Since unification in 1871, Germany experiences fast economic growth. Early successes in manufacturing, engineering, chemicals, and the auto industry --some with state support -- play a key role in growth after the interruption of world wars and depression. Hundreds of cartels strongly influence the economy until the postwar period.
War breaks out, and expectations for a quick victory soon vanish. More and more resources are needed to wage the unending trench warfare, and much of the effort is financed through bonds in the hopes of repaying them later through the spoils of victory.
Under the Treaty of Versailles, Germany must give up territory (and population) and pay reparations. War debt, reparations, and reckless printing of money cause crippling hyperinflation in the postwar years, while unemployment remains high through the '20s. The onset of the Depression ends a slight recovery. Government spending increases to 25 percent of GDP between the wars, up from 15 percent.
Depression in the United States prompts creditors to call in their loans to Germany. Unemployment rises to nearly 30 percent in 1932. Budget cuts designed to convince the Allies Germany was suffering too much to pay reparations do lead to a moratorium, but also cause misery and discontent, which in turn fuels the Nazi rise to power.
With the Nazis in power, subsidies boost industries tied to arms and self-reliance. Unemployment is almost zero, but wages are low, and foreign reserves shrink to fund expansion. Unlike Japan, Germany does not limit consumer goods, and rearmament is not yet fully planned. In 1936 Hitler urges Germany to be ready for war by 1940 through a Four-Year Plan that sets production quotas.
The war's opening blitzkrieg does not disrupt the civilian economy significantly. But by 1942, the war effort includes ever more centralized planning and control, and a warfare state that subordinates private property to Nazi purposes evolves. After 1944, faced with fewer workers, Allied bombing, and lost territory, planners struggle to maintain production, often relying on foreign and slave labor.
The economy is ruined by war, and many remaining assets are carried off by occupiers. Köln mayor Konrad Adenauer sleeps in his suit and coat to stay warm. The Allies control wages and prices, and in their zone the Soviets begin to establish a planned economy. Behind the scenes, a black market flourishes. Initially, parties from across the spectrum support a mixed economy.
After firing his predecessor for calling U.S. food aid "chicken feed," the Allies appoint Ludwig Erhard as economic director. An Ordoliberal, he believes the state's role should be to promote competition while maintaining social welfare. Facing shortages and a black market, Erhard ends price controls after the Allies replace the Reichsmark currency with the Deutsche Mark, and the recovery begins.
Elections endorse the Ordoliberal "social market economy." Business, labor, and government cooperate on tripartite supervisory boards. The resulting Wirtschaftswunder ("economic miracle") raises GDP by two-thirds and reduces unemployment to 1 percent. Facets of a mixed economy remain, such as partially state-owned firms and several subsidies and controls. Public spending reaches 35 percent of GDP.
The miracle gives way to slower growth and new problems such as inflation. Keynesian economics minister Karl Schiller believes the state should play a bigger role, and the Law for Promoting Stability and Growth coordinates planning at all levels and sets targets for currency, growth, employment, and trade. Early success helps the SPD gain power, but Schiller resigns in 1972 as the economy slumps.
Oil shocks cause new problems as unemployment and budget deficits increase. Unemployment rises to almost 4 percent after many years at 1 percent. Critics charge that the economy is unable to adapt to global changes due to collective bargaining and rigid wage structures. Manufacturing stagnates, and subsidies for favored industries such as steel, shipbuilding, and agriculture increase.
In the Thatcher-Reagan era, Helmut Kohl's "reversal" policy scales back the state, whose spending has reached half of GDP. The privatization trend begins. Goals include cutting the deficit and regulation and making labor more flexible. Subsidies grow despite pledges, but public spending as a percent of GDP temporarily falls. Unemployment rises to 9 percent, but growth returns by the decade's end.
The fall of the Berlin Wall leads to the absorption of a command economy by a free-market one, followed by collapse of a rusted-out East German economy unable to compete or pay competitive wages. Firms are privatized or closed, and the West transfers $100 billion annually for social benefits and subsidies to firms, leading to high interest rates that restrict growth and jobs in Germany and Europe.
The Maastricht Treaty on European unification has a tremendous impact on Germany. The treaty places curbs on deficits and bans monopolies, reinforcing a growing view that state ownership is an obstacle to efficiency and innovation. The government sells some of its stakes in Volkswagen, Deutsche Telekom, Lufthansa, and the railroads through the stock market.
The new government strives to cut the budget while also reforming taxes (through tax cuts and fewer loopholes) and the pension and health care systems (by introducing private alternatives). The economy shows signs of growth in 2000 before lagging again. As of March 2002, unemployment in all of western Germany is 8.3 percent, compared to 19.1 in the former communist East.
A global slowdown, low business confidence, and an inflexible labor market combine to mire Germany in stagnation. Unemployment hovers around 10 percent -- or four million people. The budget deficit, at 3.6 percent of GDP, exceeds European Union rules. In late 2002 Wolfgang Clement becomes "super-minister" for economics and labor, with the difficult assignment of accomplishing labor market reform.
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