Federal Republic of Germany

V

Economy

When Germany became a nation in 1871, it was a latecomer in the race toward industrialization (see Industrial Revolution), which was then dominated by the United Kingdom and France. Unification under Chancellor Otto von Bismarck resulted in a boom that made Germany an industrial leader by 1910. Germany’s economic development was based on an alliance of industrial business leaders with the Prussian aristocracy, who controlled much of the land. It emphasized the production of coal and steel, machines and machine tools, chemicals, electronic equipment, ships, and later, motor vehicles. Well-organized business, labor, and farm associations in league with the government produced a distinctive “organized capitalism,” different from the less regulated forms of capitalism in Britain and the United States. Germany’s strong economy carried it into two world wars in the 20th century. Despite heavy Allied bombing against German targets that helped end World War II in 1945, Germany’s industrial base survived largely intact.

After World War II Western powers saw the need to strengthen European economies to resist the threat of Soviet expansion and the encroachment of Communism. To this end, the U.S. government in 1947 initiated the European Recovery Program, commonly called the Marshall Plan, which offered generous investment loans to all European countries devastated by the war. Under the stewardship of economics minister Ludwig Erhard, the Marshall Plan helped launch a 20-year economic expansion in West Germany that raised living standards and industrial production far above prewar levels. This recovery is often described as West Germany’s “economic miracle.”

East Germany did not participate in the Marshall Plan and instead constructed a communist economic system, in which central planning by a state commission set all wages and prices. Most private industries and farms were turned into state or cooperative enterprises. East Germany became one of the most industrialized and prosperous Communist countries.

However, after German unification in 1990, the enormous differences between the West and East German economic systems brought East Germany to the brink of collapse. Many East German workers abandoned their jobs for better opportunities in the West, and East German consumers spurned their own products for Western goods. To make matters worse, the overvalued East German currency, the ostmark, was exchanged one-to-one for the West German deutsche mark (DM), whose street value was actually seven to ten times higher. This exchange plunged struggling East German enterprises into the highly competitive West German and international markets without protection. The East German enterprises now had to pay their debts and payrolls in higher-value DM while at the same time losing market share to the superior West German products that were becoming widely available. A wide range of West German goods became available on East German shelves. The Eastern European markets for East German exports disappeared, since many of these countries could not afford to pay in DM for East German goods previously attained by bartering their own products. Many East German enterprises failed. New private and public investments, most of them from the former West Germany, have since flowed into the former East Germany as its economy was restructured and privatized.

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Numerous difficulties have marked Germany’s economic development since unification. Following unification, Germany began to pour tens of billions of dollars annually into the infrastructure of former East Germany. These immense financial transfers are expected to continue into the second decade of the 21st century. In just the first seven years after unification, this involved an amount equivalent (in real, uninflated value) to 70 times the Marshall Plan aid to West Germany.

Convergence between the two economies has slowed since the mid-1990s, and Germany as a whole has experienced relatively low rates of annual growth—especially following the painful economic downturn in 2002 and 2003. The unemployment rate in the former East Germany remains double that in the west. Worker productivity in the east still lags far behind that in the west, and many skilled workers in the east continue to move westward seeking better-paying jobs. In addition, the east remains dependent on large financial transfers from the west for economic development and social welfare assistance.

Since the early 1990s, these structural economic problems have weakened the German economy—an economy long regarded as the economic powerhouse of Europe. Nevertheless, with its large and modern industrial base, Germany’s economy remains the largest in the European Union (EU). Germany uses the EU’s common currency, the euro, and more than one-half of German exports and imports are with other EU countries.

A

Labor

In the past, West Germany had very low unemployment, and East Germany had full employment under its communist system. In the early 1990s, however, unemployment in Germany increased. This increase was due to a number of problems, including industrial restructuring in former East Germany, declines in export orders brought about by recession in other countries, and monetary policies designed to curb inflation. In early 1997 unemployment hit a postwar high of 12.2 percent, with more than 4 million Germans out of work. In the west, the level was more than 9 percent, while eastern Germany’s rate was about 17 percent. Among the reasons for the sluggishness in job creation were the high wage rate common in Germany and the strong trade unions, which seek to protect existing wages and jobs. Unemployment remains high in Germany with a national rate of 9.8 percent in 2004.

Germany has a history of strong labor unions (see Labor Union). The first German unions were founded in 1868 and grew into a mighty political and economic force until the Third Reich took over all labor organization in 1933. After 1945 the unions came back with redoubled force in the West under the German Trade Union Federation (DGB). In 1949 the DGB had 4.8 million members in 16 industrial federations and 101 unions. By 1989, on the eve of unification, there were 7.9 million DGB members. German unification briefly raised this figure by 50 percent before the number of members finally settled at about 9 million. The federations ranged from the powerful metalworkers and autoworkers to the leather workers. Other important DGB federations were the Public Service Union and the Chemical, Paper, and Ceramics Workers. Major labor unions outside the DGB included the White Collar Employees, the Civil Service Union, and the Christian Workers Union.

East Germany meanwhile had organized the state-controlled Free German Trade Union Federation (FDGB). At its peak, the FDGB claimed a membership of 9.6 million, including pensioners, students, production workers, office employees, intellectuals, and professionals. The FDGB collapsed at the time of unification, and DGB organizers from the west moved in and offered East German workers their support during the transition to a market economy, which included waves of dismissals, reduced hours, and early retirements. The DGB conducted a series of strikes for higher wages and better working conditions for East German workers, beginning with large strikes of metalworkers and public employees in 1992 and 1993. However, with the dismantling of some of the largest East German industrial conglomerates and agricultural collectives, whole regions became depressed areas of high unemployment, especially in the north and northeast.

B

Manufacturing and Industry

Manufacturing and industry have long been central to German economic development, although recent global and European trends are forcing changes upon the German economy. Industry helped the country recover economically from World War II and from the unification of East and West Germany. Although the economy has gradually moved in the direction of services, manufacturing and industry are still important in the country and accounted for 29.7 percent of the gross domestic product (GDP) in 2005. Germany is a leading producer of such products as iron and steel, cement, chemical products, electronics, food and beverages, machinery and machine tools, and motor vehicles.

Large-scale manufacturing enterprises are concentrated in several areas. The most important industrial area encompasses the state of North Rhine-Westphalia, which includes the steel-producing Ruhr region. The Ruhr region is one of the most intensely developed industrial areas in the world, and a large majority of Germany’s iron, steel, and bituminous coal comes from this area. Its early and intense development also make this region the equivalent of a rustbelt area in the United States, where traditional manufacturing is in decline and unemployment is high. The area around the confluence of the Rhine and Main rivers forms another major industrial region, comprising the cities of Frankfurt am Main, Wiesbaden, Mainz, and Offenbach. They produce metals, electronic equipment, pharmaceuticals, chemicals, and motor vehicles. To the south, Stuttgart and Munich are also manufacturing hubs. Their products include aircraft, textiles and clothing, office machinery, optical instruments, and beer. Berlin, the Hannover-Brunswick area, and the port cities of Hamburg, Bremen, Kiel, and Wilhelmshaven are other important industrial centers.

Since unification, industry in the former East Germany has suffered from a number of problems stemming from the long years when it was protected from international competition. Some industries—such as chemicals and plastics, shipbuilding, textiles, and motor vehicles—lost their markets to superior or less expensive products made in western Germany or abroad. Inefficient manufacturing processes in the east made it necessary to cut the industrial work force in half, leading to mass unemployment. After unification, Germany broke up most large eastern corporations and transferred them from state ownership into private hands. Some enterprises were taken over by their own managers; most were bought in bits and pieces by West German or foreign investors. By the late 1990s, former East Germany was well on its way in moving from a manufacturing economy toward a predominantly service-oriented economy.

C

Mining

Mining plays a small role in the modern German economy. Several minerals, however, are produced in sizable quantities. Hard coal deposits are mined in the Ruhr area and the Saarland. Brown coal, also known as lignite, is mined in the foothills of the Harz Mountains; near Cologne; in southeastern Brandenburg; and in central Germany. Before 1990 brown coal satisfied about three-fifths of East Germany’s energy needs, but caused massive environmental problems. Since unification, East German brown coal extraction has declined dramatically. The federal government shut down the least productive East German mines and covered open strip mines with vegetation. However, brown coal continues to supply about one-third of the electricity needs of Germany. In addition, nuclear energy and hard coal, which burns more cleanly than brown coal, are gaining in importance. The German government subsidizes both the hard coal and brown coal industries.

Iron ore production had declined in West Germany by the mid-1980s because it could be imported more inexpensively than producing it locally. Germany’s potash salts industry ranks as one of the largest exporters of potash-based fertilizers in the world. The deposits are located mostly in Thüringen in central Germany. Four-fifths of the potash is exported. Thüringen also has significant deposits of copper.

D

Farming

Farming is of limited importance to Germany’s economy. Together with forestry and fishing, farming accounts for about 10 percent of the GDP in the former East Germany as compared to 1 percent in the country as a whole. Only 2 percent of the labor force is involved in these sectors. Germany imports about one-third of its food. The nation’s principal crops are wheat, potatoes, sugar beets, and barley. The fruit industry is also significant, producing apples and grapes, some of which are used to make Germany’s famous wines. In addition, farmers raise livestock, including hogs, cattle, sheep, and poultry.

Since 1950 the numbers of farms and farmers have dropped dramatically. Most farms are quite small—only 2 percent are larger than 100 hectares (about 250 acres). The smaller farms, located mostly in the west, are often owned and operated by families who also work other jobs.

In East Germany, a drive for agricultural collectivization in the 1950s eliminated small and medium-sized farms and expropriated large landholdings. The Communist government considered farming to be no different from industrial production. Consequently, it strove for large-scale mechanization of its large cooperatives and state farms. All farmers were forced into production cooperatives whose number gradually shrank over the years.

German unification demonstrated the economic superiority of well-managed small and medium-sized farms in the West over the collective and cooperative giant farms of East Germany. The latter proved inadequate to the tasks of marketing and meeting refined consumer demands, and they generated a great deal of air and water pollution. They also failed to inspire desire in their cooperative farmers to take back and maintain their own original farm properties once the collectives were broken up.

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