The history of the German economy

The German Economy

Germany is the largest economy in Europe. According to the CIA World Factbook it is the “fifth largest economy in the world in PPP terms”This is not surprising as it is, after Russia, the second most populous country in Europe with a population of 82.3 million. This huge, central European economy is a result of the 1990 merger between the superior Federal Republic of Germany (West Germany) and that of the German Democratic Republic (East Germany). This merger of two very distinct economies has not been an easy process and the reintegration and modernisation of the eastern German economy after the collapse of the Union of Soviet Socialist Republics (USSR) is an ongoing (and costly) process. Economic standards in the east are much lower than those in the west and according to the CIA World Factbook: in 2008 “annual transfers from west to east” came “to roughly $12 billion.” [2] The government, under Gerard Schroeder, launched reforms to combat the chronically high unemployment rate and low average growth rate which resulted in strong growth in 2006 and 2007 and falling unemployment which reached a record low of 7.8%. Germany is a major “exporter of machinery, vehicles, chemicals, and household equipment and benefits from a highly skilled labour force.” [3] Germany is the world’s second largest exporter, after China, with $1.159 trillion exported in 2009. [4] This makes up over a third of Germany’s total output. The vast majority of Germany’s products are in engineering, especially in machinery, metals, chemicals and most famously automobiles. [5] Some of the largest car manufacturers in the world are located in Germany. These include Mercedes-Benz, BMW, Audi, Porsche and Volkswagen.

Unlike many European countries, such as the UK and France where the capital city dominates the national economy, Germany does not have a single economic centre: it is a poly-centric country. Only 3 of Germany’s 100 largest companies are headquartered in the capital Berlin. The stock exchange is located in Frankfurt am Main, the largest Media company is headquartered in Gütersloh; the most important car manufacturers are in Wolfsburg, Stuttgart and München.

Economic History of Germany

After World War 2 Germany lay in ruins. People’s land, their homes, and their property lay in ruin. Millions of people were force to emigrate and those that stayed behind often didn’t have enough food or clothes for their families. Inflation was astronomical and “Parker pens, nylon stockings, and Camel cigarettes represented the accepted, if not the legal, tender of the time.” [6] Unemployment was very high at this time.

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The government of the time saw an opportunity to create from the ruin a new, more stable economy. One which would provide equal opportunities to all and would avoid the creation of “underprivileged social groups” which can lead to “revolution and–in turn-repression” [7] The German government believed that the creation of a stable economy would mean a more stable society something I also believe in. One of the first steps the country took was currency reform where the old Reichsmark was replaced by the new deutsch mark which took place on the 20th June 1948. “The monetary, economic and institutional reforms of June 1948 were followed by about 18 months of consolidation with stable to slightly falling prices.” [8] This period of spontaneous growth is referred to as the miracle economy.

Due to the economic reforms West Germany received a lot of support from investment funds for European recovery such as the Marshall plan. There was an incredible economic boom in the years following 1950 as a result of this. “The growth rate of industrial production was 25.0 percent in 1950 and 18.1 percent in 1951.” [9] This rapid growth continued throughout the 1950s with some occasional slowdowns. By 1960 the level of industrial production had risen to two and a half times that of 1950. During the same decade GDP rose by two-thirds. There were also dramatic changes in the unemployment rate over this period as it fell from 10.3 percent in 1950 to 1.2 percent in 1960. [10] 

During the 60s the economy did not grow as rapidly as it had done during the 50s in part due to the fact that such an extreme pace of growth could not be sustained. One of the results of this slowdown was the election of a new government with new economic policies at the end of 1966. Over the next decade there were major changes in the way the government viewed its role in the countries economy. The new government’s economic ideas were much more closely linked with those of Keynesians than the free market policies employed by their predecessors. “In 1967 the Bundestag passed the Law for Promoting Stability and Growth … That law … provided for coordination of federal … and local budget plans in order to give fiscal policy a stronger impact.” [11] This government was voted out of office in 1972 when the German economy was in a downturn despite all their best efforts and government interventions.

Information for graph from Penn World Table. [12] 

We can clearly see from the graph the dramatic global downturn in 1972 and the effect that an upsurge in oil prices in 1973-1974 had on West German growth rates. By 1976 the worst was over and growth began to resume but the economy again turned down and despite government efforts to stimulate growth, failed to revive quickly. It was only by mid-1978 that the banks and the government were able to bring the economy into balance. After that, the economy continued expanding through 1979 and much of 1980. But the upturn proved to be uneven and unrewarding, as the problems of the mid-1970s rapidly returned. By early 1981, the country faced the worst possible situation: growth fell and unemployment rose, but inflation did not abate. [13] 

During most of the 1980s, the figures on growth and inflation improved very slowly, and the figures on unemployment barely moved at all. There was little job growth until the end of the decade. It was only in the late 1980s that Germany’s economy finally began to grow more rapidly. The growth rate for German GDP rose to 3.7 percent in 1988 and 3.6 percent in 1989, the highest levels of the decade. The unemployment rate also fell to 7.6 percent in 1989, despite an influx of workers from abroad. [14] 1989 was the last year of a separate West German economy.

Both Economies were quite similar around the time of unification with similar products and industries but their exports were in different directions. Unification occurred on the 1st of July 1990 it was a landmark moment in world economics as it was the first time that “a capitalist and a socialist economy had suddenly become one, and there were no precise guidelines on how it could be done.” [15] Of course this resulted in problems such as “the comparatively poor productivity of the former East German economy and its links to the collapsing socialist economies of the Soviet Union and Eastern Europe.” [16] One of the first steps taken by the West German government was to privatise the East German economy. Investors were afraid to invest in East Germany as there were a lot of disputes regarding property ownership resulting from years of “Nazi, Soviet, and later GDR expropriations” which “had taken place between 1933 and 1989”. [17] Another problem which discouraged investment was the very poor standard of infrastructure in East Germany. Despite all these problems the unification continued, slowly. Immediately after unification the economy of East Germany went into a downturn. Unemployment at this time rose to over 3 million people and industrial production fell to half its previous amount. East German economic growth was very slow partly due to the fact that very little money was being invested to give the East German economy the jumpstart it so badly needed with only 1% of GDP being invested in the region. In contrast to the recession being experienced in the East the Western economy went into a small upturn with GDP for 1990 growing at a rate of 4.6 percent. [18] The unemployment rate also fell to 7.2 percent. This dramatic improvement is attributed to the simultaneous opening up of a large new market of some 16 million people and the availability of a large new workforce. This new increase was similar to the dramatic growth experienced during the years of the economic miracle. To avoid high inflation at this time the banks raised interest rates sharply from “7.1 percent in 1989 to 8.5 percent in 1990, to 9.2 percent in 1991, and to 9.5 percent in 1992.” [19] As the banks policies began to take effect the economic growth slowed with growth rates falling “from 4.2 percent in the first quarter of 1991 to 0.8 percent in the last quarter of 1992. For all of 1992, the western German growth rate was 1.5 percent, a decline from the 3.7 percent rate of 1991 and even more from the 4.6 percent rate of 1990.” [20] This sharp drop in growth rates can be clearly seen on the graph. At the same time the East German economy was continuing to grow at a steady rate and in 1992 GDP rose for the first time to over $3 trillion. The total of unemployed also reached a new record high with 4 million people unemployed (the majority of whom were from East Germany).

As we can see in the graph the worst period of growth for the German economy in recent times was in the early 00’s. The worst growth figures were achieved in 2001 (0.71%), in 2002 (-0.71%) and in 2002 (-0.17%).

GDP

The gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year.

Germany’s GDP is $3.353 trillion (2009 est).

Like most European countries the service sector contributes the most to Germany’s GDP (about 72.3%), after this is industry (26.8%) and agriculture (0.9%).

Information for graphs from UN Statistical Database. [21] 

The GDP per capita is $40.726 (2009 est)

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Unemployment

Unemployment describes the state of a worker who is able and willing to take work but cannot find it.

Germany has a labour force of 43.5 million of which the majority are employed in the services sector. Their current unemployment rate is around 7.5% (2009 est). In East Germany unemployment is a serious problem as it is much higher than in the west of the country. Unemployment can exceed 20% in some municipalities in East Germany. [22]