GERMANY’S RISE TO THE ECONOMIC POWERHOUSE OF THE EU

Alex Vaudrain

Introduction

Germany currently holds Europe’s largest economy and is the world’s fourth largest.

Germany uses a Social Market Economic platform.

Is the worlds third largest exporter, exporting roughly 1.5 trillion dollars worth of product last year.

34 of the Fortune 500 companies are based in Germany including Volkswagen, Siemens, BMW, Bosch, ThyssenKrupp, Bayer, and Duetsche Bank.

History 1800’s

In the early 1800’s thanks to the Napoleonic period in which Germany became influenced by the Continental System, Serfdom and Guilds were abolished and moved to a Common Market system in 1818, though it was not until 1833 that all German states were on board expect Austria. Austria was excluded by the Prussians.

This concept worked well, but it wasn’t until 1970 when Chancellor Otto von Bismarck unified all the German states that the system reached its full potential and jump started Germany’s industrial revolution.

With the new unification of the states and the introduction of the rail system coal became in high demand, something Germany had a lot of which lead them to become the world leader in chemical industries.

Post World War I

Germany going into WWI thought the war was going to be won quickly and easily. With this philosophy, the still imperialist government borrowed the money to pay for the war instead of raising taxes and cutting spending else where.

Germany was now dependant on winning the war and having the allied forces pay reparation payments in order to afford the war.

After four years of trench warfare in the west Germany was in great debt and had an impending revolution if the war did not end.

World War I

After signing the Treaty of Versailles the Weimar Republic was formed, the Kaiser was removed and the socialist parties received 76% of the votes in the 1919 election.

Now heavily in debt and required to make reparation payments the German economy nearly collapsed and in 1921 French and Belgium troops invaded to essentially pillage for materials and goods.

By 1923 striking workers left Germany in a desprite state. The government began printing exurbanite amounts of Reischmarks causing massive hyperinflation.

Cost of a loaf of bread in Germany:Nov 1918: 1 mark Nov 1922: 163 marksSept 1923: 1,500,000 marks Nov 1923:

200,000,000,000 marks

Post WWI

The Weimar Republic allowed parties with a small percentage of votes to be represented. This allowed many radical groups to gain power. With radical groups that would not compromise there was a constant political standstill leading to further economic troubles.

People began using the mark for wallpaper or burning it for heat because it was more valuable in those ways than to use it in stores.

1924-1929

These years were considered the “Golden Years” American lent Germany large amounts of money to get its economy back on track.

Industry grew exponentially and the German economy was back and thriving.

This was until the collapse on Wall Street when the American dollar lost value leading to the Great Depression. This also lead to a great depression in Germany since most of there money was backed by the USD.

The Third Reich

The Nazi party seemed to have pulled Germany out of the Great Depression.

From 1933 to 1939 unemployment dropped from 6 million to 302,000

Hitler's goal was to make Germany self-sustaining and no longer need to trade with “outside influences”.

German’s great economic success to the outside world was unbelievable since the rest of the world had massive unemployment and inflation.

Nazi Germany Economic Success Germany’s success was nearly a trick on paper. Woman

and Jews were no longer considered on the unemployment numbers. Also anyone who was unemployed was considered “work-shy” and shipped to concentration camps. By 1939 the military was 1.4 million strong and with that large influx the necessity for weapons, clothing, and food put more people to work under the governments penny. Hitler started workers unions which increased work week hours from 60-72 hours weekly. Strikes were outlawed and anyone who spoke against the Nazi party for working so much were executed by the Gestapo.

Hitler’s goal of independence was never achieved, 33% of raw materials were imported. The government did see a 5 billion dollar increase in income, but they also had a spending increase of 18 billion. When all was said and done the real earnings in 1938 were the same as 1928.

Post WWII

Post World War II

In 1949 and 1950 Germany had a great successful re-launch of their economy. At a 15% annual growth rate and 24% production increase. These numbers though would only be temporary if not for William Repoke, a liberal economist by European definition but would be considered conservative in America. William proposed higher interest rates to encourage saving, lower income tax, and direct inverstment with capital goods like coal steel and iron.

Even though there was economic success their was still a capital goods shortage because of war destruction and reparation payments. This discouraged entrepreneurs from investing in fear that their goods would be confiscated. Despite that by 1950 most of Germanys exports were manufactured goods and its economy was on the right track.

1960s-1970s

After such rapid growth post WWII Germany needed a plan to sustain growth. They currently had full or overutilization of capital, 1% unemployment, but their currency, the Mark was still undervalued.

Salaries caught up to growth and where 80% higher on average.

Karl Schiller

German minister of economics from 1967-1972

Believed it was the governments duty to manipulate the economy, not directly but broadly. During his seat he increased social program spending by over 10%. The combination of these two and increasing oil prices lead to the recession of 1973-1976

1976-1990

Though out of the recession growth was slow and unemployment still high with increasing inflation and minimal GPD growth.

This period was essentially a long fight to stay out of another recession with a couple postive bumps along the way.

July 1st, 1990

For the first time ever in history a Capitalist and Socialist economy converged into one. This had never been done before, so their were no guidelines on how to handle the situation.

Reunification and Its Results In 1990 Eastern Germany fell into a deep recession as

Western Germany went into a boom due to the new Eastern market and newly available workers.

The goal of the German government was to privatize all of the eastern companies to the highest bidders. This was carried out by the Treuhand which managed to privatize over 14,000 companies by 1994

The reason for the recession in the east was that entrepreneurs were afraid to invest due to all the land claims. Since 1933 no one knew who owned what leading to mass confusion which was sorted out by 1992. At this point over 400,000 works commuted to the west for work.

As infrastructure updates in east Germany were required this put millions to work causing a little more balance in the east vs west economies. By 1995 Germany was back in the black for growth and though the western economy was much stronger there was more balance between the two.

The Euro

In 1999 the Euro was first introduced. This would be the common currency of most European countries. The euro made trade imbalances far less and international trade much easier.

As a major manufacturing country with heavy exports Germany benefited greatly by its introduction. The euro was worth more per USD than the Mark.

Germany at this time was in a crisis much alike Spain, Greece and France are now. They had to much government spending and an aging population.

Agenda 2010

In 2003 Agenda 2010 was put into effect. This drastically cut taxes by 25% and drastic cuts in government medical cost absorption, pension reforms, and unemployment benefits.

The Agenda was put into 4 parts. The first part was designed to make new jobs, this included staff service agencies, Investments in the higher education for German people, and subsidence payments. Part two invested in entrepreneurs and made it easier for businesses to start up. Part three was the reform of the job centers to put more people to work and gave a stronger connection between the employers and the unemployed.

Agenda 2010

Part 4 was the reform of unemployment benefits. This cut the amount of people on unemployment down and the amount of aid received. Now in order to gain unemployment benefits a citizen is required to sign a contract which states that if the state finds them a job they are required to take the work unless it impedes there rights.

Modern Economic Success

Most of the modern German economy is in manufacturing high quality, high complexity, and high value goods. Thanks to Agenda 2010 opening new businesses in manufacturing is very easy and inviting for outside companies. This created the German bussiness class The Mittelstand.

The Mittelstand are small companies of 500 or less employees that make up 70% of the German economy. These companies are mostly in the manufacturing business and are extremely good at producing one highly complex good.

The result of the Mittlestand is that in 66% of goods manufactured in Germany are considered to be in the top three best for that particular product.

Trade Surplus

Germany has a trade surplus meaning it exports more than it imports. Last year Germany exported 1.5 trillion dollars worth of goods and only imported 1.3 trillion

A major factor for this is that agriculture in Germany only employs 2.4% of its population and is only .9% of the GPD but satisfies 90% of the countries nutritional needs.

German car companies including BMW, Porsche, and Audi make up 90% of the luxury car market.

German Technology

Germany has one the most highly skilled labor worces in the world. A strong connection between education and employment leads to feats of engineering and business.

Germany companies spend on average 23% more on Reasearch and development than their American counterparts.

Leading producer of wind and solar technologies

Third largest amount of Patents in the world

Governments role in current success Tax cut up to 25% Cut spending deficit from 4.1% in 2010

to .1% in 2013 through cuts in social spending and unemployment benefits through Short Work.

Made opening businesses easier and gave incentives.

Invested in Academia to train a highly skilled labor force.

Essentially forced people to work if opportunity was available.

The Reason the Rest of the EU is in Turmoil Did not cut taxes instead increased

them. Increased social spending and

unemployment benefits No major manufacturing or

manufacturing of high quality or high complexity goods, so they are now made in China.