Germany: Unifying the
Social Market Economy
The Historical Legacy
(1789-1846) Early advocate of German unification. Exiled to U.S. in
1825; became citizen, businessman, statesman, influenced by Hamilton.
Returned to Germany, supported creation of Zollverein
and external protection.
Otto von Bismarck
- Pragmatic chancellor (1871-90) who united the German
states. Developed protective tariffs and comprehensive social
- Private property and totalitarian control. Used rationing,
quotas, wage/price controls, encouraged cartels. Labor unions
subordinated to German Labor Front.
The Social Market
the economic philosophy of Ordoliberalism from the Freiburg School.
First implemented by Ludwig Erhard, Minister of Economics from
1949 to 1963.
Market system would coordinate economy; planning and fine tuning ruled
Monetarist program adopted for price stability and supply side
investment incentives were used to encourage growth.
Cartel laws to prevent monopolistic practices and preserve
Social welfare programs adopted in the tradition of Bismarck.
Article 3 of the Treaty on European Union, activated in 2009,
says that the whole EU will "establish an internal market. It shall
work for the sustainable development of Europe based on balanced
economic growth and price stability, a highly competitive social market economy,
aiming at full employment and social progress, and a high level of
protection and improvement of the quality of the environment."
UPDATE, October 2013:
"Secrets of Germany's Economic Success"As
a rule, the economic system is usually fairly important to an economy's
success. That, after all, is what creates the conditions for a
country's economic activities. In Germany, this system is a "social
market economy" - on the one hand, it is based on capitalist
competition, but on the other hand it still allows the state to provide
1989 - Opening of the Berlin Wall
March 1990 - New E. German govt. creates Treuhandanstalt
May 1990 - West established "Fund for Germany Unity"
June 1990 - West controls Treuhandanstalt, prices released
July 1990 - Monetary system unified
October 1990 - Political union
Immediate or flexible rate transition? Dramatic leap chosen to stop
massive immigration from East to West.
What rate(s) of exchange? Maintain Eastern competitiveness, or asset
values? Choice: range of rates from 1:1 on salaries and pensions to 3:1
on claims of individuals living outside Eastern Germany - average
effective rate of about 1.8:1.
Wages in nationalized sector? W. German unions insisted on quick
equalization. In the larger firms that enage in collective
bargaining, wages in the East are now about 97% of those in the West.
Wolfgang Ullman, East German theologian and agitator, called for
holding company to take possession of state property, and gradually
redistribute to E. Germans with vouchers.
Instead, Treuhand fell under control of West, initially attempted
rapid sales to strategic
system was quick, attracted capital and skill, but not transparent.
- Supported by Bismarck & Hitler to control world markets.;
control prices and market conditions. After World War II a
movement started to dissolve the cartels. Still allowed to
promote exports, to ease the adjustment problems of dying industries,
or to reduce research and development costs.
entrepreneurs - Workers and investors favor
stable industries, traditionally dislike "gambling."
III. The Labor Market & Labor Relations
Bargaining - Only 18
percent of the labor force
unionized, but 60% of employees in Western Germany and 47% in Eastern
Germany are covered by collective agreements. Closed shop is
illegal. Unions represent large
groups of workers in broad industrial groups; are generally moderate.
labor on most nonwage issues, such as work-place safety,
employment security, the organisation of working time, rules on
internet use and working from home;
Supervisory Boards—provide overall
guidance to the company and appoint the management board that handles
day-to-day decisions. Labor
representatives hold 1/3 of positions in firms with over 500 employees
and 1/2 positions in firms with over 2,000. Little labor influence on
corporate policy. Labor reps concerned with continued
prosperity of the company.
Supporters: codetermination has maintained peaceful labor
relations. Critics: it threatens private property.
UPDATE, October 2013:"Germany can keep VW veto law"
Germany defeated the European Commission in the top EU court to shield
VW from takeovers.
Lower Saxony supports protection of jobs and labor's role in corporate
decision-making, which they say has fostered VW's rise to become the
world's third-largest carmaker in 2012... The VW law has often been
cited as an example of Germany's model of consensus-based industrial
relations. The company's 20-member supervisory board is evenly split
between management and labour representatives, an expression of VW's
belief in what it calls "co-determination".
Most of VW's 104 global plants have works councils... that discuss
personnel issues and working conditions with management.
VW has exported that principle across the globe, though is currently
facing difficulties setting up a labor representation body for workers
at its U.S. plant in Chattanooga, Tennessee.
- Required for hundreds of jobs, it involves 2/3 of mid-school grads.
Lasts 2-3 years, some work on-the-job and some in training centers,
ending with national exam. Years later, another exam to
become "meister." Financed by industry/government. Curriculum developed
by industry, unions, and educators. 50-80 percent of apprentices stay
with training companies; low teenage unemployment.
- Recruited for low-skill positions during labor shortage of
1960s. Play vital role in sanitation, construction,
hospitals, etc. When unemployment rose in 1973, ban imposed
on further recruitment. In 1983, Parliament offered prepaid
social benefits to workers who returned home. Flood of immigrants and
return of Germans after communist collapse led to violence, caused
government to tighten restrictions.
Active Labor Market Policy
- Reduction of spending is major cause of higher unemployment now in
IV. Financial Markets
Highly independent Prime function is to "safeguard the
- The government encourages savings and investment by allowing workers
to save in seven-year tax free accounts with subsidized interest, by a
savings program for home down payments, by an absence of a capital
gains tax, and by maintaining a low inflation rate.
The Banking Sector
- The largest banks are all purpose banks; they can broker securities,
underwrite stock and bond issues, and provide investment counseling.
- Play relatively small role in the German financial system.
Frankfurt has the largest exchange. Bond trading is about six
times that of stock trading. Banks are the largest issuers
and owners of bonds. Most German companies finance through
bank lending and have high debt-to-equity ratios.
The Governmental Sector
Fiscal Policy and
Planning - Initially after World War II,
rejected Keynesianism and established supply-side fiscal
policy. Later, more use of stabilization, but returned to a
supply-side policy in 1982. Kohl administration has tried
unsuccessfully to reduce the governmental share of GNP and cut
taxes. Presently, trying to cut some governmental and
company-based social benefits.
– Before the adoption of the Euro, the Bundesbank maintained a strong
monetarist stance. Germany had the strongest anti-inflation
record of all Western industrial nations.
Redistribution of Income - Under
Bismarck, programs established for insurance against sickness,
accidents, elderly and disabled, and for widows and orphans.
Unemployment insurance adopted after World War I. After World
War II, system of social welfare programs. Today, includes
maternity grants, "child care vacations" for new mothers, family
allowances for families with school age children, free university
educations for many. Unemployment insurance covers
agricultural and at-home workers. The tax system is based on regressive
consumption taxes and apparently contributes to income inequality.