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Domestic Economy and International Economic Relations

The Domestic Economy of Germany

The German economy is full of contradictions. It is modern but old-fashioned. It is immensely powerful but suffers from serious structural weaknesses. It is subject to national laws and rules but is so closely tied into the European Union that it is no longer truly independent. It has a central bank that controls European monetary policy and has a deepening impact on the global economy but that also insists on making its decisions mainly on the basis of domestic considerations. Finally, although Germany must compete against highly efficient economies outside its own continent, it continues to carry the expense and burden of traditional industries that drain resources that could be better used elsewhere.

The German economy as it is known today is an outgrowth of the 1990 merger between the dominant economy of the Federal Republic of Germany (FRG, or West Germany) and that of the German Democratic Republic (GDR, or East Germany). This merger will one day produce a massive economic entity that will constitute the fulcrum of Europe as a production center, as well as a transportation and communications center. But each partner brings different elements to the mix, and the merger has proved difficult and costly. The merger will dominate Germany's economic policy and reality until well into the next century. 

The record of the West German economy during the four decades before unification shows a signal achievement. The first decade, that of the 1950s, had been that of the "economic miracle." The second decade, that of the 1960s, had seen consolidation and the first signs of trouble. The 1970s had brought the oil shocks, the generous social programs, the rising deficits, and finally a loss of control. In the 1980s, new policies at home and a more stable environment abroad had combined to put West Germany back on the path of growth.  

The East German economy had been a powerhouse in Eastern Europe, where Moscow had relied on it to produce machine tools, chemicals, and electronics. But it had grown increasingly inefficient, and its currency had become worthless outside its own borders. East Germans had felt frustrated at their lack of true material well-being, as well as their lack of freedom. They joined their economy enthusiastically with that of West Germany in 1990. The merger gave them a rude shock, however, in part because of the simultaneous collapse of East Germany's markets in the Soviet empire and in part because of the inefficiencies that the communist system had left behind.  

The united German economy is a dominant force in world markets because of the strong export orientation that has been part of the German tradition for centuries. Although the burdens of unification have cut into West Germany's traditional export  surplus, German industry continues to produce some of the best machine tools, automobiles, trucks, chemicals, and engineering products in the world. Its management culture, which mingles competition and cooperation, stresses quality and durability above all other virtues. Because many German companies are small or medium-sized, they are able to concentrate on a few production lines that compete effectively even if they are expensive. 

The German culture of cooperation also extends to the relations between the private sector and the government. The social market economy, in which all elements of the system cooperate, stresses the importance of having all parties to the social contract work together. Workers play a role in management. Managers mingle with workers. The bureaucracy attempts to create an environment in which all parties serve a common purpose. Although the rules intended to prevent the recurrence of the German cartel system of the last century are strictly enforced by the Bundeskartellamt (Federal Cartel Office), certain practices that would be forbidden under United States antitrust laws are widely tolerated in Germany. 

The dominant force in the German economy is the banking system. The central bank, the Bundesbank, is deeply committed to maintaining the value of the nation's currency, the deutsche mark, even at some potential cost to economic growth. It fears inflation above all other ills and is determined to prevent the recurrence of Germany's ruinous Great Inflation of the early 1920s. Private banks also play an important role. German industrial and service companies rely much more on bank finance than on equity capital. The banks provide the money and in turn sit on the supervisory boards of most of Germany's corporations. From that vantage point, they stress the traditional banking virtues of slow but steady and nonrisky growth. Their influence and thinking permeate the economy.  

German agriculture is not as strong as German industry. It is a relatively small part of the gross domestic product (GDP) and is heavily subsidized by the EU's Common Agricultural Policy (CAP) and by the German government itself. The accession of East Germany to a united Germany expanded the relative size of the agricultural sector and somewhat improved its efficiency, but Germany is not an agricultural producer like Spain or Italy. 

West Germany developed a system of high wages and high social benefits that has been carried over into united Germany. The extent and the generosity of its social programs now leave Germany at a competitive disadvantage with respect to the states of Eastern Europe and Asia. German labor costs are above those of most other states, not because of the wages themselves--which are high by global standards but not out of line with German labor productivity--but because of social costs, which impose burdens equal to the wages themselves. Thus, German companies and German workers must decide  either to abandon some of the social programs that are at the core of the revered social market economy or to risk losing out in the increasingly intense global competition of the 1990s and beyond. The Germans have not solved this problem, but they are beginning to address it more seriously than before.   

International Economic Relations

Ever since its creation in 1949, the Federal Republic of Germany (FRG), or West Germany, as it was also called until its unification in 1990 with the German Democratic Republic (GDR, or East Germany), has played an increasingly important role in the world economy. Consistently among the most important trading nations in the world, Germany often derives a higher share of its gross domestic product (GDP) from exports than any other major state. The Federal Republic plays an even more important role in international financial matters. Its currency, the deutsche mark, is the second most important currency in the world after the United States dollar.  

Germany does not act alone in international economic matters. Instead, it usually acts through Europe. West Germany was a founding member of the European Coal and Steel Community (ECSC) and of the follow-on European Community (EC), known since late 1993 as the European Union (EU). Germany increasingly makes its international policies in conjunction and consultation with other EU members. More than half of its trade is with other EU states, and the deutsche mark is the anchor of the European Monetary System (EMS) and of its planned follow-on, the European Monetary Union (EMU). 

Despite its central role in the world economy, Germany has never developed nor sought a high profile as a major international economic player. It receives much less attention than Japan in United States newspapers and economic journals, even though it wields as least as much influence in global financial affairs. This relative discretion reflects Germany's general reticence about projecting itself on the world stage in economic matters and the consistent German wish to integrate its economy into the EU.  Germany has benefited from a strikingly benign international economic climate for the past half-century. Despite occasional crises--such as the effects of the United States decision to end the dollar's link to gold in 1971 and of the "oil shocks" of the 1970s that resulted from exporters' sharp increases in the price of petroleum--the global economic scene has been remarkably stable in comparison with that of the 1920s and 1930s. This stability has favored the kind of international trading state that West Germany represented and that united Germany is expected to become once unification is complete. 

Under United States leadership, the Western world with free-market economies established the International Monetary Fund  (IMF) and the World Bank in 1944. In 1947 these nations created a virtually universal trade structure, the General Agreement on Tariffs and Trade (GATT). The combination of open financial and trade systems has helped promote continuous and even dramatic expansion since World War II of world trade and the liquidity of international capital. Nothing could have better suited West Germany and now united Germany. The productive capacities of both East Germany and West Germany always exceeded the absorptive capacity of their respective domestic markets. From the West German standpoint, this characteristic helped to fuel the German export drive and to generate investment capital. It also strengthened the deutsche mark and helped make the German economy internationally prominent. 

Although Germany has a global currency and a world-class trade sector, the German economy remains essentially continental in focus. Because the economy lacks the size necessary to deal with the effects of truly massive currency flows, Germany has looked for partners in international economic matters as it has in international strategic and political matters.  

The German government and the Bundesbank, Germany's central bank, are active participants in formal and informal international institutions and arrangements concerned with global finance and the coordination of national economic policies. West Germany was a founding member of the association of free-market economies known as the Group of Five (G-5), which later became the Group of Seven (G-7). But the German government has also had to acknowledge that it cannot direct the policies of the independent Bundesbank, which are more often based on Germany's domestic needs than on the wishes of the outside world. 

- Domestic Economy and International Economic Relations
- Bundesbank
- The Economic Miracle
- Impact of Unification on German Economy
- Germany in the World Economy
- National German Currency
- Culture of German Management

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