Economic issues in Economic issues in Germany Germany 1945-20051945-2005

Group 1, presentation 2:Group 1, presentation 2:Laura Bond-PowellLaura Bond-Powell

Joanne EldridgeJoanne EldridgeAndria IoannouAndria Ioannou

Katie MacDonaldKatie MacDonaldCatherine WoodCatherine Wood

West Germany- Economy West Germany- Economy (Post War)(Post War)

• After the Nazi experience, an economy free of state domination and intervention was needed.

1. The powerful aid for investment and the reconstruction of Europe by American funding known as the Marshall Plan.

3. The stimulus to German industry provided by the diversion of other Western resources for Korean War production  

• 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.

• Small and medium-sized companies provided the basis for West Germany's economic prosperity.

4. Tax laws favoring business owners5. Heavy private investment

2. The large influx of refugees to West Germany (influx of refugees to West Germany (among the more among the more than 11 million refugees from East Germany and former German than 11 million refugees from East Germany and former German areas of Europe)areas of Europe). This large population transfer was significant . This large population transfer was significant and beneficial to the labour force as among these refugees there and beneficial to the labour force as among these refugees there were highly skilled labourers who were prepared to work hard for were highly skilled labourers who were prepared to work hard for a low wage.a low wage. Later, ‘guest workers’ came from Italy, Spain, and Later, ‘guest workers’ came from Italy, Spain, and Turkey.Turkey.

This recovery is described as West Germany's ‘economic miracle’ and was due to:

6. Introduction of a new stable currency, the deutsche mark

West Germany- Economy West Germany- Economy (1950s)(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.  Wages and salaries rose over 80% between 1949 and 1955, catching up with growth. 

In 1957 West Germany’s new central bank, the Bundesbank was created. 

The EC helped strengthen Germany's economy through increased trade with other member nations.

West Germany was a founding member of the European Coal and Steel Community (ECSC), 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. created in 1951 which was a forerunner to the EEC and the EU.

By 1955, West Germany had made an amazing economic recovery. By 1955, West Germany had made an amazing economic recovery.

Its prosperity helped the republic gain the support of its citizens.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- Economy West Germany- Economy (1960s)(1960s)

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.

• 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%. 

West Germany- Economy West Germany- Economy (1970s)(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.

West Germany- Economy West Germany- Economy (1980s)(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 The government took an active part in the reconstruction of the economy, but never

took complete control. took complete control. In 1982 it owned about $25 billion worth of assets (railroads, oil companies, the In 1982 it owned about $25 billion worth of assets (railroads, oil companies, the

largest national automobile producer (Volkswagen) and other firms). largest national automobile producer (Volkswagen) and other firms). West Germany developed a mixed economy, in which the government took an active 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.  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. 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 The growth rate for West German GDP rose to 3.7% in 1988 and 3.6% in 1989, the

highest levels of the decade. highest levels of the decade. The unemployment rate also fell to 7.6% in 1989, despite an influx of workers from The unemployment rate also fell to 7.6% in 1989, despite an influx of workers from

abroad. abroad.

West Germany- Economy West Germany- Economy (Reunification)(Reunification)

• 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.

• West Germany developed a system of high wages and high social benefits that has been carried over into united Germany.

• From 1990 the positive and negative distortions generated by German From 1990 the positive and negative distortions generated by German unification set in.unification set in.

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.

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.  

East Germany- EconomyEast Germany- Economy Similar economy to all other Soviet statesSimilar economy to all other Soviet states Centrally-planned economy (CPE)Centrally-planned economy (CPE) State-owned factories etc.State-owned factories etc. Everyone employed to do something, however Everyone employed to do something, however

insignificantinsignificant Prices fixed administratively by the CPE- didn’t Prices fixed administratively by the CPE- didn’t

necessarily reflect the product’s valuenecessarily reflect the product’s value Entire year’s economy planned in advance: rate Entire year’s economy planned in advance: rate

of economic growth, utilisation of raw materials of economic growth, utilisation of raw materials & labour, amount of imports/exports…& labour, amount of imports/exports…

1981 Plan- assessed amounts of raw materials 1981 Plan- assessed amounts of raw materials and amount/quality of end product, to ensure and amount/quality of end product, to ensure efficient use of resourcesefficient use of resources

All products consumed/used in the GDR were All products consumed/used in the GDR were also produced therealso produced there

CPE ensured no private businesses and no room CPE ensured no private businesses and no room for decisions/initiativefor decisions/initiative

In 1985, over 95% of the total national income In 1985, over 95% of the total national income was earned by state-owned enterprises.was earned by state-owned enterprises.

Everything distributed in accordance with the Everything distributed in accordance with the 1981 Plan (System of Material Balances)1981 Plan (System of Material Balances)

Couldn’t predict amounts needed- some places Couldn’t predict amounts needed- some places got too much of the product; some got too littlegot too much of the product; some got too little

East German Ostmark practically worthlessEast German Ostmark practically worthless Prices kept constant by heavy subsidies from the Prices kept constant by heavy subsidies from the

government (80% of the cost of basic supplies)government (80% of the cost of basic supplies)

East Germany- EconomyEast Germany- Economy

After reunification…After reunification… High demand for West German products (seen as High demand for West German products (seen as

better quality)- decline in domestic consumption better quality)- decline in domestic consumption of Eastern productsof Eastern products

Decline in output of manufacturing & Decline in output of manufacturing & construction sectors- strain on the East German construction sectors- strain on the East German economyeconomy

Standard of living in the GDR rose from 50.1% of Standard of living in the GDR rose from 50.1% of that in the west (1990) to 71% (1993)that in the west (1990) to 71% (1993)

Similar-looking economy to West Germany (same Similar-looking economy to West Germany (same types of product, emphasis on exportation), but types of product, emphasis on exportation), but totally different systemtotally different system

First phase of unification: West Germany went First phase of unification: West Germany went into a boom, East Germany into a depressioninto a boom, East Germany into a depression

East Germany- EconomyEast Germany- Economy

Effect of reunification on Effect of reunification on German economyGerman economy

Cost so far = approximately Euro 1.5 Cost so far = approximately Euro 1.5 trilliontrillion

Solidarity pact calls for the transfer Solidarity pact calls for the transfer of another Euro 156 billion by 2019of another Euro 156 billion by 2019

1993 – Germany registered a 1993 – Germany registered a negative growth rate of 1.2%negative growth rate of 1.2%

The German budget is now close to The German budget is now close to exceeding the 3% maximum allowed exceeding the 3% maximum allowed in the Euro-zonein the Euro-zone

Problems of rebuilding Problems of rebuilding the Eastthe East

Conversion rates from East German Conversion rates from East German Mark to Deutsche MarkMark to Deutsche Mark

High production costs of the EastHigh production costs of the East Deindustrialisation of the East, leading Deindustrialisation of the East, leading

to an unemployment rate of 20%to an unemployment rate of 20% Large dependent population in the EastLarge dependent population in the East Confusion over property rightsConfusion over property rights

Possible reforms to combat Possible reforms to combat the problems of rebuildingthe problems of rebuilding

Job creation schemes & vocational Job creation schemes & vocational training programmestraining programmes

Create a new sector of low skilled, Create a new sector of low skilled, low pay jobslow pay jobs

Sacrifice some social benefits in Sacrifice some social benefits in order to cut labour costs and raise order to cut labour costs and raise competitiveness competitiveness

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

Institutional change and Financial Institutional change and Financial

implicationsimplications

Treaty of Unification expanded the number of Länder to 16 by Treaty of Unification expanded the number of Länder to 16 by providing for the accession of the 5 new eastern Länder:providing for the accession of the 5 new eastern Länder:

Brandenburg, Mecklenburg-West PomeraniaBrandenburg, Mecklenburg-West Pomerania,, Saxony, Saxony- Saxony, Saxony-Anhalt and Thuringia. Resulted in an increase in seat allocation in Anhalt and Thuringia. Resulted in an increase in seat allocation in the European Parliament from 81-99 MEPs between 1986-1994. the European Parliament from 81-99 MEPs between 1986-1994.

Problems with the Exchange Rate Mechanism Problems with the Exchange Rate Mechanism

Demands for European Structural Funds Demands for European Structural Funds

Demands for a reduction in budgetary contributions Demands for a reduction in budgetary contributions

German Budgetary German Budgetary contributions contributions

2003 figures – 2003 figures –

Forecast 2005 Forecast 2005

figures show a figures show a

German German

contribution of contribution of

€ €21 313 Million21 313 Million (Source Europa)(Source Europa)

From shifting trade patterns, to a new economy, and a From shifting trade patterns, to a new economy, and a different Germany within the EUdifferent Germany within the EU

Increase in Increase in importsimports from EU partners such as Italy, to provide for the from EU partners such as Italy, to provide for the new demand in goods from the east. new demand in goods from the east. Between 1989 and 1991, Between 1989 and 1991, imports of goods and services increased by almost 23.5% in terms of imports of goods and services increased by almost 23.5% in terms of value.value. (Source (Source www.fatemi.comwww.fatemi.com))

The implementation of the The implementation of the acquis communautaireacquis communautaire of EU Law and of EU Law and Treaties.Treaties.

Increased unemployment due to the deindustrialisation of the EastIncreased unemployment due to the deindustrialisation of the East

From ‘Junior’ member to ‘Senior’ role. Taking a firm stance on the From ‘Junior’ member to ‘Senior’ role. Taking a firm stance on the EMU convergence criteria and formulating a more assertive role in EMU convergence criteria and formulating a more assertive role in foreign policy e.g. German insistence on EU recognition of Bosnia, foreign policy e.g. German insistence on EU recognition of Bosnia, Croatia and Slovenia in 1992, are instances which are reflective of a Croatia and Slovenia in 1992, are instances which are reflective of a gradual and, ‘silent revolution… affecting relations between EU gradual and, ‘silent revolution… affecting relations between EU members and future EU development’. (E. Kirchner, (1996) members and future EU development’. (E. Kirchner, (1996) Developments in German Politics 2Developments in German Politics 2, p.159 ) , p.159 )

German Reunification as a precursor to Eastern enlargement: German Reunification as a precursor to Eastern enlargement: German reunification was symbolic of European unification and German reunification was symbolic of European unification and paved the way for the Central and Eastern European expansion in the paved the way for the Central and Eastern European expansion in the 2000s. 2000s.

Germany and the Germany and the EuroEuro

-Unemployment has reached over Unemployment has reached over 4 million in June4 million in June-Major companies have collapsed -Major companies have collapsed putting thousands of jobs at risk putting thousands of jobs at risk e.g. Babcock Borsige.g. Babcock Borsig-Some economists believe the Some economists believe the Deutschmark was 20% overvaluedDeutschmark was 20% overvalued-German economic model is -German economic model is unravellingunravelling

Problems

- In the euro debate suggests Germany could bring In the euro debate suggests Germany could bring back a new DM back a new DM

- Study by Dr Colligon- DM would have been even Study by Dr Colligon- DM would have been even weaker without the euroweaker without the euro

- Euro weakness is a continuation of the previous Euro weakness is a continuation of the previous DM trend.DM trend.

- DM has been depreciating since 1995DM has been depreciating since 1995

Germany and the Deutschmark

Conclusion Conclusion

Germany’s economic problems stem Germany’s economic problems stem from the vast differences between the from the vast differences between the economies of West and East Germanyeconomies of West and East Germany

Reunification has changed Germany’s Reunification has changed Germany’s relations with the EU, and has paved relations with the EU, and has paved the way for Central and Eastern the way for Central and Eastern Enlargement Enlargement

The adoption of the Euro has The adoption of the Euro has enhanced problems inherent in enhanced problems inherent in Germany’s economy Germany’s economy