Economic issues in Germany 1945-2005

1. Economic issues in Germany 1945-2005 Group 1, presentation 2: Laura Bond-Powell Joanne Eldridge Andria Ioannou Katie MacDonald Catherine Wood

2. West Germany- Economy (Post War) • In 1945, at the end of World War II, Germany's economy lay in ruin and both West and East Germany had to be rebuilt. • The West German economy recovered at an amazing rate in the 1950's. This recovery is described as West Germany's ‘economic miracle’ and was due to: • The powerful aid for investment and the reconstruction of Europe by American funding known as the Marshall Plan. • The large influx of refugees to West Germany (among the more than 11 million refugees from East Germany and former German areas of Europe). This large population transfer was significant and beneficial to the labour force as among these refugees there were highly skilled labourers who were prepared to work hard for a low wage.Later, ‘guest workers’ came from Italy, Spain, and Turkey. • The stimulus to German industry provided by the diversion of other Western resources for Korean War production   • Tax laws favoring business owners • Heavy private investment • Introduction of a new stable currency, the deutsche mark • After the Nazi experience, an economy free of state domination and intervention was needed. • Small and medium-sized companies provided the basis for West Germany's economic prosperity.

3. West Germany- Economy (1950s) • The West German boom began in 1950. • The growth rate of industrial production was 25.0% in 1950 and 18.1% in 1951. • Growth continued at a high rate for most of the 1950s. Wages and salaries rose over 80% between 1949 and 1955, catching up with growth.  By 1955, West Germany had made an amazing economic recovery. Its prosperity helped the republic gain the support of its citizens. The deutsche mark was the second most important currency in the world after the US dollar.   West Germany was a founding member of the European Coal and Steel Community (ECSC), created in 1951 which was a forerunner to the EEC and the EU. The EC helped strengthen Germany's economy through increased trade with other member nations. In 1957 West Germany’s new central bank, the Bundesbank was created. 

4. West Germany- Economy (1960s) • By 1960 industrial production had risen to 2.5 times the level of 1950 and far beyond any that the Nazis had reached during the 1930s in all of Germany. • GDP rose by 2/3 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% to 1.2%.  • The West German economy however did not grow consistently in the 1960s because: • such a pace could not be sustained, • the supply of labour from East Germany was cut off by the Berlin Wall, built in 1961, • the Bundesbank was worried about possible overheating and slowed the pace of growth several times.

5. West Germany- Economy (1970s) • The West German economy led toward an extensive social welfare system that has become one of the most expensive in the world. • The government began to protect and support some sectors and industries. • It preserved existing industries rather than providing a force for renewal. • In the 1970s, the state assumed an ever more important role in the economy. • Growth did not again reach the levels that it had attained in the early years of the 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. • Global economic statistics showed that the West German share of total world production had grown from 6.6% in 1965 to 7.9% by 1975 (since the productive capacities of both East Germany and West Germany always exceeded the absorptive capacity of their respective domestic markets). • Twelve years later, in 1987 it had fallen to 7.4%, largely because of the more rapid growth of Japan and other Asian states.

6. West Germany- Economy (1980s) In the 1980s West Germany emerged as a leading economic power, along with Japan and the USA. West German international leadership became more prominent in the late 1980s. • The government took an active part in the reconstruction of the economy, but never took complete control. • In 1982 it owned about $25 billion worth of assets (railroads, oil companies, the largest national automobile producer (Volkswagen) and other firms). • West Germany developed a mixed economy, in which the government took an active part in the development of the resources but a free enterprise system remained.  • In the late 1980s the economy finally began to grow more rapidly. • The growth rate for West German GDP rose to 3.7% in 1988 and 3.6% in 1989, the highest levels of the decade. • The unemployment rate also fell to 7.6% in 1989, despite an influx of workers from abroad.

7. West Germany- Economy (Reunification) The first decade, (1950s), had been that of the "economic miracle." The second decade, (1960s), had seen consolidation and the first signs of trouble. The 1970s had brought the oil shocks, the social programs, the deficits, and finally a loss of control. In the 1980s, new policies and a more stable environment abroad led to economic recovery.   Since its creation in 1949, the FRG has played an important role in the world economy. Consistently among the most important trading nations in the world, Germany often derives a higher share of its GDP from exports than any other major state. • One of the first steps toward the unification of East Germany and West Germany was the union of the two economies. • On July 1, 1990, the economies of the ‘two Germanys’ became one. • It was the first time in history that a capitalist and a socialist economy had suddenly become one. • From 1990 the positive and negative distortions generated by German unification set in. • West Germany developed a system of high wages and high social benefits that has been carried over into united Germany.

8. East Germany- Economy • Similar economy to all other Soviet states • Centrally-planned economy (CPE) • State-owned factories etc. • Everyone employed to do something, however insignificant • Prices fixed administratively by the CPE- didn’t necessarily reflect the product’s value • Entire year’s economy planned in advance: rate of economic growth, utilisation of raw materials & labour, amount of imports/exports… • 1981 Plan- assessed amounts of raw materials and amount/quality of end product, to ensure efficient use of resources

9. East Germany- Economy • All products consumed/used in the GDR were also produced there • CPE ensured no private businesses and no room for decisions/initiative • In 1985, over 95% of the total national income was earned by state-owned enterprises. • Everything distributed in accordance with the 1981 Plan (System of Material Balances) • Couldn’t predict amounts needed- some places got too much of the product; some got too little • East German Ostmark practically worthless • Prices kept constant by heavy subsidies from the government (80% of the cost of basic supplies)

10. East Germany- Economy • After reunification… • High demand for West German products (seen as better quality)- decline in domestic consumption of Eastern products • Decline in output of manufacturing & construction sectors- strain on the East German economy • Standard of living in the GDR rose from 50.1% of that in the west (1990) to 71% (1993) • Similar-looking economy to West Germany (same types of product, emphasis on exportation), but totally different system • First phase of unification: West Germany went into a boom, East Germany into a depression

11. Effect of reunification on German economy • Cost so far = approximately Euro 1.5 trillion • Solidarity pact calls for the transfer of another Euro 156 billion by 2019 • 1993 – Germany registered a negative growth rate of 1.2% • The German budget is now close to exceeding the 3% maximum allowed in the Euro-zone

12. Problems of rebuilding the East • Conversion rates from East German Mark to Deutsche Mark • High production costs of the East • Deindustrialisation of the East, leading to an unemployment rate of 20% • Large dependent population in the East • Confusion over property rights

13. Possible reforms to combat the problems of rebuilding • Job creation schemes & vocational training programmes • Create a new sector of low skilled, low pay jobs • Sacrifice some social benefits in order to cut labour costs and raise competitiveness

14. Impact of the Reunification on relations with the European Union

15. Institutional change and Financial implications • Treaty of Unification expanded the number of Länder to 16 by providing for the accession of the 5 new eastern Länder: Brandenburg, Mecklenburg-West Pomerania, Saxony, Saxony-Anhalt and Thuringia. Resulted in an increase in seat allocation in the European Parliament from 81-99 MEPs between 1986-1994. • Problems with the Exchange Rate Mechanism • Demands for European Structural Funds • Demands for a reduction in budgetary contributions

16. German Budgetary contributions • 2003 figures – • Forecast 2005 figures show a German contribution of €21 313 Million (Source Europa)

17. From shifting trade patterns, to a new economy, and a different Germany within the EU • Increase in imports from EU partners such as Italy, to provide for the new demand in goods from the east. Between 1989 and 1991, imports of goods and services increased by almost 23.5% in terms of value.(Source www.fatemi.com) • The implementation of the acquis communautaire of EU Law and Treaties. • Increased unemployment due to the deindustrialisation of the East • From ‘Junior’ member to ‘Senior’ role. Taking a firm stance on the EMU convergence criteria and formulating a more assertive role in foreign policy e.g. German insistence on EU recognition of Bosnia, Croatia and Slovenia in 1992, are instances which are reflective of a gradual and, ‘silent revolution… affecting relations between EU members and future EU development’. (E. Kirchner, (1996) Developments in German Politics 2, p.159 ) • German Reunification as a precursor to Eastern enlargement: German reunification was symbolic of European unification and paved the way for the Central and Eastern European expansion in the 2000s.

18. Problems Germany and the Euro Unemployment has reached over 4 million in June -Major companies have collapsed putting thousands of jobs at risk e.g. Babcock Borsig Some economists believe the Deutschmark was 20% overvalued -German economic model is unravelling

19. Germany and the Deutschmark • In the euro debate suggests Germany could bring back a new DM • Study by Dr Colligon- DM would have been even weaker without the euro • Euro weakness is a continuation of the previous DM trend. • DM has been depreciating since 1995

20. Conclusion • Germany’s economic problems stem from the vast differences between the economies of West and East Germany • Reunification has changed Germany’s relations with the EU, and has paved the way for Central and Eastern Enlargement • The adoption of the Euro has enhanced problems inherent in Germany’s economy