of the 1930s.

1. Main effects of recession

Decline in Trade and industrial production

In February 2009, The Economist claimed that the financial crisis had produced a „manufacturing crisis”, with the strongest declines in industrial production occuring in export- based economies [2]. In March 2009, Britain’s Daily Telegraph reported the following declines in industrial outptut, from January 2008 to January 2009: Japan -31%, Korea -26%, Russia - 16%, Brazil -15%, Italy -14%, Germany -12% [3].

1 Associate Professor, College of Dunaújváros DF, 2401. Dunaújváros, Táncsics Mihály u. 1/a. [email protected]

Unemployment

The International Labour Organization (ILO) predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis – mostly in „construction, real estate, financial services and the auto sector” – bringing world unemployment above 20 million for the first time [4]. The number of unemployed people worldwide could increase by more than 50 million in 2009 as the global recession intensifies, the ILO has forecast [5].

Period of deglobalization and protectionism

Some analysts even say the world is going through a period of deglobalization and protectionism after years of increasing economic integration [6] [7].

Return of volatility

For a time of major economies of the 21st century were believed to have begun a period of decreased volatility, which was sometimes dubbed The Great Moderation, because many economic variables appeared to have achieved relative stability. The return of commodity, stock market, and currency value volatility are regarded as indications that the concepts behind the Great Moderation were guided by false beliefs [8].

Financial markets

January 2008 was an especially volatile month in world stock markets, with a surge in implied volatility measurements of the US-based S&P index, and sharp decrease in non U.S. stock market prices on Monday, January 21, 2008 [9]. Some headline writers and a general news columnist called January 21 „Black Monday” and referred to a „global shares crash” though the effects were quite different in different markets [10] [11]. There were several large Monday declines in stock markets world wide during 2008, including one in January, one in August, one in September, and another in early October. As is often the case in times of financial turnmoil and loss of confidence, investors turned to assets which they perceived as tangible or sustanaible. The price of gold rose by 30% from middle of 2007 to end of 2008. A further shift in investors’ preference toward assets like precious metal or land is discussed in the media [12] [13].

Travel

According to Zagat’s 2009 U.S. Hotels, Resorts & Spa survey, business travel has decreased in the past year as a result of the recession. Reasons for the decline in business travel include company travel policy changes, personal economics, economic uncertainity and high airline prices. Hotels are responding to the downturn by dropping rates, ramping up promotions and negotiating deals for both business travellers and tourists.

Political instability

In December 2008 Greece experienced extensive civil unrest that continued into January and some violence continues as of 21 March 2009. In January 2009 the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police due to the government’s handling of the economy. Hundreds of thousands protested in France against President Sarkozy’s economic policies.

Prompted by the financial crisis in Latvia, the opposition and trade unions there organized a rally against the cabinet of premier Ivars Godmanis.

2. Recession in Germany – Focus on stimulating measures, Opel dilemmas

In Germany officials had warned the economy could contract by as much as 1.5 percent in the second quarter of 2009 because of declining export orders. The Federal Statistics Office as announced in 13 november 2008 economy of Germany officially fell into recession that GDP contracted 0,5% in the third quarter, after a 0,4% percent drop in the second, which corresponds to the official definition of a technical recession [14]. Germany’s industrial output was down 2.4 percent, the fastest rate for a decade. Orders have no fallen for six month in a row, the worst run since the eraly 1990s [15]. The German Chamber of Industry and Commerce warned of up to 200 000 job losses in coming months [16]. German retails sales fell 1.4 percent in June more than any expectations. The German economy declined by 0.5 percent in the second quarter. Germany’s ruling coalition has reached agreement a €50 billion (70 billion dollar) economic stimulus plan over the next two years, making of it Western Europe’s biggest rescue plan for now in this crisis [17].

Opel was the first European carmaker to seek a government bailout since the crisis began, originally sought to gurantee loans of about 1 billion euros for 2009. Opel employs around 26,000 people in Germany at plants in Rüsselsheim, Bochum, Kaiserslautern and Eisenach, nearly half the total European workforce of the wider GM Europe group. The potential job losses from plant closures are much higher than that if components suppliers are included.

The German government is in a serious dillema: these people 25,000 to 26,000 workers who lose their jobs will cost the state, they are still taxpayers now – 2 to 3 billion euros. Doesn’t it make more sense to help them keep their jobs [18]? An insolvency at Opel cannot be avoided. The state should not try to prevent an insolvency with loans. The funds would end up in the United States. The German government cannot vote to support anything like that. The second problem is if the state helps Opel now, then it will have to help BMW tomorrow, and then Daimler the next day and all the car parts suppliers.

The German government tries to solve Opel dilemmas by looking for investors for Opel, the German subsidiary of General Motors. Italian carmaker Fiat and Austrian-Canadian auto components manufacturer Magna are currently at the top of the list. German Economics Minister views both concepts with same openness and scepticism [19]. Opel’s work council believes a Fiat takeover would mean shuttered factories and job cuts. German Transport Minister opinion: „Whoever wants to close factories and cut jobs is not acceptable Opel partner”, he said [20]. German Finance Minister stressed that the government could only provide short-term help [21].

3. Recession in Hungary – Focus on austerity mesures

Hungary’s transition from a planned to a free market economy was smoother than for many of its former Soviet neighbours. By 1998 it was attracting nearly half of all foreign investment in the region, much of it from USA, Germany and Austria. It has struggled with a low employment rate and a large budget deficit.

Hungary’s central bank raised interest rates by three percentage points on 22 October 2008 to counter a sharp fall in the value of its currency, the forint. The emergency move took bank rates

to 11,5%. The currency has suffered as investors have pulled up of forint assets amid worries abour its banking system. On 28 October 2008 it emerged that Hungary has been granted a rescue package by the IMF, the EU and the World Bank worth $25bn. Hungary which joined the European Union in 2004, has been hit hard by the current financial crisis due to its heavy dependence on foreign capital to finance its economy and has one of the biggest public deficits in the EU. In November 2008 Hungary has received a $25 billion cash injection from the International Monetary Fund to save it from financial collapse. In December, the IMF transferred $5 billion and the ECB $2 billion.

In February 2009 a Gyurcsany package was necessary announced because the budget was planned to accommodate one percent drop in GDP but the government began talking about a recession of 3-3,5 percent.

In April new prime minster Gordon Bajnai announced the biggest savings in the package of additional austerity measures will come from public sector and affect mainly ordinary people: employees, pensioners, public administration, families with children etc.

Table. 1.: Main elements of Gyurcsány and Bajnai’s austerity measures

Gyurcsány package Bajnai package GYED The insurance term required for eligibility will The duration of GYED and GYES will be be raised to 12 months limited to a maximum of two years Child benefit It will become taxable income and children The upper age limt will be reduced from 23 to aged 14-18 will only be eligible if they fulfill 20; the amount of the family benefit will not their study obligations be raised for two years Home Support Housing and home support will be taxable From 1 July 2009, housing support and interest subsidies are to be stopped Pensions From 2016 the age of retirement is to be The pension age will be raised by half a year increased by four months every year; from every year; pension payments to new 2011 it will only be possible to retire early if pensioners who have worked for less than 40 the amount of the pension is reduced; the 13 th years will be reduced; pensioners will lose month pension payment will be abolished for half of their 13 th month pension payment in the newly retired 2009 and all of it from next year, pension with inflation Gas and district heating Stricter enforcement of the principle of need A reduction in gas and district heating as a basis for entitlement in regard to gas and subsidies are to be stopped district heating support Source: Él ő, Anita: To be continued. The Gyurcsány package before parliement. Heti Válasz online. April 9th , 2009.[22]

Meanwhile the Hungarian GDP fall and unemployment rise become more acute. According to preliminary data of the Central Statistical Office (KSH) and Ecostat the calender adjusted, yr- on-yr gross domestic product of Hungary decreased by 5,8 % in the first quarter of 2009. The declined compared to Q4 of 2008 was 2,3 %.

While the ratio of official job seekers stood at 9,1 % in the period between December 2008 and February 2009, by the end of the March the number had climbed to 403,000 or 9,7 %. Such Hungarian Unicum product manufacturer like Herz Salami company, Gyulai Húskombinát are in a financial crisis situation. These companies already requested state subsidies at the end of 2008, but has not received anything as yet.

4. Recession in Serbia – focus on restrictive and stimulating measures

The Serbian banking i.e. financial sector did not experience initial losses in a way as the developed countries. Namely, the participants on the Serbian financial market did not take part in the financial products related transactions similar to those which were the financial triggers in the developed countries, and the market itself is of such a limited scope that it had virtually no impact on the industry. At the same time, the long term macroeconomic position of Serbia is characterized by a distinct balance of payments deficit resulting from the foreign trade deficit [23] [24]. This indicates three basic facts:

1. In Serbia, spending is far greater than production and the excess spending is financed by foreign sources (foreign investment, greenfield, or securing additional capital, loans – mostly private remittances, etc.) 2. Excessive spending is closely linked to overheated demand, i.e. ultimately to excessive liquidity on the market, and 3. High GDP growth is closely related to high demand generated by foreign funds (different kinds) but also by funds from local sources.

The measures implemented by the Government of Serbia must be tailored to the specific needs of the Serbian market and cannot be mere cut-and-paste of measures implemented in the countries of the region or globally, because the causes of the crisis differ from country to country.

The planned measures will be partially restrictive and partially stimulating. The restrictiveness of the measures comes from the need to decrease the spending in an organized way so as not to have the market do that through inflation and drastic devaluation of the national currency. At the same time the measures will be stimulative in order to avoid the recession and maintain the GDP growth continuity, even if it means a more moderate GDP growth rate as compared to the previous couple of years.

Most important restrictive measures in the Sector of the State

• The budget is generally restrictive with a 1,5% GDP deficit; • A more responsible approach to state revenues (revenue agency, funds, public and utility companies) within the executive, bankrupcy and liquidation procedures (in particular in those cases where the property has already been sold off); • Increasing the capacity of the budget inspection; • More restrictive rulebooks on the use of service cars for budget beneficiaries. • Regulating and stipulating the maximum compensation for managing and monitoring board members; • Regulating and stipulating the criteria for the salaries of managing directors – motivation scheme for increasing business efficiency; • Cutting expenses for representation, business trips, fairs, professional development, part time employment and piece work contracts, etc.

• Cutting all other costs which are not directly linked to the business activities of the companies and organizations where state has the majority ownership; • More efficient and controlled public tender procedures; • Giving recommendation to local self government units to implement a similar string of measures to companies/organizations operating at the local level.

Most important stimulating measures

1. Increasing liquidity of the economy through • Issuing soverign guarantees to banks which would then offer loans to businesses on favorable terms; • Incentive loans from the Development Fund in the amount of 18.7 billion dinars; • International loans for infrastructure development • Favorable loans for the development of small and medium size enterprises (APEX loans) in the amount of EUR 250 million; • In cooperation with the National Bank of Serbia, implement package of measures which would cause high liquidity in the banking sector to spill over into the economy. 2. Increasing exports through • Providing working capital under favourable terms for effecting export related activities; • A higher level of export contracts insurance; • Financial support to product certification; • Supporting exporters in finding new markets. 3. Increasing domestic demand through the implementation of infrastructure projects – targeting the most vulnerable sectors: construction industry, construction materials, metal and metal products industry • Construction of co-op apartments; • Development of rural infrastructure. 4. Increasing investments by creating a favorable business climate • Regulatory guillotine – building permits, issuing consent, red tape; • Opening market for the construction of new production capacities in the energy sector. 5. Decreasing the fiscal burden • Interest write off for unpaid taxes and contributions if they are now settled on regualr basis;

Most important measures in the General Population Sector

• Increasing saving accounts: the foreign currency savings accounts has been increased from EUR 3.000 to EUR 50.000; abolishing savings tax until the end of 2009. • Employment: companies which receive incentive funds are under the obligation not to reduce the number of employees, increasing the effectiveness of the Employment Bureau in the area of retraining and new job search. • Social welfare: social spending are at the same level as in 2008, targeting social vulnerable categories (amendments to the Law on Social Protection) – to assist those in need through better identification of socially vulnerable categories, to a greater extent than before.

5. Some concluding remarks

As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool. Many policy makers (ex. U.S. president Obama) around the world currently see Keynesian solutions as the best option for shielding their populations from the current crisis. Nevertheless this revival of Keynesian ideas has attracted considerable criticism. The key issue of contention is the optimal level of government intervention in economic affairs. In the case of German government that means government will support whoever invests in Opel with financial guarantees but will not take a direct stake in the Genaral Motors subsidiary. German government was making Western Europe’s biggest economic stimulus plan and intends to avoid jobb losses from plant closures by active government intervention.

Hungarian government is contrary to accepted opinions continued neoliberal economic policy by forcing to austerity measures. The Hungarian government, both Gyurcsány and Bajnai cabinet also has just been drifting and it has done nothing other than occassionally adjust the budget’s expenditure to the deteriorating indicators on revenue and has done almost nothing to slow down crisis or to stimulate the economy.

Serbia policy responses are partially restrictive and partially stimulating. The restrictiveness comes from the need to decrease the spending of the previous couple of years. At the same time the measures are stimulative in order to avoid the recession and maintain the GDP growth continuity.

References

[1] The Great Recession. Jan19th, 2009. Organizing for America. my.barackobama.com http://my.barackobama.com/page/community/post/walterhecht/gGxHkj [2] The collapse of manufacturing. Economist com, Feb 19th 2009. http://www.economist.com/opinion/displaystory.cfm?story_id=13144864 [3] Evans-Pritchard, Ambrose. Thanks to the Bank it’s a crisis; in the eurozone it’s a total catastrophe. Telegraph.co.uk. 08 Mar 2009. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4958395/Thanks [4] Financial crisis to cost 20 mn jobs: UN. expressindiacom, Oct 21 2008. http://www.expressindia.com/latest-news/Financial-crisis-to-cost-20-mn-jobs-N/376061/ [5] Mortished, Carl. Global unemployment heads towards 50 million. The Times, January 29 2009. http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/articl e5607656.eceto-the-Bank-its-a-crisis-in-the-eurozone-its-a-total-catastrophe.html [6] Faiola, Anthony. A Global Retreat As Economies Dry Up. Washington Post. March 5, 2009. http://www.washingtonpost.com/wp- dyn/content/article/2009/03/04/AR2009030404221.html [7] Gjelten, Tom. Economic Crisis Poses Threat To Global Stability. NPR. February 18, 2009· http://www.npr.org/templates/story/story.php?storyId=100781975 [8] Tett, Gillian. Insigth: Volatility returns with vengeance. FTcom, October 27 2008. http://www.ft.com/cms/s/0/d6527f50-a442-11dd-8104- 000077b07658.html?nclick_check=1 [9] Markets, Uncertain Times. The Economist, February 4, 2008 http://www.economist.com/displaystory.cfm?story_id=10635708

[10] MacMahon, Peter: Market falls continue as Ł84bn is lost on Black Monday. The Scotsman. (Johnston Press Digital Publishing), 22 January 2008 http://business.scotsman.com/economics/84bn-lost-on-Black-Monday.3695586.jp [11] Wilson, Greg It is a Black Monday as stock markets tank in every corner of the globe. Daliy News. (NYDailyNews.com), January 22nd 2008 http://www.nydailynews.com/money/2008/01/22/2008-01- 22_its_a_black_monday_as_stock_markets_tank.html [12] Hale, David There is only one alternative to the dollar. Financial Times. January 5 2009 http://www.ft.com/cms/s/0/5b21dafc-db5a-11dd-be53-000077b07658.html . [13] Seized: The 2008 landgrab for food and financial security. Grain. October 2008. http://www.grain.org/briefings/?id=212 [14] Hopkins, Kathryn-Conolly, Kate. Germany officially in recession as OECD expects US to lead recovery. The Guardian, 14 November 2008. http://www.guardian.co.uk/world/2008/nov/14/oecd-recession-germany-inflation- deflation [15] Thessing, Gabi. German Economy Enters Worst Recession in 12 Years. Bloomberg.com November 13, 2008 http://www.bloomberg.com/apps/news?pid=20601068&refer=home&sid=asVhpVLebe1 Q [16] Evans-Pritchard, Ambrose. Recession warnings ruffle Europe as Germany and Italy stall. Telegraph.co.uk, 27 Feb, 2009 http://www.telegraph.co.uk/finance/newsbysector/transport/2792901/Recession-warnings- ruffle-Europe-as-Germany-and-Italy-stall.html [17] Germany agrees on 50-billion-euro stimulus plan. France 24. International news. 6 January 2009. http://www.france24.com/en/20090106-germany-agrees-new-50-billion- euro-stimulus-plan [18] German Politicians Spar Over Aid To Carmaker Opel. Javno, February 22, 2009. http://www.javno.com/en-economy/german-politicians-spar-over-aid-to-carmaker- opel_236583 [19] Berlin rules out saving Opel jobs. BBC News. 10 May 2009. http://news.bbc.co.uk/2/hi/business/8042509.stm [20] German government demands guarantees from Opel investors. Deutsche Welle. 26.04.2009. http://www.dw-world.de/dw/article/0,,4207738,00.html [21] German Government Considers Stake in Carmaker Opel. Spiegel Online International. 02.17.2009. http://www.spiegel.de/international/germany/0,1518,608077,00.html [22] Él ő, Anita: To be continued. The Gyurcsány package before parliement. Heti Válasz online. April 9 th , 2009. http://www.hetivalasz.com/article/0904/to_be_continued [23] Government of the Republic of Serbia. Office of the Prime Minister. The economic crisis and its impact on the serbian economy. December 2008. [24] Jelasic, Radovan. Serbia against the economic crisis. BIS Review 4/2009. Belgrade, 9 January 2009.

Direct internet links: [25] Wikipedia – Late 2000s recession: http://en.wikipedia.org/wiki/Late_2000s_recession#cite_note-Guardian-Landgrab-74 [26] Wikipedia - Late 2000s recession in Europe: http://en.wikipedia.org/wiki/Late_2000s_recession_in_Europe#Hungary [27] Wikipedia – 2008-2009 Keynesian resurgence: http://en.wikipedia.org/wiki/The_Keynesian_Resurgence_of_2008_/_2009