History of the German Economy

Germany is well known as a developed country with the biggest European economy and the fourth-largest global economy in terms of GDP. In this article, we’ll be walking through its rich history and the events that made the build of a flourishing economy possible!

The history of Germany doesn’t go far beyond because it was established as a unified country only in 1871; much later than the industrial revolution of many countries. Despite its late entry into the market, it was doing fairly well in the economy and hence its growth was titled the “German Miracle”. 

WORLD WAR 1 :

World War 1 completely devastated the German economy. High debts, massive unemployment, and deteriorating GDP were ruining the German economy! To increase the demand, the government decided to print more money which ultimately led to hyperinflation around the 1920s. Thus German previous currency - ”Reischmark” was losing its value, and the barter system was gradually subsuming the official medium of exchange. This situation was only going to worsen with the Great Depression coming into the scene around the late 1920s.

HITLER’S REGIME : 

Hitler was appointed as the Chancellor of Germany on 30th January 1932. Whilst some historians praised his regime for successfully getting Germany back on track; the others claim that his followers distorted history far from reality. For instance, the unemployment rate, which was close to 30% at the beginning of The Great Depression, was almost brought down to zero during the late 1930s. However, his critics believed that this “miracle figure” is shallow as it fails to reflect the reality: real wages remained low and it was the working hours that increased; only “white men” were considered employable, thus dismissing work opportunities for women and men of other races; expenses on military skyrocketed even during the peacetime as they were preparing for the World War II and many more. However, Hitler’s regime introduced many economic policies to the nation that were successful at growing the economy(though these policies were aimed at increasing military spending). Hitler’s whole ideology was based on the fact that Germany is the purest country that was destined to rule the world which was full of other nations that were considered to be inferior to the Aryan race. Hence, they needed a bigger military to fight the war which went on to become known as World War II. However, after 6 years of bloody warfare that killed more than 20 million people and left Europe in ruins, the war ended with German defeat. Allied powers have decided to split German territories between each other to restore the German economy and prevent the rise of fascism, which resulted in Germany being split into 2 separate nations - West and East Germany. 

WEST GERMANY :

Following a capitalist approach, West Germany was heavily funded by the US following the passing of the Marshall Plan in the US congress. They reduced the money supply, introduced Deutsch Mark currency to resolve the problem of hyperinflation post-war. West Germany became an exporting powerhouse of electronic and mechanical items. Its industrial production as of 1958 was 4 times the one of 1948; thanks to its booming automobile industry like Audi, BMW, Volkswagon, etc. No wonder, West Germany was having great economic prosperity reporting an annual GNP growth of 8% from 1951-1961, double the times of that of the US.

EAST GERMANY:

In contrast to its counterpart, it followed the communist approach and it registered a mere 50% growth of that of the West. The communist approach has a significant say in this, as it implemented extreme schemes like drastic increases in taxes and the government’s participation in all sectors of the economy! However several geographical disadvantages also played their part in this. First of all, East Germany is smaller and colder than West, and secondly, East Germany had comparatively limited access to the sea, implying fewer trade activities, etc. To hide the obvious economic benefits of the West, the Berlin Wall was constructed to prevent people from migrating to the West in search of a better life. One can’t determine how much it helped for the concerned issue, but what is clear is that over the period of time they grew apart with their unique cultures. Towards the 1980s, it’d have been difficult to believe the fact that they were once a unified country.

UNIFICATION IN 1990: 

In 1990, after many political disturbances in the Soviet Union and many other communist countries, the Berlin Wall fell. These two countries once again merged to become one political unit. It was one of the most important moments in the economic & political history of Germany. Counties that grew apart over the years were re-unified only to cause major troubles and hindrance in the prosperity. From the economic system to currency - everything was different between two sides of what seemed to be one country. Hence, it took a long way for Germany to come to the position it is in now. Deutsche Mark replaced the currency of East Germany in the ratio 1: 1. Rhine capitalism, which collectively had both the capitalistic and socialistic approaches, came into force. Hands down, the following decade was tough for Germany. Initially, the West had to face the brunt of East Germany’s lack of resources, technological backwardness, low productivity and rapid unemployment. However, with the financial support from the developed countries, loyal support of local products, and the useful schemes implemented by the government, Germany was able to restore its elder glory.

POST-RE-UNIFICATION:

Germany was finally able to reclaim its lost position as a dominant figure in the European economy. The automotive industry was its huge support system. With consecutively registering a huge export surplus, Germany is one of the world’s largest exporters. The major contributors to exports are not only automotive vehicles, but also pharmaceuticals, transport equipment, basic metals, food products, rubber, and plastic.

MITTELSTAND: THE MAJOR CONTRIBUTOR TO GERMANY’S PROSPERITY :

Though the above-discussed factors played an important role in Germany’s prosperity, the biggest contributor to this is MITTELSTAND, also known as, Small & Medium Enterprises. As these are mainly family-run businesses, they prioritize customer value and relationships over profit, and decades over quarters. With the labour reform, where flexible wage rates slowly replaced the union’s high pay-roll demands, there was a visible migration of workers from big factories to Mittelstand as employee well-being was valued there.

With all these positive factors, they managed to contribute 67 per cent of exports and account for 99% of the companies in the country.

CURRENT CHALLENGES & PANDEMIC :

As export almost accounts for 50% of the total output, it clearly highlights the over-dependence of its growth on the international market. For instance, the global economic downturn of 2019 affected Germany’s GDP as it was a little over 0.5%. This also portrays the low domestic consumption; implying at the time of economic downturn, the government’s stimulation scheme to boost demand is often not effective. Just like many countries, it’s also facing the problem of the ageing population as it was projected that it’ll face de-population by the year 2030. 

Though on the medical front, it didn’t face problems like spiking COVID cases, it’s obvious that it faced major economic problems; as for the last quarter of 2021, the German economy reported a decline of 2.1%. It’s important to look beyond figures as they don’t narrate the full story; the spirit of the people even during this hard time is what makes the country stand apart. At a time when the workers were given reduced pay-rolls; Germany implemented a “Kuzarbeit Scheme”; where the working hours were reduced and the remaining time was utilized for the skill-enhancement apprenticeship; so that after the pandemic, they will come back much stronger.

We understand that Germany’s journey was a bed of roses, but with thorns. From the First World War to the COVID pandemic, they have experienced it all. But from every bitter experience, they never gave up; instead, they always came back much stronger to get ready for the next challenge. Germany always marches forward and its efficiency is real. 

Written by Guru Priyaa PK | Proofread by Alidar Kuatbekov and Alexey Dudarev