Today in History
Travel to Germany
Facts About Germany
Thirty Years' War
German Chocolate Cake
How To in Germany
Domestic Economy and International
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
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
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
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.
Economy and International Economic Relations
- The Economic Miracle
- Impact of Unification
on German Economy
- Germany in
the World Economy
- National German Currency
- Culture of German
- Geography (lands and
- Society (population, religion,
marriage, urbanization, social structure, immigration)
- Education (elementary,
junior, senior, vocational, higher)
- Economy (the Economic
Miracle, financial system, Bundesbank, business culture)
- Politics (government,
the Chancellor, the President, parties, Bundestag)
- Mass Media (newspapers,
radio and TV)
- Armed Forces (army,
navy, air forces, police)