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Germany, Economy

ostmark, Communist economic system, European Recovery Program, industrial output, German unification

When Germany became a nation in 1871, it was a latecomer in the race toward industrialization, which was dominated by Britain 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 people 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 capitalism of Britain and the United States. This strong economy carried the country into two world wars and, despite Allied bombing from 1942 to 1945, survived largely intact.

After World War II ended in 1945, the Western powers saw the need to build up European economies in order to resist the threatened encroachment of the Soviet Union and 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 that had been 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 built up a Communist economic system. It instituted an economy based on central planning by a state commission that set all the 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 great differences between the West and East German economic systems brought East Germany to near total collapse. Many East German workers abandoned their jobs for superior 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 West Germany, have since flowed into the former East Germany as its economy was restructured and privatized.

Germany’s economic development after unification had its ups and downs. In particular during a severe recession in 1992 and 1993, economic growth slowed down and, for a while, the economy even shrank somewhat before resuming its modest growth rate of between 1 and 3 percent. Throughout this period, however, Germany continued to pour tens of billions of dollars into the infrastructure of former East Germany, and it will continue to do so for several more years. In just the first seven years after unification, this involved an amount equivalent (in real, uninflated value) of 70 times the Marshall Plan aid to West Germany. In 1993 the eastern growth rate was at a gratifying 9.2 percent, while that of western Germany was only 2.3 percent and the national average was 2.9 percent. Growth in the former East Germany was led by the construction industry, which accounted for one-third of the East’s industrial output. The service sector and light manufacturing followed.

By 1994 the German economy had recovered from its slump. The export sector was the first to expand again, followed by investments and consumption. In spite of the recovery, per capita industrial output in the former East Germany was still only one-third that of the West, although its share of production for export was almost at West German levels. But, compared to other post-Communist economies, East German economic progress was far ahead of such countries as Poland and the Czech Republic. By 1998 economic growth was about 3 percent of GDP annually for Germany as a whole.

Despite higher taxes and some economic problems since unification, the German economy remains strong. Its large and modern industrial economy has made Germany the economic powerhouse of the European Union (EU). More than one-half of both exports and imports are with EU countries. German banks are generally among the best performers in the European banking sector.

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