Germany’s Economy

Typical of modern industrialized countries, Germany has fewer than 3 percent of its workforce engaged in extractive industries. The North Sea has been a traditional fishing ground with herring being the most important catch. However, over-fishing has resulted in a decline in the fishing industry, and Germany now relies on imported fish to meet its needs. Similarly, the forests of Germany provide about half of the country’s wood products. Most of the remainder is imported from Scandinavia.

Primary Industries

As described in Chapter 2, agriculture in the north is dominated by the growing of grains and fodder beets to feed cattle, pigs, and sheep. Wheat and corn are grown along the southern edge of the North German Plain, and grapes (for wine) and vegetables are grown in the Central Uplands. Germany produces significant surpluses of butter, wine, wheat, and meat products.

In the former West Germany, the farms tend to be small with only 5 percent of the land holdings larger than 124 acres (50 hectares). As might be expected with the small plots, nearly half of all operators are part-time farmers. Increased mechanization has resulted in a significant decline in farm labor. In 1949, 20 percent of the workforce was in agriculture, now it is less than 3 percent. In East Germany, cooperative and state farms averaged 11,292 acres (4,570 hectares), but here, too, machinery decreased the number of workers. After 1990, an effort was made to return farmland to its pre-1952 owners. This had the effect of significantly reducing farm size.

Coal and iron mining were the basis for the development of modern industry in Germany. The loss of government subsidies and increasing environmental concerns have led to a reduction in coal production. Coal is being replaced as a source for electricity generation by natural gas, nuclear fuel, and hydroelectricity. Today, much of Germany’s iron ore needs are met by imports from France and other countries.

Postindustrial economies such as Germany’s sometimes find it less expensive to import various products of primary industries from developing nations, rather than investing in their local resources. The main reason is the huge difference in the cost of labor, hence, production versus economic value of agricultural products and minerals. Simply stated, it is less expensive to import the items than to produce them at home. Domestic production also can be discouraged in other ways.

For example, the European Union establishes various regulations, such as the need to follow strict environmental guidelines and trade quotas that can limit a country’s production. Thus, it often appears easier just to import products from other countries and concentrate more on profit generating service industries.

Manufacturing

Germany was one of the first European countries to enter the industrial age. By the 1830s, textiles were being produced in the Rhine uplands in the west, and in the Ore Mountains in the east. The forests of the Central Uplands were cut for charcoal to fuel iron foundries before the development of coal as an energy source. By the 1870s, German industry had moved into the production of chemicals and electrical equipment.

Three factors led to rapid growth. First, the government was highly involved in supporting industry. Early interest in free trade to help industries find markets was followed by tariff restrictions on cheap imports after 1878. Secondly, large investment banks had developed to provide the necessary capital, and large firms had formed cartels that could fix the prices of finished products. Companies such as Krupp, Thyssen, and Stinnes date from this period. Finally, although wages were low, the government was the first in Europe to introduce sickness insurance (1883), accident insurance (1884), and old age and disability insurance (1889). Rules regulating working conditions were in place before the turn of the century. Workers were represented by trade unions and the workers’ party, the Social Democratic Union, was the largest party in the German Parliament by 1912.

Enormous industrial power supported the armed forces during both world wars. The First World War crippled Germany, but industries were rebuilt in preparation for World War II. The war destroyed much of the transportation system and residential areas, but industry was relatively undamaged. At the end of the war, a large number of skilled people were unemployed and ready to work.

West German Growth

The West German economy recovered from World War II rapidly due to a number of factors. In June 1948, a new currency was introduced. Every person was given 40 deutsche marks, providing opportunities for both spending and investment. Stores quickly filled with merchandise.

The United States decided to help rebuild Europe. It hoped to create profitable new markets for American exports and to prevent the expansion of Communism. Between 1947 and 1952, the Marshall Plan provided foreign aid to the countries of Western Europe, including West Germany. West Germany received more that $13 billion in capital goods, as well as management expertise, and this put a highly skilled and relatively cheap labor force back to work. The Organization of European Economic Cooperation (OEEC) administered the Marshall Plan. The OEEC also hoped to reduce tariffs and quotas between member countries to increase trade. Further, the new government of West Germany financed the reconstruction of infrastructure and kept taxes low to encourage business development. Prior to 1955, the government relied on foreign troops for its protection and did not have to spend tax dollars on the military.

West German growth was based on trade, and a number of organizations were developed to increase economic cooperation. In 1950, Germany wanted to import iron ore from France, and France wanted German coal. Trade was improved through the International Ruhr Authority. This evolved into the European Coal and Steel Community (ECSC) with the addition of Belgium, the Netherlands, Luxembourg, and Italy. In 1957, the same six countries formed the European Atomic Energy Commission (Euratom) to develop nuclear power generation. The same year they also organized the European Economic Community (EEC or Common Market) to introduce a series of improvements to be implemented over the next 13 years. These included the removal of internal tariffs and quotas in order to form a free trade area, and the creation of a common set of external tariffs to form a customs union.

Under the EEC, labor would be allowed to move freely between member countries and would have access to the rights and benefits of the host country’s welfare system. A Common Agricultural Policy established prices and quotas for many products, a Common Fisheries Policy established national quotas for European waters, and a Common Transportation Policy allowed for the planning of major roads and rail lines. The European Investment Bank provided money for regional infrastructure programs, the European Regional Development Fund provided grants to industry, and the European Social Fund encouraged employment mobility. The 1958 European Monetary Agreement made all currencies exchangeable to the British pound and the French franc, thus encouraging the free movement of capital.

Although West Germany had a free-market system, government policy facilitated economic growth. Low taxes, high interest rates, and low wage increases for workers encouraged investment. The government was also a major employer. Cartels controlled by large companies were allowed to continue in operation. Between 1951 and 1961, the gross national product rose twice as fast as that of the United States, while industrial output rose by 60 percent. Millions of refugees from East Germany and other parts of Eastern Europe created both a market and a labor force. Unemployment was near zero. After the building of the Berlin Wall, hundreds of thousands of Turkish and other foreign workers came to take jobs unfilled or unwanted by upwardly mobile Germans.

The slowing of the economy in 1966 caused a change of government and the introduction of an 11 percent sales tax. The government invested heavily in infrastructure such as expressways, higher education, research, and economic planning. In 1967, the ECSC, Euratom, and the EEC were amalgamated into the European Community (EC).

In 1972, the European Monetary Cooperation Fund stabilized the currencies of the six EC countries within a fixed range. This hurt Germany’s trade as the value of the mark increased. In 1978, the currencies were fixed. This allowed businesses to do their bookkeeping in European monetary units, thus eliminating the costs associated with exchange calculations. The European Community was expanded in 1973 with the addition of Great Britain, Ireland, and Denmark. In 1975, the Lome Treaty allowed special trade relationships with 52 former colonies around the world. Greece became the tenth member of the EC in 1981.

The EC is controlled by the Council of Ministers, made up of representatives from each member country. Originally, unanimous consent was required on all policies, but after 1987, a weighted majority vote system was introduced. The policies of the council are implemented by the European Commission, which has the right to create legislation that all member countries must follow. Complaints are taken to the European Court of Justice. All member countries elect members to the European Parliament, where they sit by party and not as country blocks. The Parliament can suggest legislation that should be passed by member countries, but has no overriding authority like that of the European Commission.

Germany supported its farmers by restricting imports and raising the prices of foreign foods to make German products competitive. The Common Agricultural Policy of the European Community deprived the West German farmer of this protection, and many farmers left for better-paying industrial jobs in the cities. There was a drop from 5.2 million to 1.7 million farm laborers between 1950 and 1976, and farm size became larger. This was a migration similar to the one that occurred in the United States at the same time.

Highly dependent on trade and fuel imports, West Germany was hurt by the Organization of Petroleum Exporting Countries (OPEC) oil price increases of 1973 and 1979 and the global recession of the 1970s and 1980s. Increased competition in world export markets from Japan also hurt Germany. Unemployment hovered between 8 and 10 percent, and crisis management tended to replace economic planning. However, the inflation rate remained one of the lowest in Europe. As oil became more expensive, Germany turned to nuclear power to generate electricity and in the 1980s paid for the construction of a natural gas pipeline to Russia to supply fuel despite protests from the United States. In 1985, Spain and Portugal joined the EC and the Single European Act called for a single European market by 1993.

East German Growth

East Germany did not follow the same economic path that West Germany did: it had developed a command economy. Collectivization of farmland, machinery, and livestock began in 1952. By the 1960s, the government was encouraging more specialization in fruit, crops, and livestock, and East Germany was nearly self-sufficient in food production even if choices were limited. Small private allotments provided most of the eggs and vegetables.

Based on its prewar industrialization, the government took over factories, or entered into joint ownership agreements. Economic development plans put emphasis on heavy industry, rather than consumer goods. Emphasis also was placed on quantity over quality. In the 1950s, there was a constant labor shortage. Many skilled young men migrated to West Germany, where they provided much-needed
labor and helped boost that country’s economy. East Germany encouraged women to fill the job openings. Most of the out-migration was through Berlin, so East Germany built the Berlin Wall in 1961 to stop this flow.

In 1963, a new economic system allowed for decentralization and bonus incentives. More emphasis was placed on quality. Fear of political uprisings led to the termination of these programs in 1968. Although more interest was placed in research and technology, East Germany remained a few years behind West Germany in electronics and other consumer goods. The East German economy suffered due to its dependence on oil imports from the Soviet Union. It had to compensate with the use of poor quality lignite coal and the development of nuclear power stations. There were also limited opportunities for foreign trade.

To match the trade arrangements developing in West Germany, the Soviet Union organized a Council for Mutual Economic Assistance (COMECON) that included East Germany and the five other Eastern European states. This was primarily a trade arrangement between the member states and the Soviet Union, although the Eastern European countries were allowed to trade with each other. The main problem was the lack of currency with which to buy goods; thus, much of the interaction involved the exchange or barter of goods. During the 1970s and 1980s, East Germany was the wealthiest of the COMECON countries and had the highest per-capita production in the Eastern bloc. In fact, it rose to the twelfth most important trading nation in the world. Exports included vehicles and machines, chemicals, optical goods, and electronics. About a quarter of all East German trade was with non-COMECON countries. A special trade relationship with West Germany gave it access to the European Economic Community (EEC) as a destination for 8 percent of trade. This provided much-needed access to hard currency. Toll roads to Berlin, compulsory currency exchanges for visitors, and money spent by relatives visiting from the West also added to East Germany’s foreign currency holdings.

The removal of barriers to movement between East and West Germany in 1989 created a flood of migrants from the East that numbered in the hundreds of thousands. Neither country’s economy could take this demographic change. The West German mark was introduced as the currency of East Germany in the hope that it would lift the economy, but the high-valued mark only caused East Germany to lose exports. This added to the problems of the renewed loss of its labor force. In the West, jobs could not be created fast enough and unemployment rose. This led to attacks on Turkish and other guest workers, many of whom had either brought their families to Germany, or formed families in Germany and did not want to leave.

States of former East Germany still lag economically behind those of West Germany. Even though hundreds of billions of dollars were invested in the former East Germany after the unification, more improvements are necessary. The biggest economic and social obstacle is the high unemployment rate among “easterners” and the lower levels of investment being made in the eastern part of the now unified country. This situation is easily understood; it simply takes time and huge capital investment to completely integrate that part of the country that was split off for almost a half century. The next generation of Germans will, perhaps, enjoy all the benefits of a unified country. For now, however, they continue to face the expensive process of integration.

Industrial Regions

Unification of the two Germanys was necessary in order to try to stop the flow of migrants by improving conditions in East Germany. Initially, the transition from a command to a capitalist economy led to higher production costs and the closure of unprofitable factories in East Germany. Unemployment became a major problem. The demand for Western goods in East Germany created a small economic recovery in West Germany, but further hurt the East’s economy. Food processing and building materials are examples of industries that have declined. It was hoped that investors from the West would see an opportunity for expansion and profits in the East. The decision of the government to try to return state-owned property to those who had owned it prior to its confiscation some 40 years earlier proved difficult. Consideration of changes that had occurred in the interim posed a particular problem. Western companies had difficulty obtaining clear title to property and therefore preferred to invest in undeveloped sites, rather than taking over existing factories.

Germany is the fourth-largest producer of iron and steel in the world. Production in the Rhur Valley peaked in 1973. As in America’s industrial belt, failure to update equipment has resulted in a loss of some world markets; however, Germany still has a reputation for high-quality products. After unification, most of the steel plants in East Germany were closed because they were too inefficient and did not meet environmental laws. The prodution of machinery remains important, particlarly motor vehicles by companies such as Audi, Ford, BMW, Daimler-Benz, Opel, and Volkswagen.

The last three firms have opened new plants in the former East Germany. In addition, Bombardier, a Canadian company, has begun manufacturing rail cars in the former East Germany.

Although some oil is extracted on the North German Plain, most of the country’s crude oil is imported over 1,560 miles (2,500 kilometers) of pipelines. Lines from Trieste, Genoa, and Marseille bring oil to southern Germany, where it is refined at Karlsruhe and Ingolstadt. Oil is shipped by pipeline, barge, and rail from Rotterdam and is processed in Cologne and Frankfurt. The volume of oil shipments that arrive at Wilhelmshaven make this Germany’s third-largest port. This oil is the basis for the chemical industry in the Ruhr. There are also oil refineries in Hamburg. Both Hamburg and Bremen have prospered since unification, as their outlying areas have been increased. New rail and highway connections have been constructed to eastern Germany. Oil piped from Russia is refined at Schwedt on the Oder River and related chemical industries have developed. The chemical industry in Leipzig has declined due to tighter pollution controls. Natural gas is imported from the Netherlands, Norway, and Russia.

Electrical engineering firms such as Siemens, AEG, Telefunken, and Osram are based in Berlin. Germany is also well known for optical and precision instrument companies such as Zeiss. Textiles remain important in the northern Rhine region and southern Germany, but most of the factories in the former East Germany have closed. High-tech industries have developed in the south of Germany in Stuttgart, Munich, and Frankfurt.

The Service Sector

Much like other economically developed countries, most of Germany’s workforce is employed in the provision of services. Consumer services include retail and office workers. Business services include law firms, advertising agencies, and accountants. Transportation is an important service industry. Frankfurt is the international air-transport hub for the country and home of Lufthansa Airlines, one of the world’s largest state-owned airline companies.

Frankfurt is also the home of the Federal Bank and the stock exchange, making the city the country’s financial center. Germany has hundreds of private banks and credit unions providing financial services. The three largest are Deutsche Bank, Dresdner Bank, and Commerzbank.

Government services include public utilities, the post office, telecommunications, and railway, canal, highway, and urban rapid transit services. The main sources of tax revenue are the value-added tax (or sales tax), income tax, petroleum taxes, and corporate taxes. The federal government also collects tobacco and alcohol taxes, and customs duties. The state governments collect motor vehicle taxes and receive equalization payments from the federal government. Local governments collect property taxes and issue trade and entertainment licenses. Germany provides substantial payments to the European Union and pays its share to the United Nations.

One of the particularly significant service industry growth areas is tourism. For decades, Germany has been a popular destination for tourists from throughout the world. Some tourists come to enjoy the country’s rich cultural heritage. Others are attracted by quaint villages, clean cities, the majestic Alps with their many ski resorts, or simply to admire the beautiful countryside. Its geographic location contributes significantly to expanding tourism, because it is almost impossible to cross Europe north of  the Alps without passing through Germany. Frankfurt is one of the world’s busiest airports, and Germany’s highway and railroad systems efficiently connect it with other parts of Europe.

The European Union

With unification, the former East Germany became a part of the European Community. In 1995, Austria, Sweden, and Finland joined the European Community (EC) and the name was changed to the European Union (EU). In 1992, the Treaty of European Unity (Maastricht Treaty) called for a single currency to be used across all of the member countries by 1999. In 1996, Germany had to cut government spending to stay within the requirements to enter this monetary union.

In 1999, 12 of the 15 countries met the requirements for monetary union, and the “euro” was introduced as a common accounting currency. The European Central Bank was based on the German Federal Bank. On January 1, 2002, euro notes and coins were introduced and the national currencies of the 12 countries were phased out. Germany’s decision to relinquish use of the mark is a strong indicator of its interest in greater unification within Europe. Although the introduction of the euro was initially welcomed, it also created some undesirable consequences. The shift to a common currency meant that prices had to be transferred from marks to euros in a transparent and reasonable fashion. It soon became obvious that while changing currency, many merchants chose to inflate prices up to 15 or 20 percent and take advantage of customers. During the euro’s first months this was a common problem not only in Germany, but throughout most if not all of the EU countries.

The main economic purpose of the EU is to increase internal trade among the member states. Fifty-five percent of Germany’s exports go to other EU members, with France (10.2 percent), the United Kingdom (7.9 percent), and Italy (6.9 percent) being the main partners. The United States buys 8.8 percent of all German exports. The major export items include machinery, vehicles, chemicals, metals and manufactured goods, foodstuffs, and textiles. Germany is a trading nation with total exports of $1.133 trillion and total imports of $916.4 billion in 2006. This positive balance of trade creates growth in the economy and allows expenditures for state and locally organized programs.

EU countries account for 52 percent of Germany’s imports, with France (8.7 percent), the Netherlands (8.5 percent), and the United Kingdom (6.3 percent) being the main partners. The United States provides 6.6 percent of German imports. Typical of industrialized countries, imports fall into the same categories as exports. German companies also began investing in eastern Europe as soon as those countries entered market economy systems in the aftermath of Communism’s downfall.

Because of uneven economic strength, eastern European countries were in a position to provide a labor force that was skilled, but demanded much lower salaries than in the West. One of the earliest such ventures, for example, was the purchase of the Czech Republic’s automobile company Skoda by German manufacturer Volkswagen. This and other types of investments proved beneficial to both sides. Among eastern European countries, Russia has become, by default, a major partner not only to Germany but also to most of western Europe. Similar to the United States, these countries have a growing demand for fossil fuels from other countries, because domestic production does not meet their demands. Thus, Russia, as one of the world’s largest exporters of oil and natural gas, stepped in as western Europe’s main supplier. Germany is currently among the leading consumers of Russian gas and both countries are building a pipeline through the Baltic Sea that will connect the two countries directly. The vitality of imported energy to Germany’s economy can be most appropriately visualized by noting that consumption of natural gas is five times higher than production, while consumption of oil is about 40 times higher than local production.