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Germany
in the World Economy
Along with the United States and Japan, Germany has one of the world's
biggest economies and most dominant central banks. Of the three, Germany
has the smallest and most vulnerable economy. Germany's GDP of DM3 trillion
is less than one-third of United States GDP and less than one-half of
Japan's. Despite Germany's relatively small size, it has consistently
exerted a powerful influence on the world economy. Since the end of World
War II, the Federal Republic has played a key role in beginning, managing,
or ending each crisis and each phase experienced by the global monetary
system.
The first phase was the Bretton Woods era, named after the New Hampshire
resort where the Allied monetary conference of July 1944 created the IMF
and shaped the global postwar order. The dollar was pegged to gold at
a fixed rate of US$35 per troy ounce, constituting the official backing
of the global monetary system; other currencies were linked to the system
through their own fixed, dollar-pegged exchange rates. Countries could
devalue or revalue with respect to the dollar, and the dollar price of
gold could at least theoretically remain constant even as rates of exchange
between separate currencies fluctuated.
By the late 1960s, there was a surplus of dollars in the international
financial system. Largely for domestic reasons, the United States had
put far more emphasis on expanding dollar liquidity than on maintaining
dollar value. Growing fear of United States inflation had made those dollars
less desirable, and many central banks held more dollars than they wanted.
The United States proposed that other countries revalue their currencies
as provided under the Bretton Woods Agreement. But those other countries,
and West Germany in particular, were not prepared to revalue. Money poured
into purchases of the deutsche mark, sometimes for the purchase of German
goods, but more often to hedge against the dollar or to make a profit
when--as was widely expected--the deutsche mark would have to be revalued.
West German foreign-exchange reserves rose from US$2.7 billion in December
1969 to US$12.6 billion by December 1971, and to US$28.1 billion by September
1973. The steady flow of foreign money into deutsche marks not only undercut
the Bretton Woods system but also threatened to import inflation into
Germany by expanding the German money supply.
West Germany tried to help support the dollar during the late 1960s and
early 1970s. Bundesbank president Karl Blessing sent a letter to the chairman
of the United States Federal Reserve Board pledging not to purchase United
States gold but to maintain West German reserves in dollars. West German
chancellor Ludwig Erhard (1963-66) agreed to make large purchases of United
States dollar instruments and to make "offset" payments to lessen demands
in the United States Congress for a reduction in United States forces
stationed in West Germany. The United States and several other nations
pressed West Germany to revalue in order to compensate for the dollar
glut. Although the Bundesbank would have favored revaluation to reduce
the risk of inflation, the West German government was afraid that a revaluation
would cut into West Germany's global competitiveness and curtail exports.
Finally, after intensifying waves of speculation, the Bretton Woods system
collapsed in August 1971. The United States stopped the sale of gold at
US$35 per troy ounce and thus removed the fixed link between the dollar
and gold. With that step, the system lost its anchor.
The deutsche mark remained under strain throughout the post-Bretton Woods
period. It was alternately used in interventions to support the dollar
or as a hedge against it. Other currencies again flooded into purchases
of deutsche marks. To ease pressure within Europe, West Germany and other
European states agreed to peg their currencies to a special system of
relatively narrow exchange-rate bands formally entitled the "European
narrow-margins agreement" but informally known as the "snake." But the
snake also failed to hold. The domestic policies and even the economic
philosophies of its leading member states--West Germany, France, Britain,
and Italy--diverged too widely. The deutsche mark was the strongest currency,
and others could not hold their value against it.
The United States and West Germany played key roles in trying to arrange
a new global monetary system. But they had opposite objectives: the United
States was determined not to have the dollar reassume responsibility for
maintaining an international arrangement, fearing the great cost to its
exports and economic stability. The United States government believed
that countries with a trade surplus, such as West Germany, should accept
part of the responsibility for solving exchange-rate crises and should
be prepared to revalue, and it insisted on advance agreement for sanctions
against any country that refused to do so. Despite its readiness to make
minor exchange-rate adjustments for the sake of new currency alignments,
West Germany refused to commit itself to any arrangement that would oblige
it to revalue in the future.
In March 1973, the United States and other governments and central banks
gave up trying to preserve the Bretton Woods system by setting new fixed
exchange rates. With that decision, the next phase of the postwar international
system, "floating," began. With floating, the relationship between the
United States dollar and the deutsche mark became subject to market forces
rather than official negotiations. West Germany was not certain whether
floating would serve its needs but was not prepared to pursue any alternative.
Floating did not insulate domestic economies from international events
and global economic forces. Although the floating era may have ended the
period of fixed links to the dollar and to gold, it did not give countries
complete monetary freedom. It only meant that adjustments would be made
by the markets, not by government decree or agreement. Those adjustments
would, at least theoretically, occur in reaction to trade and payments
imbalances, correcting them over time. However, the situation did not
work out as expected or planned. The increasingly important role played
by capital flows, speculative or not, undercut the theoretically self-regulating
mechanism of trade flows as the basis of currency values.
The economic consequences of floating for Germany were not uniformly
beneficial. The Bundesbank welcomed floating because it gave the bank
more flexibility. The bank, in fact, could virtually control the deutsche
mark's exchange rate if it was prepared to manipulate interest rates to
that end. But West German industry, and especially West German exporters,
did not welcome the unpredictability that flexible exchange rates introduced
into commercial arrangements and production plans.
West German exporters also faced a particular problem that persisted
in the 1990s. The Bundesbank's favorite instrument for fighting inflation,
a high real domestic interest rate, is also the instrument that attracts
capital to the deutsche mark and keeps the currency valuable. Many businesspeople
feared then, as they have since, that the Bundesbank's anti-inflationary
policy would always keep the deutsche mark stronger than most other currencies
and would thus jeopardize exports.
German exchange-rate policy has been constantly caught on the horns of
that dilemma. When a decision absolutely needed to be made during the
floating era, however, German governments and the Bundesbank have almost
always chosen an anti-inflationary course of action. They have preferred
a strong currency, which might adversely affect trade, to a weak one,
which would jeopardize the stability of the German monetary system. With
that choice, they set policy for others as well as for themselves. As
long as the deutsche mark is strong and German interest rates remain high,
even the United States can diverge from German policy only at the risk
of seeing its own currency fall in value. Because of Germany's monetary
dilemma, and because the German government as well as the nation's bankers
and industrialists have recognized German limitations and vulnerabilities,
all have been anxious to establish the highest possible level of international
predictability. The Germans have become regular participants in international
economic consultations, and they have emphasized the value of such consultations
at every opportunity.
Global economic coordination after the end of the Bretton Woods system
has resulted in the development of a number of coordinating institutions.
One, first known informally as the Group of Five (G-5), consisted of the
United States, West Germany, Japan, Britain, and France. After Canada
and Italy joined, the association became known as the Group of Seven (G-7).
The G-7 includes the finance ministers and central bankers of the principal
economic powers, who meet periodically and consult regularly between meetings.
In addition to the meeting of G-7 finance ministers, there is an annual
G-7 economic summit at which the heads of state or government of the same
seven countries meet to coordinate economic and political policies or
at least to attempt to understand each other better. The summits have
been held annually since 1975 on a rotating basis among the summit states,
usually in the capital. At the Naples summit of the G-7 in 1994, Russia
joined the political discussions, essentially turning the gathering into
the Group of Eight (G-8).
Three summits, those of 1978, 1985, and 1992, took place in Germany.
Each was significant for different reasons. In 1978 Chancellor Helmut
Schmidt (1974-82) committed West Germany to a more reflationary policy,
to his later regret. Seven years later, Chancellor Helmut Kohl (1982-
) and other summit principals made commitments toward supply-side policies
that most participants agreed were then necessary and that both Kohl and
United States president Ronald Reagan wanted to use to reduce the role
of government in their national economies. Seven years later, at Munich
in 1992, the G-7 agreed to provide aid to Russia. However, the summit
did not reach agreement on the Uruguay Round of the GATT negotiations,
and Chancellor Kohl did not carry out what the United States had regarded
as his promise to persuade the French to reduce their insistence on large
EC agricultural export subsidies.
German bankers and financial officials have usually spoken skeptically
about possible results from the summits, making abundantly clear that
the meetings do not affect their views, although they may subsequently
adjust specific policies. Bundesbank president Hans Tietmeyer has stated
that West Germany sees them as occasions for "cooperation," not "coordination."
German global policy has thus been guided by broad efforts to coordinate
specific policies, but with a firm wish to preserve German interests and
its friendships with the EU members it considers its principal economic
partners.
- 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)
- Mass Media (newspapers,
radio and TV)
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