German Economic System From 1980 Until 2005 Term Paper

Pages: 6 (1718 words)  ·  Bibliography Sources: ≈ 4  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

German economy, as it exists today, is a result of the 1990 merger between the dominant economy of the Federal Republic of Germany, i.e. The FRG or West Germany, and the German Democratic Republic, or the GDR or East Germany. This merger has produced a massive economic entity that presently serves as the focal point of Europe as a production center as well as a transportation and communications center. However, each partner has brought many different elements into the whole system which at times has proved to be difficult and expensive. Yet this merger between the two former halves of Germany dominates its economic policy and will surely continue to do so well into the 21st century.

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Historically, the East German economy served as a central system in Eastern Europe with Moscow, under the control of the Communist government, as its main supporter, but more recently since the collapse of the Soviet Union, it has become far less of a supporter. In 1990, when East Germany joined forces with West Germany, this merger proved to be rather eye-opening, due in part to the collapse of the East German markets in the Soviet Union and the inefficiencies left behind after the communist system had imploded upon itself. According to Tatyana Gordeeva, the people of Germany "proudly label their economy a 'soziale Marktwirtschaft' or social market economy" to demonstrate that the current system following the end of World War II "has both a material and social... dimension." These traits are the result of the consequences of the Nazi regime which mandated that the current economic system must be "free of state intervention and domination" while also protecting "the competitive environment from monopolistic or oligopolistic tendencies" ("German Economy," Internet).

Term Paper on German Economic System From 1980 Until 2005 Assignment

Thus, the united Germany economy is presently a dominant force in global markets because of its strong emphasis on exports. Although the burdens of German unification have drastically altered West Germany's traditional export system, current German industries produce some of the best materials and commodities in the world. Of course, the major force in the German economy is the banking system with the central bank (Bundesbank) serving as the foundation for maintaining Germany's national currency (deutsche mark). Private banks also play a major role, for German industrial and service-oriented companies depend to a great degree on bank finance rather than on equity capital.

In the late 1980's, the economy of West Germany experienced much growth, for its GDP rose to 3.7% in 1988 and 3.6% in 1989, the highest levels for the decade. The unemployment rate also declined to 7.6% in 1989 despite the arrival of many workers from foreign countries. As a result, the late 1980's created great strides in the West German supply-side system while tax rate reductions led to more vitality and revenue.

1989 served as the last date for the West German economy as a separate and individual entity, and from 1990 onward, the disparities created by unification were most noticeable which forced the West German economy to re-invent itself and become a viable member of the economic and political system with East Germany. One of the prime results was that the West German economy evolved from a primary focus on Western Europe to one of global orientation while utilizing the benefits gained from unification.

At the time of German unification, both West and East German economies shared similar traits, for both concentrated on industrial production, such as the manufacture of machining tools, automobiles and precision instruments. Both possessed a very well-trained and educated working force and were highlighted by an emphasis on exportation, yet the East German economy was very centralized with practically no private property as compared to West Germany which was then under a democratic economic system.

On July 1, 1990, the economies of East and West Germany merged which marked the first time in European history where a capitalist and a socialist economy became united. This brought about many problems with the most severe being related to the poor productivity of the former East German economy and its links with the socialist economies of the former Soviet Union and parts of Eastern Europe which were still under communist control. As might have been expected, the economy of East Germany entered a deep slump almost immediately after unification and within a year, the number of unemployed rose above 3 million while industrial production dropped to less than half its previous rate. In 1991, some experts estimated that the entire production of East Germany amounted to less than eight percent of that of all of West Germany.

After unification, East Germany's economy experienced a deep recession while that of West Germany moved into a rather large economic boom. In West Germany, the GDP increased at a rate of 4.6% for 1990 which reflected the demand for goods from East Germany. The greatest growth rate came after 1990 and grew steadily but slowly well into 1991. Prices stayed relatively stable, due to the fact that the cost of living increased only 2.8%. Employment also increased during this time from approximately 21 million to 29 million persons while the unemployment rate dropped below 7%. These dramatic figures resulted from the opening of East Germany to a new market of some 17 million persons and the influx of thousands of workers from East Germany who could now cross into West Germany to find work and new lifestyles. By the end of 1991, some 300,000 Germans were commuting from the East to the West to work and by 1992 the number had jumped to over 400,000. However, the economy in East Germany remains to this day rather weak, for "unemployment is double" that of West Germany and "economic output per head (is) not much more than half of that in the west" ("Economy of Germany," Internet).

All of this massive growth in the German economy quickly became a major problem for the Bundesbank which was forced to focus on three specific elements -- first, the sudden financial shifts between East and West Germany; second, government deficits that resulted from large expenditures in East Germany, and lastly, the potentially dangerous inflationary effects of rapid growth in West Germany. Thus, the Bundesbank raised short-term interests rates through 1991 and 1992 with the average rate climbing from 7.1% in 1989 to 8.5 in 1990, to 9.2% in 1991 and to 9.5% in 1992.

As these rates began to take hold, growth in West Germany declined while the economy in East Germany also lessened even more. Yet by 1992, the German economy reached its perceived apex, for with the addition of East Germany, the GDP went above 3 trillion deutsche marks. However, the total German unemployment rate reached a record number of some 4 million people; two-thirds of this number were unemployed in West Germany with the remainder in East Germany. This situation created a depression of sorts well into 1993 when the economy registered a negative growth rate of about 1.2%. By 1994, after the Bundesbank lowered short-term interest rates, German economic growth continued at about 2.4% annually with only small declines in unemployment. By 1995, the German economy experienced even more strong growth and the number of unemployed steadily dropped which indicated that Germany was on the correct path toward economic prosperity. However, unification had come at a very high price, for all Germans were affected by it and continue to feel its aftershocks even today.

According to the information contained in "The German Economy" (Abacci Atlas, Internet), the combined German economic system between 1998 and 1999 experience rapid growth which allowed the country to become a major partner in the European Union and one of Europe's greatest economic powers. As of 1999, the GDP or purchasing power parity was 1.864 trillion deutsch marks; real growth rate was at 1.5%, and per capita (purchasing power parity) stood at 22,700 deutsch marks. Sector-wise, German agriculture, as of 1999, stood at 1.2%; industry at 30.4% and services at 68.4%.

The inflation rate for 1999 (consumer prices) stood at 0.8% while the labor force exceeded 40 million workers. By occupation, industry accounted for 33.7%; agriculture at 2.7% and services at 63.6% (1998 est.). As of 1999, the unemployment rate stood at 10.5%, a rather low number considering that West Germany upon unification was flooded by workers from East Germany. Budget-wise, total revenue expenditures for 1999 stood at $996 billion; capital expenditures were 1.036 trillion.

Since Germany has been blessed with a wide variety of natural resources, industry continues to be Germany's main economic stimulus. Almost all of Western Germany has some form of industry with the main areas being the Ruhr district in North Rhine-Westphalia, the traditional center of German coal, steel and heavy manufacturing. Cities, such as Hanover, Munich and Frankfurt, represent the main concentration of German industry; the automotive industry, a well-respected and highly influential global market, has been increasingly centered in southern Germany, especially in Bavaria and Baden-Wurttemberg. As of 1999, Germany's industrial production growth rate stood at 0.9% ("The Germany Economy," Internet).

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