Path dependent economics : explaining differences in German and US reactions to financial crisis

Among the many striking developments that arose out of the 2008-2009 financial crisis and the subsequent euro crisis has been the policy divergence between the United States and Germany. Typically, the two countries have broadly similar preferences regarding economic policy. To be sure, this is not the first time that Germany and the US have failed to see eye to eye on economic matters,1 but the recent gap in perception and policy does warrant attention because it has been unusually large. Unlike the famous quarrels between Jimmy Carter and Helmut Schmidt in the 1970s,2 personality does not seem to play a role in this case. What then does explain the gulf? This contribution argues that variance in perception among policy elites and professional economists in the two countries is principally a product of different constructed understandings of the lessons of the economic crises of the 1920s and 1930s. Dissimilar understandings account for much of the discrepancy in the two countries’ broader policy prescriptions for the 2008-2009 financial crisis and the subsequent euro crisis. Structural differences between the two economies also play a role, but at a lower level. They help account for divergences in broadly similar policies adopted, most notably, stimulus packages.