Transcript German Economy

Economic issues in Germany
1945-2005
Group 1, presentation 2:
Laura Bond-Powell
Joanne Eldridge
Andria Ioannou
Katie MacDonald
Catherine Wood
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:
1. The powerful aid for investment and the reconstruction of Europe by American funding
known as the Marshall Plan.
2. 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.
3. The stimulus to German industry provided by the diversion of other Western resources
for Korean War production
4. Tax laws favoring business owners
5. Heavy private investment
6. 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.
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.
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.
Wages and salaries rose over 80% between 1949 and 1955, catching up with growth.
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.
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.
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.
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.
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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.
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.
East Germany- Economy
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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
East Germany- Economy
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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)
East Germany- Economy
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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 sectorsstrain 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
Effect of reunification on German
economy
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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
Problems of rebuilding the East
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Conversion rates from East German Mark to
Deutsche Mark
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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
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Possible reforms to combat the
problems of rebuilding
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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
Impact of the
Reunification on relations
with the European Union
Institutional change and Financial implications
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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.
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Problems with the Exchange Rate Mechanism
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Demands for European Structural Funds
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Demands for a reduction in budgetary contributions
German Budgetary contributions
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2003 figures –
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Forecast 2005
figures show a
German
contribution of
€21 313 Million
(Source Europa)
From shifting trade patterns, to a new economy, and a different Germany within the EU
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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)
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The implementation of the acquis communautaire of EU Law and Treaties.
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Increased unemployment due to the deindustrialisation of the East
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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 )
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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.
Germany and the Euro
Problems
-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
Germany and the Deutschmark
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In the euro debate suggests Germany could bring back a new
DM
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Study by Dr Colligon- DM would have been even weaker
without the euro
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Euro weakness is a continuation of the previous DM trend.
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DM has been depreciating since 1995
Conclusion
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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