Question

1. Case Study 1: Government Intervention

In Germany in 2009 there was considerable debate about the extent to which the government should be intervening in the economy. For example, its citizens were worried about the future of Opel, a German car brand that was part of the ailing General Motors. Some wanted the government to make sure jobs were saved no matter what. Others, however, were more hesitant and worried about becoming the government becoming too interventionist. Traditionally since the Second World War the German government has seen itself as a referee in market issues and has avoided trying to control parts of the economy. It would regulate anti-competitive behavior, for example, but not try to run many industries. However, in the recession of 2009 when the economy was shrinking the government was forced to spend more to stimulate demand and had to intervene heavily to save the banking sector from collapse. The government also had to offer aid to businesses to keep them alive.

Questions

1. What are the possible benefits of a government intervening in an economy?

3. What prompted greater intervention by the German government in 2009?

4. What would determine whether the German continued to intervene on this scale in

the future?

Answer 1

1. Governments can intervene to provide a basic security net – unemployment benefit, minimum income for those who are sick and disabled. This increases net economic welfare and enables individuals to escape the worst poverty. This government intervention can also prevent social unrest from extremes of inequality. There are many advantages of government intervention such as even income distribution, no social injustice, secured public goods and services, property rights and welfare opportunities for those who cannot afford.

3. Germany was shaken by the financial crisis that began in mid-September 2008 on two levels: First, its banks were hit by the spreading financial panic, forcing the government to intervene in the overleveraged banking sector; second, its exports were hit by falling worldwide demand as credit dried up.

4. The value of currency and the economic power of Germany will determine such an intervention in future.