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The Economic Miracle of Germany
The economic reforms and the new West German system received powerful
support from a number of sources: investment funds under the European
Recovery Program, more commonly known as the Marshall Plan; the stimulus
to German industry provided by the diversion of other Western resources
for Korean War production; and the German readiness to work hard for low
wages until productivity had risen. But the essential component of success
was the revival of confidence brought on by Erhard's reforms and by the
new currency.
The West German boom that began in 1950 was truly memorable. The growth
rate of industrial production was 25.0 percent in 1950 and 18.1 percent
in 1951. Growth continued at a high rate for most of the 1950s, despite
occasional slowdowns. By 1960 industrial production had risen to two-and-one-half
times the level of 1950 and far beyond any that the Nazis had reached
during the 1930s in all of Germany. GDP rose by two-thirds during the
same decade. The number of persons employed rose from 13.8 million in
1950 to 19.8 million in 1960, and the unemployment rate fell from 10.3
percent to 1.2 percent.
Labor also benefited in due course from the boom. Although wage demands
and pay increases had been modest at first, wages and salaries rose over
80 percent between 1949 and 1955, catching up with growth. West German
social programs were given a considerable boost in 1957, just before a
national election, when the government decided to initiate a number of
social programs and to expand others.
In 1957 West Germany gained a new central bank, the Deutsche Bundesbank,
generally called simply the Bundesbank, which succeeded the Bank Deutscher
Länder and was given much more authority over monetary policy. That
year also saw the establishment of the Bundeskartellamt (Federal Cartel
Office), designed to prevent the return of German monopolies and cartels.
Six years later, in 1963, the Bundestag, the lower house of Germany's
parliament, at Erhard's urging established the Council of Economic Experts
to provide objective evaluations on which to base German economic policy.
The West German economy did not grow as fast or as consistently in the
1960s as it had during the 1950s, in part because such a torrid pace could
not be sustained, in part because the supply of fresh labor from East
Germany was cut off by the Berlin Wall, built in 1961, and in part because
the Bundesbank became disturbed about potential overheating and moved
several times to slow the pace of growth. Erhard, who had succeeded Konrad
Adenauer as chancellor, was voted out of office in December 1966, largely--although
not entirely--because of the economic problems of the Federal Republic.
He was replaced by the Grand Coalition consisting of the Christian Democratic
Union (Christlich Demokratische Union--CDU), its sister party the Christian
Social Union (Christlich-Soziale Union--CSU), and the Social Democratic
Party of Germany (Sozialdemokratische Partei Deutschlands--SPD) under
Chancellor Kurt Georg Kiesinger of the CDU.
Under the pressure of the slowdown, the new West German Grand Coalition
government abandoned Erhard's broad laissez-faire orientation. The new
minister for economics, Karl Schiller, argued strongly for legislation
that would give the federal government and his ministry greater authority
to guide economic policy. In 1967 the Bundestag passed the Law for Promoting
Stability and Growth, known as the Magna Carta of medium-term economic
management. That law, which remains in effect although never again applied
as energetically as in Schiller's time, provided for coordination of federal,
Land , and local budget plans in order to give fiscal policy a stronger
impact. The law also set a number of optimistic targets for the four basic
standards by which West German economic success was henceforth to be measured:
currency stability, economic growth, employment levels, and trade balance.
Those standards became popularly known as the magisches Viereck, the "magic
rectangle" or the "magic polygon."
Schiller followed a different concept from Erhard's. He was one of the
rare German Keynesians, and he brought to his new tasks the unshakable
conviction that government had both the obligation and the capacity to
shape economic trends and to smooth out and even eliminate the business
cycle. Schiller's chosen formula was Globalsteuerung, or global guidance,
a process by which government would not intervene in the details of the
economy but would establish broad guidelines that would foster uninterrupted
non-inflationary growth.
Schiller's success in the Grand Coalition helped to give the SPD an electoral
victory in 1969 and a chance to form a new coalition government with the
Free Democratic Party (Freie Demokratische Partei--FDP) under Willy Brandt.
The SPD-FDP coalition expanded the West German social security system,
substantially increasing the size and cost of the social budget. Social
program costs grew by over 10 percent a year during much of the 1970s,
introducing into the budget an unalterable obligation that reduced fiscal
flexibility (although Schiller and other Keynesians believed that it would
have an anticyclical effect). This came back to haunt Schiller as well
as every German government since then. Schiller himself had to resign
in 1972 when the West German and global economies were in a downturn and
when all his ideas did not seem able to revive West German prosperity.
Willy Brandt himself resigned two years later.
Helmut Schmidt, Brandt's successor, was intensely interested in economics
but also faced great problems, including the dramatic upsurge in oil prices
of 1973-74. West Germany's GDP in 1975 fell by 1.4 percent (in constant
prices), the first time since the founding of the FRG that it had fallen
so sharply. The West German trade balance also fell as global demand declined
and as the terms of trade deteriorated because of the rise in petroleum
prices.
By 1976 the worst was over. West German growth resumed, and the inflation
rate began to decline. Although neither reached the favorable levels that
had come to be taken for granted during the 1950s and early 1960s, they
were accepted as tolerable after the turbulence of the previous years.
Schmidt began to be known as a Macher (achiever), and the government won
reelection in 1976. Schmidt's success led him and his party to claim that
they had built Modell Deutschland (the German model).
But the economy again turned down and, despite efforts to stimulate growth
by government deficits, failed to revive quickly. It was only by mid-1978
that Schmidt and the Bundesbank were able to bring the economy into balance.
After that, the economy continued expanding through 1979 and much of 1980,
helping Schmidt win reelection in 1980. But the upturn proved to be uneven
and unrewarding, as the problems of the mid-1970s rapidly returned. By
early 1981, Schmidt faced the worst possible situation: growth fell and
unemployment rose, but inflation did not abate.
By the fall of 1982, Schmidt's coalition government collapsed as the
FDP withdrew to join a coalition led by Helmut Kohl, the leader of the
CDU/CSU. He began to direct what was termed die Wende (the turning or
the reversal). The government proceeded to implement new policies to reduce
the government role in the economy and within a year won a popular vote
in support of the new course.
Within its broad policy, the new government had several main objectives:
to reduce the federal deficit by cutting expenditures as well as taxes,
to reduce government restrictions and regulations, and to improve the
flexibility and performance of the labor market. The government also carried
through a series of privatization measures, selling almost DM10 billion
in shares of such diverse state-owned institutions as VEBA, VIAG, Volkswagen,
Lufthansa, and Salzgitter. Through all these steps, the state role in
the West German economy declined from 52 percent to 46 percent of GDP
between 1982 and 1990, according to Bundesbank statistics.
Although the policies of die Wende changed the mood of the West German
economy and reinstalled a measure of confidence, progress came unevenly
and haltingly. During most of the 1980s, the figures on growth and inflation
improved but slowly, and the figures on unemployment barely moved at all.
There was little job growth until the end of the decade. When the statistics
did change, however, even modestly, it was at least in the right direction.
Nonetheless, it also remained true that West German growth did not again
reach the levels that it had attained in the early years of the Federal
Republic. There had been a decline in the growth rate since the 1950s,
an upturn in unemployment since the 1960s, and a gradual increase in inflation
except during or after a severe downturn. Global economic statistics also
showed a decline in West German output and vitality. They showed that
the West German share of total world production had grown from 6.6 percent
in 1965 to 7.9 percent by 1975. Twelve years later, in 1987, however,
it had fallen to 7.4 percent, largely because of the more rapid growth
of Japan and other Asian states. Even adding the estimated GDP of the
former East Germany at its peak before unification would not have brought
the all-German share above 8.2 percent by 1989 and would leave all of
Germany with barely a greater share of world production than West Germany
alone had reached fifteen years earlier.
It was only in the late 1980s that West Germany's economy finally began
to grow more rapidly. The growth rate for West 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. Thus, the results of the late 1980s appeared to
vindicate the West German supply-side revolution. Tax rate reductions
had led to greater vitality and revenues. Although the cumulative public-sector
deficit had gone above the DM1 trillion level, the public sector was growing
more slowly than before. The year 1989 was the last year of the West German
economy as a separate and separable institution. From 1990 the positive
and negative distortions generated by German unification set in, and the
West German economy began to reorient itself toward economic and political
union with what had been East Germany. The economy turned gradually and
massively from its primarily West European and global orientation toward
an increasingly intense concentration on the requirements and the opportunities
of unification.
- 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
- Geography (lands and
capitals, climate)
- 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)
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radio and TV)
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navy, air forces, police)
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