When Germany became a nation in 1871, it was a latecomer in the race toward industrialization, 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 German 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 large state-owned manufactures and cooperative agricultural enterprises in East Germany did not survive the transformation to a market economy, a process that resulted in unusually high unemployment. In early 1997 unemployment in Germany 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 sought to protect existing wages and jobs.
Private and public investments, most of them from western Germany, flowed into the former East Germany as its economy was restructured and privatized. Since reunification the German government has invested tens of billions of dollars every year to modernize the infrastructure of roads, transport, communications, and housing in the former East Germany. In just the first seven years after unification, financial transfers from east to west involved an amount equivalent (in real, uninflated value) to 70 times the Marshall Plan aid to West Germany. These immense financial transfers were expected to continue into the second decade of the 21st century. During convergence of the two economies, Germany has experienced relatively low rates of annual growth—especially following a painful economic downturn in 2002 and 2003.
From the early 1990s into the 2000s structural economic problems—high unemployment, lagging productivity in the east, and sluggish economic growth overall—plagued the German economy. Germany’s economy, long regarded as the economic powerhouse of Europe, has been weakened by these problems. Nevertheless, with its large and modern industrial base, Germany’s economy remains the largest in the European Union (EU) and one of the largest in the world. Germany uses the EU’s common currency, the euro, and more than one-half of German export and import trade is with other EU countries. "Germany" © Emmanuel BUCHOT, Encarta, Wikipedia
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