What is Ailing the German Economy? A Critical Analysis of German Social Market Economics

Inquir y: Th Journal W hat is Ailing the German Economy? A Critical Analysis of German Social Market Economics Robert T. Cheek Jr. 0 0 University of Arkansas , Fayetteville , USA Follow this and additional works at: http://scholarworks.uark.edu/inquiry Part of the European History Commons, and the International Economics Commons Recommended Citation - 46 INQUIRY Volume 8 2007 This paper offers a narrative historical description ofthe German Social ,\farket Economy.from its inception following JI(Jrld War II, up to the recent Agenda 2010 reforms enacted under the administration ofChancellor Gerhard Schroder. It is the purpose ofthis work to explore why the German Social Market System enjoyed such a high degree of success in its early years, and u?hich flaws might be causing the chronic pmb/ems oflow growth and high unemployment that have plagued Germany more recently. In particular. the paper argues that a high-cost and highly inflexible labor market resulting from Gennany :S system ofautonomous collectil'e wage bargaining may be stymieing business growth and scaring mrayforeign investment. Introduction The health ofthe German economy is a topic of special concern, not only for the people and politicians of Germany, but also for all of the member countries of the European Union. As the largest economy in Europe, Germany's economic strength has significant influence on the \veil-being of its neighbors. Since the mid-1970s, the German economy has sutfered under struggling gross domestic product (GOP) growth rates, with persistently high unemployment figures. At the end of2006, eight percent of German workers were unemployed. with unemployment rates in areas of the East as high as 20%. Since reunification. Germany's real GOP growth rate has averaged a meager 1.8% (OECD Statistics 2007) . Economists and politicians alike point to the severe weakness of the eastern German economy as a major cause for the current situation. The cost of unification is estimated to have exceeded E1.5 trillion, and every year the German government pumps ?70 to ?80 billion into the region costs which consume four percent of the GOP annuall; (E~onomist May 8. 2004). The high unemployment in the area has spurred many of the young and skilled workers of the East to migrate elsewhere, resulting in a dramatic aging of this population and a loss in creative force. Apart from the problem of the East. many experts point to an inflexible labor market as a major cause for high unemployment numbers and see heavy bureaucratic regulations imposed by the German government as stymieing new business growth. Furthermore, weaknesses such as high l~bor costs, poor worker flexibility, a heavy tax burden, and h1gh energy costs are all cited as detractors which are keeping foreign and domestic investors from setting up production facilities within Germany (Economist Aug. 20 2005). In order to better understand the current problems facing Germany's economy, it is useful to consider the history of Germany's modem political and economic system. Foilowing the defeat of Germany in 1945, the country was occupied by the victorious Allied forces. Tom apart by the emerging Cold War conflict, two states emerged from the ruins of the Third Reich: the German Democratic Republic (GDR) in the East, a communist regime with strong ties to the Soviet Union, and the Federal Republic of Germany (FRG) in the West with a liberal democratic constitution. Although both states quickly recovered from the devastation left by the Second World War, Western Germany stood out in the following decades as a Wirtschaftswunder, or "economic miracle," quickly becoming one of the strongest economies in Europe. This period of economic growth would continue all the way into the early 1970s. At the core of the new development strategy for West Germany was the swift introduction of the Social Market Economy, combined with substantial financial transfers under the Marshal Plan and a currency reform enacted in 1948. Fueled by a heightened world-wide demand for industrial goods brought on by the Korean War, the period of the German economic miracle was characterized by skyrocketing increases in industrial productivity, along with historically low unemployment rates. Between 1950 and 1960 industrial production in West Germany had risen to two-and-a-halftimes the level of 1950, GOP grew by two-thirds, and the unemployment rate fell from 10.3 percent to an astonishing 1.2 percent (Haselbach 158). Beyond its immediate success, the Social Market Economic System gained both popularity and recognition from the population at large in Germany. The degree of importance this system holds in the minds of the German people is best understood in light of the circumstances under which this system emerged. At the end of Nazi rule in Germany, recognizing the scale and gravity of the atrocities committed under it, the German people could not deny that as a group they had made a terrible mistake. In (...truncated)