THE GERMAN ECONOMY is replete with contradictions. It is modern but old-fashioned. It is immensely powerful but suffers from serious structural weaknesses. It is subject to national laws and rules but is so closely tied into the European Union (EU) that it is no longer truly independent. It has a central bank that controls European monetary policy and has a deepening impact on the global economy but that also insists on making its decisions mainly on the basis of domestic considerations. Finally, although Germany must compete against highly efficient economies outside its own continent, it continues to carry the expense and burden of traditional industries that drain resources that could be better used elsewhere.

The German economy as it is known today is an outgrowth of the 1990 merger between the dominant economy of the Federal Republic of Germany (FRG, or West Germany) and that of the German Democratic Republic (GDR, or East Germany). This merger will one day produce a massive economic entity that will constitute the fulcrum of Europe as a production center, as well as a transportation and communications center. But each partner brings different elements to the mix, and the merger has proved difficult and costly. The merger will dominate Germany's economic policy and reality until well into the next century.

The record of the West German economy during the four decades before unification shows a signal achievement. The first decade, that of the 1950s, had been that of the "economic miracle." The second decade, that of the 1960s, had seen consolidation and the first signs of trouble. The 1970s had brought the oil shocks, the generous social programs, the rising deficits, and finally a loss of control. In the 1980s, new policies at home and a more stable environment abroad had combined to put West Germany back on the path of growth.

The East German economy had been a powerhouse in Eastern Europe, where Moscow had relied on it to produce machine tools, chemicals, and electronics. But it had grown increasingly inefficient, and its currency had become worthless outside its own borders. East Germans had felt frustrated at their lack of true material well-being, as well as their lack of freedom. They joined their economy enthusiastically with that of West Germany in 1990. The merger gave them a rude shock, however, in part because of the simultaneous collapse of East Germany's markets in the Soviet empire and in part because of the inefficiencies that the communist system had left behind.

The united German economy is a dominant force in world markets because of the strong export orientation that has been part of the German tradition for centuries. Although the burdens of unification have cut into West Germany's traditional export surplus, German industry continues to produce some of the best machine tools, automobiles, trucks, chemicals, and engineering products in the world. Its management culture, which mingles competition and cooperation, stresses quality and durability above all other virtues. Because many German companies are small or medium-sized, they are able to concentrate on a few production lines that compete effectively even if they are expensive.

The German culture of cooperation also extends to the relations between the private sector and the government. The social market economy, in which all elements of the system cooperate, stresses the importance of having all parties to the social contract work together. Workers play a role in management. Managers mingle with workers. The bureaucracy attempts to create an environment in which all parties serve a common purpose. Although the rules intended to prevent the recurrence of the German cartel system of the last century are strictly enforced by the Bundeskartellamt (Federal Cartel Office), certain practices that would be forbidden under United States antitrust laws are widely tolerated in Germany.

The dominant force in the German economy is the banking system. The central bank, the Bundesbank, is deeply committed to maintaining the value of the nation's currency, the deutsche mark, even at some potential cost to economic growth. It fears inflation above all other ills and is determined to prevent the recurrence of Germany's ruinous Great Inflation of the early 1920s. Private banks also play an important role. German industrial and service companies rely much more on bank finance than on equity capital. The banks provide the money and in turn sit on the supervisory boards of most of Germany's corporations. From that vantage point, they stress the traditional banking virtues of slow but steady and nonrisky growth. Their influence and thinking permeate the economy.

German agriculture is not as strong as German industry. It is a relatively small part of the gross domestic product (GDP) and is heavily subsidized by the EU's Common Agricultural Policy (CAP) and by the German government itself. The accession of East Germany to a united Germany expanded the relative size of the agricultural sector and somewhat improved its efficiency, but Germany is not an agricultural producer like Spain or Italy.

West Germany developed a system of high wages and high social benefits that has been carried over into united Germany. The extent and the generosity of its social programs now leave Germany at a competitive disadvantage with respect to the states of Eastern Europe and Asia. German labor costs are above those of most other states, not because of the wages themselves--which are high by global standards but not out of line with German labor productivity--but because of social costs, which impose burdens equal to the wages themselves. Thus, German companies and German workers must decide either to abandon some of the social programs that are at the core of the revered social market economy or to risk losing out in the increasingly intense global competition of the 1990s and beyond. The Germans have not solved this problem, but they are beginning to address it more seriously than before.

Medieval Germany, lying on the open Central European Plain, was divided into hundreds of contending kingdoms, principalities, dukedoms, bishoprics, and free cities. Economic survival in that environment, like political or even physical survival, did not mean expanding across unlimited terrain, as in the United States. It meant a constant struggle that required collaboration with some, competition with others, and an intimate understanding among government, commerce, and production. A desire to save was also born in the German experience of political, military, and economic uncertainty.

Even under these difficult conditions, Germany had already developed a strong economy during the Middle Ages. It was based on guild and craft production, but with elements of merchant capitalism and mercantilism. The trade conducted by its cities ranged far and wide throughout Europe in all directions, and Germany as a whole often had trade surpluses with neighboring states. One reason for these exports was the sheer necessity for the small states to sell abroad in order to buy the many things they could not produce at home.

The German guilds of the Middle Ages established the German tradition of creating products known for quality and durability. A craftsman was not permitted to pursue a trade until he could demonstrate the ability to make high-quality products. Out of that same tradition came an equally strong passion for education and vocational training, for no craftsman was recognized until he had thoroughly learned a trade, passed a test, and been certified.

The Industrial Revolution reached Germany long after it had flowered in Britain, and the governments of the German states supported local industry because they did not want to be left behind. Many enterprises were government initiated, government financed, government managed, or government subsidized. As industry grew and prospered in the nineteenth century, Prussia and other German states consciously supported all economic development and especially transportation and industry.

The north German states were for the most part richer in natural resources than the southern states. They had vast agricultural tracts from Schleswig-Holstein in the west through Prussia in the east. They also had coal and iron in the Ruhr Valley. Through the practice of primogeniture, widely followed in northern Germany, large estates and fortunes grew. So did close relations between their owners and local as well as national governments.

The south German states were relatively poor in natural resources except for their people, and those Germans therefore engaged more often in small economic enterprises. They also had no primogeniture rule but subdivided the land among several offspring, leading those offspring to remain in their native towns but not fully able to support themselves from their small parcels of land. The south German states, therefore, fostered cottage industries, crafts, and a more independent and self-reliant spirit less closely linked to the government.

German banks played central roles in financing German industry. They also shaped industrywide producer cooperatives, known as cartels. Different banks formed cartels in different industries. Cartel contracts were accepted as legal and binding by German courts although they were held to be illegal in Britain and the United States.

The first German cartel was a salt cartel, the Neckar Salt Union of 1828, formed in Württemberg and Baden. The process of cartelization began slowly, but the cartel movement took hold after 1873 in the economic depression that followed the postunification speculative bubble. It began in heavy industry and spread throughout other industries. By 1900 there were 275 cartels in operation; by 1908, over 500. By some estimates, different cartel arrangements may have numbered in the thousands at different times, but many German companies stayed outside the cartels because they did not welcome the restrictions that membership imposed.

The government played a powerful role in the industrialization of the German Empire founded by Otto von Bismarck in 1871 (see Bismarck and Unification, ch. 1). It supported not only heavy industry but also crafts and trades because it wanted to maintain prosperity in all parts of the empire. Even where the national government did not act, the highly autonomous regional and local governments supported their own industries. Each state tried to be as self-sufficient as possible.

Despite the several ups and downs of prosperity and depression that marked the first decades of the German Empire, the ultimate wealth of the empire proved immense. German aristocrats, landowners, bankers, and producers created what might be termed the first German economic miracle, the turn-of-the-century surge in German industry and commerce during which bankers, industrialists, mercantilists, the military, and the monarchy joined forces.

The German Empire also established, under Bismarck's direction, the social compact under which the German laboring classes supported the national ambitions of the newly united German state in exchange for a system of social welfare that would make them, if not full participants in the system, at least its beneficiaries and pensioners. Bismarck was not a socialist, but he believed that it was necessary to accept portions of the socialist platform to sustain prosperity and social cohesion.

From the prosperity of the empire during the Wilhelmine era (1890-1914), Germany plunged into World War I, a war it was to lose and one that spawned many of the economic crises that would destroy the successor Weimar Republic (see The Weimar Republic, 1918-33, ch. 1). Even the British economist John Maynard Keynes denounced the 1919 Treaty of Versailles as ruinous to German and global prosperity. The war and the treaty were followed by the Great Inflation of the early 1920s that wreaked havoc on Germany's social structure and political stability. During that inflation, the value of the nation's currency, the Reichsmark, collapsed from 8.9 per US$1 in 1918 to 4.2 trillion per US$1 by November 1923. Then, after a brief period of prosperity during the mid-1920s, came the Great Depression, which destroyed what remained of the German middle class and paved the way for the dictatorship of Adolf Hitler. During the Hitler era (1933-45), the economy developed a hothouse prosperity, supported with high government subsidies to those sectors that Hitler favored because they gave Germany military power and economic autarchy, that is, economic independence from the global economy. Finally, the entire enterprise collapsed in the Stunde Null (Zero Hour), when Germany lay in ruins at the end of World War II in May 1945 and when every German knew that he or she had to begin life all over again.

The first several years after World War II were years of bitter penury for the Germans. Their land, their homes, and their property lay in ruin. Millions were forced to flee with nothing but the clothes on their backs. Tens of millions did not have enough to eat or to wear. Inflation raged. Parker pens, nylon stockings, and Camel cigarettes represented the accepted, if not the legal, tender of the time. Occupation projections showed that the average German would be able to purchase a plate every five years, a pair of shoes every twelve years, and a suit every fifty years.

As Germany's postwar economic and political leaders shaped their plans for the future German economy, they saw in ruin a new beginning, an opportunity to position Germany on a new and totally different path. The economy was to be an instrument for prosperity, but it was also to safeguard democracy and to help maintain a stable society. The new German leaders wanted social peace as well as economic prosperity. They wanted an economic system that would give all an equal opportunity in order to avoid creating underprivileged social groups whose bitter frustration would erupt into revolution and--in turn--repression.

The man who took full advantage of Germany's postwar opportunity was Ludwig Erhard, who was determined to shape a new and different kind of German economy. He was given his chance by United States officials, who found him working in Nuremberg and who saw that many of his ideas coincided with their own.

Erhard's first step was currency reform: the abolition of the Reichsmark and the creation of a new currency, the deutsche mark. He carried out that reform on June 20, 1948, installing the new currency with the concurrence of the Western Allies but also taking advantage of the opportunity to abolish most Nazi and occupation rules and regulations in order to establish the genesis of a free economy. The currency reform, whose purpose was to provide a respected store of value and a widely accepted legal tender, succeeded brilliantly. It established the foundations of the West German economy and of the West German state.

Germany - The Social Market Economy

The Germans proudly label their economy a "soziale Marktwirtschaft ," or "social market economy," to show that the system as it has developed after World War II has both a material and a social--or human--dimension. They stress the importance of the term "market" because after the Nazi experience they wanted an economy free of state intervention and domination. The only state role in the new West German economy was to protect the competitive environment from monopolistic or oligopolistic tendencies--including its own. The term "social" is stressed because West Germans wanted an economy that would not only help the wealthy but also care for the workers and others who might not prove able to cope with the strenuous competitive demands of a market economy. The term "social" was chosen rather than "socialist" to distinguish their system from those in which the state claimed the right to direct the economy or to intervene in it.

Beyond these principles of the social market economy, but linked to it, comes a more traditional German concept, that of Ordnung , which can be directly translated to mean order but which really means an economy, society, and polity that are structured but not dictatorial. The founders of the social market economy insisted that Denken in Ordnungen --to think in terms of systems of order--was essential. They also spoke of Ordo-Liberalismus because the essence of the concept is that this must be a freely chosen order, not a command order.

Over time, the term "social" in the social market economy began to take on a life of its own. It moved the West German economy toward an extensive social welfare system that has become one of the most expensive in the world. Moreover, the West German federal government and the states (Länder ; sing., Land ) began to compensate for irregularities in economic cycles and for shifts in world production by beginning to shelter and support some sectors and industries. In an even greater departure from the Erhard tradition, the government became an instrument for the preservation of existing industries rather than a force for renewal. In the 1970s, the state assumed an ever more important role in the economy. During the 1980s, Chancellor Helmut Kohl tried to reduce that state role, and he succeeded in part, but German unification again compelled the German government to assume a stronger role in the economy. Thus, the contradiction between the terms "social" and "market" has remained an element for debate in Germany.

Given the internal contradiction in its philosophy, the German economy is both conservative and dynamic. It is conservative in the sense that it draws on the part of the German tradition that envisages some state role in the economy and a cautious attitude toward investment and risk-taking. It is dynamic in the sense that it is directed toward growth--even if that growth may be slow and steady rather than spectacular. It tries to combine the virtues of a market system with the virtues of a social welfare system.

Germany - The Economic Miracle and Beyond

The economic reforms and the new West German system received powerful support from a number of sources: investment funds under the European Recovery Program, more commonly known as the Marshall Plan; the stimulus to German industry provided by the diversion of other Western resources for Korean War production; and the German readiness to work hard for low wages until productivity had risen. But the essential component of success was the revival of confidence brought on by Erhard's reforms and by the new currency.

The West German boom that began in 1950 was truly memorable. The growth rate of industrial production was 25.0 percent in 1950 and 18.1 percent in 1951. Growth continued at a high rate for most of the 1950s, despite occasional slowdowns. By 1960 industrial production had risen to two-and-one-half times the level of 1950 and far beyond any that the Nazis had reached during the 1930s in all of Germany. GDP rose by two-thirds during the same decade. The number of persons employed rose from 13.8 million in 1950 to 19.8 million in 1960, and the unemployment rate fell from 10.3 percent to 1.2 percent.

Labor also benefited in due course from the boom. Although wage demands and pay increases had been modest at first, wages and salaries rose over 80 percent between 1949 and 1955, catching up with growth. West German social programs were given a considerable boost in 1957, just before a national election, when the government decided to initiate a number of social programs and to expand others.

In 1957 West Germany gained a new central bank, the Deutsche Bundesbank, generally called simply the Bundesbank, which succeeded the Bank Deutscher Länder and was given much more authority over monetary policy. That year also saw the establishment of the Bundeskartellamt (Federal Cartel Office), designed to prevent the return of German monopolies and cartels. Six years later, in 1963, the Bundestag, the lower house of Germany's parliament, at Erhard's urging established the Council of Economic Experts to provide objective evaluations on which to base German economic policy.

The West German economy did not grow as fast or as consistently in the 1960s as it had during the 1950s, in part because such a torrid pace could not be sustained, in part because the supply of fresh labor from East Germany was cut off by the Berlin Wall, built in 1961, and in part because the Bundesbank became disturbed about potential overheating and moved several times to slow the pace of growth. Erhard, who had succeeded Konrad Adenauer as chancellor, was voted out of office in December 1966, largely--although not entirely--because of the economic problems of the Federal Republic. He was replaced by the Grand Coalition consisting of the Christian Democratic Union (Christlich Demokratische Union--CDU), its sister party the Christian Social Union (Christlich-Soziale Union--CSU), and the Social Democratic Party of Germany (Sozialdemokratische Partei Deutschlands--SPD) under Chancellor Kurt Georg Kiesinger of the CDU.

Under the pressure of the slowdown, the new West German Grand Coalition government abandoned Erhard's broad laissez-faire orientation. The new minister for economics, Karl Schiller, argued strongly for legislation that would give the federal government and his ministry greater authority to guide economic policy. In 1967 the Bundestag passed the Law for Promoting Stability and Growth, known as the Magna Carta of medium-term economic management. That law, which remains in effect although never again applied as energetically as in Schiller's time, provided for coordination of federal, Land , and local budget plans in order to give fiscal policy a stronger impact. The law also set a number of optimistic targets for the four basic standards by which West German economic success was henceforth to be measured: currency stability, economic growth, employment levels, and trade balance. Those standards became popularly known as the magisches Viereck , the "magic rectangle" or the "magic polygon."

Schiller followed a different concept from Erhard's. He was one of the rare German Keynesians, and he brought to his new tasks the unshakable conviction that government had both the obligation and the capacity to shape economic trends and to smooth out and even eliminate the business cycle. Schiller's chosen formula was Globalsteuerung , or global guidance, a process by which government would not intervene in the details of the economy but would establish broad guidelines that would foster uninterrupted noninflationary growth.

Schiller's success in the Grand Coalition helped to give the SPD an electoral victory in 1969 and a chance to form a new coalition government with the Free Democratic Party (Freie Demokratische Partei--FDP) under Willy Brandt. The SPD-FDP coalition expanded the West German social security system, substantially increasing the size and cost of the social budget. Social program costs grew by over 10 percent a year during much of the 1970s, introducing into the budget an unalterable obligation that reduced fiscal flexibility (although Schiller and other Keynesians believed that it would have an anticyclical effect). This came back to haunt Schiller as well as every German government since then. Schiller himself had to resign in 1972 when the West German and global economies were in a downturn and when all his ideas did not seem able to revive West German prosperity. Willy Brandt himself resigned two years later.

Helmut Schmidt, Brandt's successor, was intensely interested in economics but also faced great problems, including the dramatic upsurge in oil prices of 1973-74. West Germany's GDP in 1975 fell by 1.4 percent (in constant prices), the first time since the founding of the FRG that it had fallen so sharply. The West German trade balance also fell as global demand declined and as the terms of trade deteriorated because of the rise in petroleum prices.

By 1976 the worst was over. West German growth resumed, and the inflation rate began to decline (see table 12, Appendix). Although neither reached the favorable levels that had come to be taken for granted during the 1950s and early 1960s, they were accepted as tolerable after the turbulence of the previous years. Schmidt began to be known as a Macher (achiever), and the government won reelection in 1976. Schmidt's success led him and his party to claim that they had built Modell Deutschland (the German model).

But the economy again turned down and, despite efforts to stimulate growth by government deficits, failed to revive quickly. It was only by mid-1978 that Schmidt and the Bundesbank were able to bring the economy into balance. After that, the economy continued expanding through 1979 and much of 1980, helping Schmidt win reelection in 1980. But the upturn proved to be uneven and unrewarding, as the problems of the mid-1970s rapidly returned. By early 1981, Schmidt faced the worst possible situation: growth fell and unemployment rose, but inflation did not abate.

By the fall of 1982, Schmidt's coalition government collapsed as the FDP withdrew to join a coalition led by Helmut Kohl, the leader of the CDU/CSU. He began to direct what was termed die Wende (the turning or the reversal). The government proceeded to implement new policies to reduce the government role in the economy and within a year won a popular vote in support of the new course.

Within its broad policy, the new government had several main objectives: to reduce the federal deficit by cutting expenditures as well as taxes, to reduce government restrictions and regulations, and to improve the flexibility and performance of the labor market. The government also carried through a series of privatization measures, selling almost DM10 billion (for value of the deutsche mark--see Glossary) in shares of such diverse state-owned institutions as VEBA, VIAG, Volkswagen, Lufthansa, and Salzgitter. Through all these steps, the state role in the West German economy declined from 52 percent to 46 percent of GDP between 1982 and 1990, according to Bundesbank statistics.

Although the policies of die Wende changed the mood of the West German economy and reinstalled a measure of confidence, progress came unevenly and haltingly. During most of the 1980s, the figures on growth and inflation improved but slowly, and the figures on unemployment barely moved at all. There was little job growth until the end of the decade. When the statistics did change, however, even modestly, it was at least in the right direction.

Nonetheless, it also remained true that West German growth did not again reach the levels that it had attained in the early years of the Federal Republic. There had been a decline in the growth rate since the 1950s, an upturn in unemployment since the 1960s, and a gradual increase in inflation except during or after a severe downturn.

Global economic statistics also showed a decline in West German output and vitality. They showed that the West German share of total world production had grown from 6.6 percent in 1965 to 7.9 percent by 1975. Twelve years later, in 1987, however, it had fallen to 7.4 percent, largely because of the more rapid growth of Japan and other Asian states. Even adding the estimated GDP of the former East Germany at its peak before unification would not have brought the all-German share above 8.2 percent by 1989 and would leave all of Germany with barely a greater share of world production than West Germany alone had reached fifteen years earlier.

It was only in the late 1980s that West Germany's economy finally began to grow more rapidly. The growth rate for West German GDP rose to 3.7 percent in 1988 and 3.6 percent in 1989, the highest levels of the decade. The unemployment rate also fell to 7.6 percent in 1989, despite an influx of workers from abroad. Thus, the results of the late 1980s appeared to vindicate the West German supply-side revolution. Tax rate reductions had led to greater vitality and revenues. Although the cumulative public-sector deficit had gone above the DM1 trillion level, the public sector was growing more slowly than before.

The year 1989 was the last year of the West German economy as a separate and separable institution. From 1990 the positive and negative distortions generated by German unification set in, and the West German economy began to reorient itself toward economic and political union with what had been East Germany. The economy turned gradually and massively from its primarily West European and global orientation toward an increasingly intense concentration on the requirements and the opportunities of unification.

Germany - Economy - Unification and Its Aftermath

The East German and West German economies at the time of unification looked very similar. They both concentrated on industrial production, especially machine tools, chemicals, automobiles, and precision manufactures. Both had a well-trained labor force and an important export component, although their exports went largely in opposite directions. But the East German economy was highly centralized and guided by a detailed and purportedly precise planning system, with virtually no private property and with no room for decision or initiative.

On July 1, 1990, the economies of the two Germanys became one. It was the first time in history that a capitalist and a socialist economy had suddenly become one, and there were no precise guidelines on how it could be done. Instead, there were a number of problems, of which the most severe were the comparatively poor productivity of the former East German economy and its links to the collapsing socialist economies of the Soviet Union and Eastern Europe.

Even before economic unification, the West German government had decided that one of its first tasks was to privatize the East German economy. For this reason, it had taken over in June the Treuhandanstalt (Trust Agency, commonly known as Treuhand), which had been established by the GDR to take over East German firms and to turn them over to new management through privatization. The agency assumed the assets and liabilities of about 8,000 East German enterprises in order to sell them to German and other bidders. By the time the Treuhand was disbanded at the end of 1994, it had privatized some 14,000 enterprises.

As economic unification proceeded, issues that had been recognized but inadequately understood in advance began to surface. There was massive confusion about property rights. As wave after wave of Nazi, Soviet, and later GDR expropriations had taken place between 1933 and 1989, there was often little knowledge of the actual ownership of property. More than 2 million claims on properties in the territory of the former GDR were filed by the December 31, 1992, deadline. As more claimants emerged, with many winning cases in the courts, potential investors were often scared off.

Another problem was that East German production costs had been very high. The conversion rates of East German marks to deutsche marks often kept those costs high, as did the early wage negotiations, which resulted in wages far above the productivity level. Western German firms found it easier and cheaper to serve their new eastern German markets by expanding production in western facilities.

A third problem was that the inadequate infrastructure also became a problem for many potential investors. Telephone service was improved only very slowly. Many investors also complained about energy shortages, as many East German power stations were shut down for safety and other reasons. Roads and railroads had to be virtually rebuilt because they had been so badly maintained.

In addition to these practical problems, there was also a deep policy dilemma that underlay the entire process of unification. From the beginning, there had been a pernicious link between the earlier and later phases of the East German transition to a free-market economy. Policies calculated to make the initial adjustment as painless as possible hampered long-run growth and prosperity. Real economic efficiency could only be achieved by permitting and even forcing considerable immediate dislocations, whereas temporary compromises might lead to permanent structural burdens. However, excessive disruptions could jeopardize the economic and political stability required for a smooth unification process and might also cause streams of East Germans to move west. The government was never able to solve this dilemma. When it was forced to choose, it usually selected the more expensive and slower course to encourage persons to stay in the east.

Despite these problems, the process of unification moved ahead, albeit slowly. The Treuhand, staffed almost entirely by Germans from the west, became the virtual government of eastern Germany. In the course of privatization, the agency decided which companies would live and which would die, which communities would thrive and which would shrivel, and which eastern Länder would be prosperous and which would not. It also decided who might or might not buy eastern firms or services.

Whether correct or not, reports persisted throughout the first years of unification that foreign enterprises were being screened more carefully and more skeptically than German firms even as they were being invited to invest. Less than 5 percent of all investment in eastern Germany was non-German, and most of that was from companies with subsidiaries in western Germany who were expanding them to the east. The Japanese did not invest, although they had earlier expressed some interest, and the offices Treuhand established in New York and Tokyo found few investors.

As might have been expected, the economy of eastern Germany went into a deep and precipitous slump immediately after unification. Within a year after unification, the number of unemployed rose above 3 million. Industrial production in eastern Germany fell to less than half the previous rate, and the total regional product fell precipitously through 1991. One estimate was that in 1991 the entire production of eastern Germany amounted to less than 8 percent of that of western Germany.

Although Germany is one of the world's most powerful economies, there have been growing doubts within Germany about the state of its economy. The principal doubts have been about the ability of the German economy to modernize quickly enough to keep up in an increasingly competitive global environment. There is also a fundamental debate about the direction that the economy must take if it is to remain successful and prosperous. That debate includes a seminal discussion about Germany's place in the global division of labor, an issue of immense importance to an exporting nation such as Germany.

Those who have led the debate, and those who have insisted most firmly that Germany's economy must change, are those who have seen the world economy changing in directions that would increasingly relegate Germany to a second rank. They have seen the coming of a world in which the work performed by traditional German production sectors--whether coal, steel, chemicals, agriculture, electronics, or machinery--can be done better and more cheaply elsewhere. They believe firmly that Germany has to deemphasize some of those sectors and abandon others in order to move with the greatest speed and the most powerful possible commitment into new areas that will lead the growth of the world economy.

Five German institutes charged with analyzing economic issues have played a central role in the debate, issuing a series of reports and recommendations throughout the 1980s and 1990s in which they warned that the German economy had to change--and change quickly. They complained ever more insistently about what they described as the inadequate response of federal, Land , and local governments to the needs of the evolving global economy.

Those who opposed the arguments of the institutes fell into several categories. Some remained committed to traditional economic sectors, which they believed could still perform competitively, especially if enough effort was made to modernize and rationalize them or to find particular specialties. Others supported traditional sectors, not for economic but for social and political reasons. Still others believed that the issues had to be raised and understood but that action could and perhaps should be postponed.

The basic complaint about modernization has been that the German economy has not remained at the forefront of global development and progress and is not moving decisively into the ranks of the most advanced industrial societies, such as the United States, Japan, and the smaller Asian economies. The institutes have pointed out that new technologies--such as computer hardware and software--could not only improve traditional production but also could become new industries in themselves.

As part of their assertion that Germany was not modernizing quickly enough, the institutes have also expressed concern that the country has not given adequate priority to research and development and that German capital has not been venturesome enough. They have argued that funds have not gone sufficiently into the kinds of research or into the start-up ventures that have helped keep the United States at the forefront of international inventiveness even as that country's traditional industries have declined.

This does not mean that German industry does not invest in research and development. EU statistics have consistently shown that Germany has been either first or second in European research and development expenditures, with only France coming close enough to be a real competitor. But those same and related statistics also have shown that the German lead has been shrinking and that Germany does not have the lead in computer-oriented research and development. In particular, they have shown that Germany has not been doing well at the global level, lagging behind the United States and even further behind Japan in the pace at which it has been increasing its research expenditures. In advanced-technology areas, Germany has been trailing badly. The total German private and public research effort has consistently amounted to about 2.8 percent of GDP, but that is about the same percentage as the United States and Japan and is clearly not enough to allow the smaller German economy to keep up. A German patent office study showed that by 1989 West Germany had fallen behind in three of four major areas of domestic patent grants compared with Japan and the United States.

German technological progress has been uneven. The country has certainly remained competitive in biotechnology and general medical research. The same could be said about its competitive position in smaller robotic machine tools and in many areas of electronic and even specialized computer research. But this does not compensate fully for the lag in cellular communications, microtechnology, and computers.

The German government has been slow to assist firms in technological development. There has been strong German financial and scientific participation in a variety of European programs, such as Esprit, Eureka, Jessi, Race, or Brite--programs that are designed to internationalize research at the European level to enable the smaller European states to compete against the United States and Japan. These European efforts are significant, but their results as of the mid-1990s have not allayed the concerns of many Germans about falling behind.

The institutes have also addressed another problem, the German lag in establishing new ventures. This shortcoming goes to the core of the total functioning of the German system, including the conservatism of banking and financial practices. Germany has not found a way to create an environment in which small entrepreneurs in new fields arise in large numbers.

With unification as Germany's principal economic priority, the debate about structural reform has taken second place, and the government is giving it less priority than it received in the 1980s. But it remains an issue and will continue to be so as other parts of the world economy--including Eastern Europe--become more competitive.

Germany - Economy - The Role of Government

The Federal Government Role

The German federal government plays a crucial role in the German economy, sometimes directly and sometimes indirectly through the effects of other policies on the economy. Unlike the Japanese government, there is no single ministry that attempts to direct industrial government and competitiveness, but government policy can have wide-ranging effects because of the many offices that play a role.

The three principal figures responsible for economic policy are the chancellor, the minister for economics, and the minister of finance. The three positions have rarely been held simultaneously by members of a single party and are usually divided among two or sometimes three parties. Economic policy therefore has to reflect the interests of at least two political parties, with all that this means in terms of compromise and conciliation. The coalition negotiations to form a new government after a national election are never more delicate or more difficult than when they touch on economic policies.

The main parties have different economic philosophies and pursue generally different objectives. The CDU and the CSU are conservative, business-oriented parties, but with a long tradition of support for social welfare programs. The FDP is liberal in the British sense, very much in favor of the free market and a minimum of government regulation. The SPD believes in combining political freedom with large social programs and government involvement in the economy. It is impossible for any of the three parties to be in a government with the others without yielding something, and government policy has therefore usually contained a mixture of sometimes contradictory objectives that then must be resolved by compromises within the cabinet.

The Chancellor

The way the chancellor and his office, the Chancellory, deal with the economy depends very much on the incumbent's interests and personal style. For example, under Helmut Schmidt (1974-82), who was very interested in economic matters, the Chancellory shaped, directed, and coordinated the economic policy of the entire government economic apparatus. It also kept close contact with the business and financial community, including the Bundesbank, and became deeply involved in long-range planning. Helmut Kohl (1982- ), however, has operated very differently, using the Chancellory for limited day-to-day coordination but not attempting to use it to manage the economic policy of the government. He has used the political, not the bureaucratic, structure to make policy, working through the CDU/CSU and the FDP or through personal contacts. Although Kohl was definitely in charge of die Wende and other government policies, he has not usually presented himself as either the originator or the executor of economic and financial policy. He has chosen to control events from behind the scenes, reducing the government's visibility as well as its role.

The Minister of Finance and the Minister for Economy

In the cabinet, roles are more fixed, although they might change in accordance with personalities and political parties. The primus inter pares over the last several decades has been the minister of finance. He is responsible for the federal budget, which has become ever more important as the government's share of national income has grown and as governments increasingly use the budget to set priorities and guide national economic activity. The minister of finance also accompanies the chancellor to the annual financial summits and is the main German spokesperson in the meetings of the Group of Seven (G-7--see Glossary), the world's principal economic powers. He is thus in a position to manage not only domestic but also international financial policy for Germany and to coordinate the two.

The minister for economics, once the government's chief economic policy maker (especially when the minister was Ludwig Erhard), has gradually lost power as many of the important functions have been transferred to other ministries--including new ministries concerned with environment and research. Since the 1970s, the minister for economics has functioned more like a United States secretary of commerce, remaining a principal channel for contact with industry, labor, and semipublic associations. But several of the ministers have complained in bitter frustration that they were not able to carry out the policies they wanted.

The Bundeskartellamt

The Bundeskartellamt (Federal Cartel Office) is the institution specifically instructed and empowered to prevent a return to the monopolies and cartels that periodically controlled much of the German economy between the 1870s and 1940s. The policies of the office, like the office itself, have been controversial, with some Germans wanting it to have greater power and others believing that it is already abusing its existing authority.

The Bundeskartellamt was established in 1957. Many, including Erhard, believed that it had not been given enough authority to restrict cartels and other monopolistic practices. The Western Allies had insisted that the fledgling Federal Republic have such a law, but West German business associations used their influence to undercut the authority of the Bundeskartellamt to the point where it has sometimes been described as a "Swiss cheese with countless holes." Some of the holes in the Swiss cheese were closed in 1973, when the Bundestag passed a merger law (Fusionsgesetz ) intended to block monopolies in advance so that the Bundeskartellamt would not always have to act after the fact.

In retrospect, the laws and the office have performed a central and useful function, but they have not been able to prevent a gradual shift toward ever larger companies in Germany. The number of mergers in West Germany increased rapidly during the late 1980s, rising to over 1,000 per year. And the Bundes-kartellamt has not been effective in curtailing the countless informal contacts and discussions that have characterized the German system (like other European systems) and that would be suspect and perhaps illegal in the United States.

Because the Bundeskartellamt tends to use nonconfrontational tactics, the office has often been denounced as ineffective. Critics contend that the office has actually blocked very few mergers or other forms of cooperation. They also assert that hidden monopolistic or oligopolistic practices have been creeping back into the German economy. But others argue that the very existence of the Bundeskartellamt has enhanced competition and that the office's predilection for solving problems through nonjudicial processes fits properly into the German system and is therefore effective in that system.

Despite its title, the Bundeskartellamt does not have the final authority over German mergers and acquisitions. That authority is reserved for the political level, the Ministry for Economics, which on more than one occasion has overruled the Bundeskartellamt. After the Bundeskartellamt had raised a number of searching questions about the legality and propriety of Daimler-Benz's 1989 acquisition of Messerschmidt-Bölkow-Blohm (MBB), and after it had even disapproved the acquisition, the minister for economics approved the merger on condition that Daimler-Benz and MBB sell off majority control in a small marine and technology division. The government justified the step by recalling that it had specifically sought the merger to support MBB--which was engaged in military production and could not be permitted to collapse--with Daimler-Benz's financial resources.

The Bundeskartellamt has faced a particularly difficult task in the integration of the East German and West German economies. Many eastern German firms could not survive unless they could merge with large western German firms. The process may, however, create new enterprises whose size and combination of resources could open the way for monopolistic or oligopolistic temptations. Powerful economic and political pressures for such mergers exist, especially to help revitalize eastern Germany, but they also raise serious questions about their potentially negative impact on competition. Under those circumstances, the Bundeskartellamt has acted with considerable circumspection, blocking some mergers but approving most of them.

The Bundeskartellamt faces an even greater problem in the growing Europeanization of German business under the aegis of deeper EU integration. It became clear by the early 1990s that the EU's European Commission in Brussels was prepared to permit greater cooperation between European firms in order to compete more effectively against the worldwide reach of the giant corporations of the United States and Japan. Such cooperation went against German cartel laws. To solve the problem, the Bundeskartellamt announced in early 1993 that it would permit greater degrees of cooperation between small- and medium-sized German firms if that cooperation actually led to greater intra-European competition.

Germany - Land and Local Governments

Because Germany has a federal system, state (Land ; pl., Länder ) and local governments also have important functions. This reflects the German tradition, which before Hitler combined a mix of national, Land , and local structures with carefully defined and deliberately circumscribed powers. Land and even local authorities are involved in many economic functions, such as social services, development and energy policy, education (including vocational training), public housing, environmental protection, and industrial policy. They also share certain tax revenues that are centrally collected but distributed among the central, Land , and local authorities in accordance with carefully negotiated ratios that were changed after unification slightly to the advantage of the new eastern Länder .

The Länder do not always act and think alike. Different old Länder have followed different economic policies since the early years of the Federal Republic. On the one hand, the minister presidents, or heads, of two Länder , Bavaria and Baden-Württemberg, have stressed industrial development policies that have departed radically from those of others, putting their Länder into the forefront of German technological development. On the other hand, the Länder of North Rhine-Westphalia and the Saarland for a long time concentrated their resources on subsidizing coal and steel production, entering the competition for new industries much later than other Länder . The possibility for creating separate Land policies has also encouraged some new Länder to try their own development policies. They have invited potential investors from other countries to visit them, and they have engaged in export promotion.

Germany - Government Subsidies

The Länder are not alone in subsidizing or supporting certain industries: the federal government does it to a massive and increasingly significant degree. Despite Germany's commitment to a social market economy, exceptions to market principles existed in West Germany and are proliferating in united Germany. German economic institutes and experts have repeatedly warned that authorities at various levels have supported many economic activities that should long ago have been discontinued or compelled to become competitive. Federal and Land authorities have ignored the complaints of the economists but have usually promised to reduce or eliminate subsidies as soon as feasible.

Before unification, the West German government and various Länder supported a number of industries and services, such as coal, steel, aerospace, shipbuilding, and agriculture, with the federal government supporting activities across the board and the Länder supporting locally important and influential industries. Between 1970 and 1989, the total volume of subsidies, including those paid through the European Community (EC--see Glossary), rose from DM12 billion to over DM45 billion. The level of subsidies rose almost uninterruptedly, even after Kohl assumed office and his government had committed itself to reducing them. Although some categories of subsidies--for example, those for agriculture--were not fully under West German but rather under EC control, even the portion specifically designated for German farmers also rose by 250 percent during the 1980s. Overall, the federal government provided about one-third of total West German subsidies. The other two-thirds came from the Länder and the localities. During the late 1980s and early 1990s, the total has generally averaged around 6 percent of West German GDP, although it has risen because of unification.

Despite the concern expressed about West German subsidies, a 1990 Organisation for Economic Co-operation and Development (OECD--see Glossary) survey of Germany concluded that German subsidies were not unusually high by the standards of the EC. The OECD described them as being around the average for OECD countries. Separate International Monetary Fund (IMF--see Glossary) and Ministry of Finance studies reached a similar conclusion, indicating that West Germany was actually somewhat below the average among EC members in the level of subsidies.

Although such conclusions might have offered some comfort as a matter of general policy, it remains true that some German industries--especially in the traditional coal and steel complex--are dependent on subsidies to such an extent that they would have to be closed if they no longer benefited from government support of one kind or another. But subsidies are also often paid even to some of the largest and most profitable German concerns, such as Daimler-Benz, Siemens, Bayer, and Volkswagen, for special production or research lines. Those companies have usually stated that the subsidies cover only a minute part of their expenditures.

After unification, the combined subsidies of western and eastern budgets rose even higher, and the new all-German government has found itself compelled to provide even more subsidies in order not to permit an excessive level of structural unemployment in the former East Germany. Official East German statistics suggested that the level of subsidies in the GDR budget was 30 percent, but in reality the level may have been much higher because of the generally low level of productivity in the GDR. Although no total figures for German subsidies have been available in the confusion and diversity of programs since unification, the government has already promised to keep a number of unprofitable East German ventures (such as the steel complex around Eisenhüttenstadt and the shipbuilding docks around Rostock) in production until they become competitive--which will not be for decades, if at all.

Germany - Labor

German labor has as much of a culture as German management. The abilities and the attitudes of the labor force have contributed at least as much to the success of the German system as those of management, and perhaps even more so. Many workers, especially in small- or medium-sized firms, regard themselves as serious professionals with a stake in their company and are usually treated as such. They live in comfortable circumstances, not as the factory workers of old. They usually travel abroad, often own foreign property, and otherwise lead lives that had formerly been reserved for the middle class.

German workers have consistently had the highest level of education of any group of workers in Europe, with much of that education acquired after they finish formal secondary school training. Worker training usually lasts two to three years and may last longer for highly specialized vocations (see The Education System, ch. 4). About 2.5 million Germans, or almost half of the fifteen- to nineteen-year-old age-group of both genders, annually receive vocational training within a range of about 400 designated occupational specialties, often on the basis of contracts with preselected employers.

Of the many fields to choose from in German vocational training, most apprentices select from about twenty specializations. Young men prefer training in manufacturing, crafts, carpentry, electronics, or painting. Young women prefer training in sales, industrial purchasing, officework or banking, or medical assistance. Even while they are in training, the students might receive up to DM1,200 in salary per month, although most receive less than that, down to DM255.

After finishing vocational training, students can go to technical colleges located all over Germany, or to public health or nursing colleges, and they can move on to advanced specialization courses in programs for continuing education. Those systems exist separately from academic colleges and universities but can be as demanding.

The programs are expensive for industry as well as for government. One estimate was that West German industry before unification spent about DM35 billion annually to support the program. The philosophy governing the expenditure of time and money was articulated by the head of personnel at Volkswagen, who said: "Training costs money; not to train costs a great deal more money."

The high level of training of German workers produces a "quality time" labor productivity formula. The German worker spends fewer hours per year at work than any competitor, averaging an annual 1,708 hours compared with 1,763 in France, 1,778 in Britain, 1,912 in the United States, and 2,166 in Japan. Yet Germany has the highest share of world trade in goods with a high skill content: 20 percent, as against 17 percent for Japan, 15 percent for the United States, and 7 percent for France.

Many of western Germany's labor traditions have moved smoothly to eastern Germany since unification. Vocational training already existed in the GDR, and labor in East Germany was not as inefficient as management or as the often antiquated production machinery. Therefore, although there have been problems of adjustment, especially for older workers in the east who were not accustomed to the pace of a modern production site, on the whole the eastern labor force has adapted well.

Many of the generalizations that can be made about German labor cannot be applied equally to the foreign workers who constitute about one-tenth of the country's labor force. The 2 million foreigners employed in Germany often work in very large companies, on assembly lines, in mining and chemical operations with little prospect for advancement, or in some service sectors at menial tasks under difficult conditions. Approximately 25 percent of foreigners work in steel and iron foundries, another 25 percent in hotels and restaurants (often as cleaning staff), and another 15 percent on automobile assembly lines. Certain industries, such as steel production, textiles, or mining, could not function without them.

Among the principal reasons for the decline in Germany's economic growth have been the high costs associated with production. German labor costs per hour in the manufacturing industry have achieved the dubious honor of being the highest in the world--largely because of high social costs. As the Bundesbank's tight money policies have consistently made the deutsche mark ever stronger, German labor costs have grown even higher against those in other countries. In part because of the rise in the value of the deutsche mark, total German wage costs were estimated by 1992 to be about 50 percent higher than in the average West European state, the United States, or Japan, and many times higher than those prevailing in most Asian states, in Eastern Europe, or in the developing world. The Bundesbank estimated that those costs had risen by almost 10 percent between the beginning of 1991 and the beginning of 1993. Chancellor Kohl himself complained that German workers could not afford to continue to have "the shortest working week, the lowest number of working years, and above all, which is the worst, the shortest machine operating time . . . in all the European Community." But, although a number of German wage settlements in 1993 and 1994 raised wages by less than the anticipated inflation rate, there are no signs that German labor is prepared to lower its income to meet international competition. The average German worker believes that quality production and efficiency justify his or her high income.

Germany - Agriculture, Forestry, and Fishing

Agriculture is a small sector of the German economy (see table 13, Appendix). It has declined in importance all during the twentieth century and by 1989 amounted to only 1.6 percent of West German GDP. Although agriculture's share of East German GDP was twice as high as in the west, even after the two economies are completely united, agriculture's share of GDP is expected to amount to only about 2 percent. However, despite the sector's small size, it remains politically important.

The number of farms had decreased steadily in West Germany, from 1.6 million in 1950 to 630,000 in 1990. In East Germany, where farms were collectivized under the socialist regime, there had been about 5,100 agricultural production collectives with an average of 4,100 hectares under cultivation. Since unification, about three-quarters of the collectives have remained as cooperatives, partnerships, or joint-stock companies. The others were returned to their original owners--if those owners could be found--or were privately sold, becoming about 14,000 private farms. In western Germany and in the newly privatized farms in eastern Germany, family farms predominate. For the 630,000 farms, there are 750,000 full-time employees. There are also, however, many more part-time employees, and most farms do not represent their owners' full-time occupation.

Although the number of farms has declined, production has actually increased through more efficient production methods. By the early 1990s, a single farmer could produce enough food for seventy-five persons, far more than was the case in the 1950s or 1960s.

Agricultural products vary from region to region. In the flat terrain of northern Germany and especially in the eastern portions, cereals and sugar beets are grown. Elsewhere, with the terrain more hilly and even mountainous, farmers produce vegetables, milk, pork, or beef (see table 14; table 15, Appendix). Almost all large cities are surrounded by fruit orchards and vegetable farms. Most river valleys in southern and western Germany, especially along the Rhine and the Main, have vineyards. Beer is produced mainly, but not exclusively, in Bavaria.

Since the 1960s, German agricultural policy has not been made in Germany but in the EC. All agricultural laws and regulations are written in Brussels, often after difficult negotiations between food-producing and food-consuming states. The main objective of those negotiations is to obtain high incomes for the farmers while keeping market prices low enough to avoid consumer protests. To make up the difference, the EC adopted the Common Agricultural Policy (CAP--see Glossary) subsidy program and the export subsidy program, both of which benefit German farmers as well as other EU farmers. In return, the German farmers have complied with European directives on the quality and quantity of production.

Germany also has significant lumber production. Almost one-third of Germany's total land area, especially in the south, is forested. German forests produce nearly 40 million cubic meters of timber every year, satisfying two-thirds of domestic demand. However, Germany has to import most of its hardwood.

There has been growing concern for decades about environmental damage to Germany's forests. By the 1970s, trees were losing their needles or leaves and were growing less full than in the past (see The Environment, ch. 3). A number of laws and regulations have attempted to stem this phenomenon, which the Germans call Waldsterben (death of the forest). The Forest Preservation and Forestry Promotion Act was passed in West Germany in 1975 to prevent destructive and wasteful timber policies. It now applies to all of Germany. Under the act, forest owners must return cut areas to their original condition, converting forests into timber farms in which the cut trees are replaced by seedlings. This policy works better for pine than for other timber. However, despite legislation and the great attention paid to the forests, no lasting solution has yet been found. As a result of the decades of ecological damage, many German forests, including the highland Black Forest in the southwest, are badly depleted.

The German fishing industry also suffers from depletion, because its principal fishing grounds have become overfished by the many modern fishing fleets that enter North European waters. German vessels have long fished the North Sea, the Baltic Sea, and the Atlantic Ocean off the British Isles and around Greenland, all areas where many competing fishing fleets also operate. The German ocean-fishing fleet has shrunk. Germany attempted through the EC to establish rules that would prevent overfishing, but those rules have proved difficult to enforce.

Germany - Industry

The German economy is essentially a processing economy. This was true of both West Germany and East Germany before unification. It will remain true in the future, although the detailed shares of GDP remain to be determined by unification and may not be clearly evident until the mid- or late 1990s.

Before unification, 40 percent of the German workforce was involved in manufacturing, with the main industries being machine tools, automotive manufacturing, electrical engineering, iron, steel, chemicals, and optics. Although the industrial sector in the former East Germany is still evolving, manufacturing in that part of Germany is expected to concentrate in the same industries over time. Thus, the future German economy will retain a powerful industrial component that will likely total well above 30 percent of German GDP.

Almost all areas of western Germany have some industry. The main industrial areas are the Ruhr district in North Rhine-Westphalia, the traditional center of German coal, steel, and heavy industry; the concentration of industry around several large cities, such as Hanover, Munich, Frankfurt am Main, and Stuttgart; the chemical production areas that stretch mainly along the Rhine River in Baden-Württemberg and farther north; and the automotive manufacturing centers, increasingly concentrated in southern Germany in Bavaria and Baden-Württemberg.

In eastern Germany, the main industrial manufacturing areas are in Saxony, Saxony-Anhalt, and Thuringia, principally concentrated in the Leipzig, Dresden, Halle, and Chemnitz regions. Before World War II, Saxony was the technology center of Central Europe. The Elbe River, like the Rhine, attracted chemical and other industry along its shores. It is uncertain which eastern German industries will survive, but the firms in the southern part of the region appear to have better chances than those farther north. Even before unification, more industry was concentrated in the south than in the north. The districts in northern East Germany had industrial employment below 25 percent, those around Berlin had industrial employment between 25 and 35 percent, and those south of Berlin had over 35 percent employment in industry. No such clear geographical delineation for sector employment existed in West Germany.

The glory of German industry is not in the big firms that are well known around the world, such as Daimler-Benz, Volkswagen, Siemens, or Bayer (see table 16, Appendix). It is in the small- and medium-sized firms that constitute what the Germans call the Mittelstand . Although that term has political and social as well as management connotations, it has been widely accepted to mean companies that employ fewer than 500 workers. Such firms constitute 98 percent of all German companies, hire 80 percent of all employees, are responsible for a significant share of exports, and provide one of the firmest foundations of the middle class.

The government has supported and furthered the Mittelstand , in part for political reasons, but also because it makes a crucial contribution to the economy. The government has established special provisions that permit those firms to cooperate if they do not thereby hinder competition. It makes available special funds to promote research and development by Mittelstand companies. After unification, the government used investment and tax incentives to encourage Mittelstand companies to invest in eastern Germany.

The single most successful German industry is mechanical engineering, with a total turnover in 1991 of DM240 billion. Unlike many industries in Germany and elsewhere, it is dominated by small rather than large companies. It includes over 4,000 firms throughout Germany. Only 3 percent of the companies have more than 1,000 employees. German mechanical engineering has a range of more than 17,000 products. Almost two-thirds of the products are exported.

The best-known industry and the second-largest, with a turnover of DM217 billion in 1991, is automotive manufacturing. Such companies as Daimler-Benz, Volkswagen, and Bayerische Motorenwerke (BMW) are known throughout the world. Almost half of all German-produced automobiles are exported, mainly to other EU members and to North America.

Electrical engineering ranks third in importance among German industries, with a turnover of DM207 billion in 1991. The biggest single firm is Siemens, although Bosch also ranks among Germany's largest companies. Products range from giant electric generating turbines exported all over the world to smaller electric engines and some consumer goods.

The chemical industry, with a total output of DM166 billion in 1991, is based principally on three large corporations that have been leaders in the field for 100 years--Hoechst, Bayer, and BASF. There are also many medium-sized companies. About one-half of the industry's products are exported.

Other important industries are the traditional German industries of steel and coal mining, both heavily subsidized and still large employers. Precision engineering remains a strong area. Aerospace is a small but growing industry, also heavily subsidized, and German companies often join with companies from other EU countries--such as Airbus and military aircraft production (see fig. 10).

One reason to believe that the eastern and western portions of the united Germany will again knit together into one large manufacturing economy is that such an economy has been part of the German tradition for centuries and that both Germanys have specialized in the same general industrial sectors. Some analysts contend that the eastern economy will even have a competitive edge later in the 1990s because of the vast sums being invested in modernizing its industrial plant.

Like most modern states, Germany relies principally on fossil fuels as sources of energy. About 40 percent of German energy consumption comes from petroleum, largely for trucks and automobiles. About 30 percent comes from domestic coal deposits, half from lignite, or brown coal, in the east and the other half from anthracite located in the west. Natural gas provides about 17 percent of energy consumed, and nuclear energy about 10 percent. Other sources of energy, such as hydroelectric, solar, or wind-powered electric power plants, are relatively insignificant. Most production is in private hands.

Electrical power comes almost equally from three sources: the largest (31 percent) is generated by lignite, the next largest (28 percent) from nuclear reactors, and the third largest (26 percent) from anthracite. Natural gas provides about 7 percent. Those proportions will undoubtedly shift over time because of the high pollution levels generated by the relatively inefficient lignite, especially in the new Länder , where it accounts for over 90 percent of electricity production (see table 17, Appendix). The public's aversion to nuclear power that developed in Germany in the 1980s will likewise cause this source of power to become less important. Natural gas will become more significant.

The necessary reduction of brown coal consumption is unfortunate for the nation's economy because it and anthracite are Germany's only significant natural resources. As of 1993, Germany was the world's largest producer of brown coal, mining nearly twice as much as the next greatest producer, Russia. Anthracite mining is also significant, and Germany was the world's ninth greatest producer of this substance in 1993.

Germany has over twenty nuclear reactors, most of them small and having production levels below 2,000 megawatts per reactor. It has virtually no domestic uranium deposits and must import enriched uranium for its reactors. Most of the reactors in operation in the early 1990s were built during the 1970s and early 1980s. Reliance on nuclear power has become controversial, however. Because of the controversy, no new nuclear reactor has entered service since 1988. A number of older reactors dating to the 1960s have ceased operations. A major international energy crisis would be needed to renew impetus in Germany's nuclear energy program because the country is densely populated, and most of its inhabitants do not want a reactor near their houses or offices.

Germany must import almost all the oil and gas that it uses. In 1993 the three largest suppliers of crude petroleum were Norway (18.4 percent of the total), the Commonwealth of Independent States (CIS--see Glossary) (17.4 percent), and Britain (12.4 percent) (see table 18, Appendix). Germany has its own modest oil deposits, estimated in 1990 at 50 million tons, in the North German Plain. It has a share of North Sea gas reserves and production, with reserves estimated in 1990 at 9.9 billion cubic meters. But these are not adequate long-term sources. Thus, Germany will increase its imports of oil and gas, most likely from Russia. East Germany relied heavily on Soviet gas before unification, and united Germany will want to purchase petrochemicals from Russia to enable Russia to pay for the German manufactures that Russia is purchasing.

Like all modern economies, Germany has become increasingly cost conscious and conservation conscious about energy consumption. Whereas GDP in West Germany rose by about 50 percent from 1973 to the early 1990s, energy consumption rose by only 7 percent.

Germany - The Bundesbank

The single most important economic institution in Germany outside the federal government is the central bank, the Deutsche Bundesbank (commonly called the Bundesbank). It has the dominant voice in German monetary policy. Through that voice, it establishes and maintains a firm policy in favor of solid currency value within Germany and increasingly within the EU and even the world at large.

If a central bank's reputation is its most precious asset, the Bundesbank is among the world's most highly endowed institutions. Its contribution to the economic and political stability of West Germany and Western Europe in the postwar years was almost legendary and was given due respect even by those who disagreed with some or many of its policies.

Although the Bundesbank often appears to be the principal maker of German economic policy, its exact powers are carefully set forth and circumscribed in the 1957 law establishing the bank. The law assigned to the bank the responsibility for "the preservation of the value of German currency," a mandate that was so important that it was clearly intended to override the bank's other principal task, "to support the general economic policy of the federal government." Even the latter task was carefully limited by the specific provision that the bank "shall be independent of instructions from the federal government."

The German economy is a bank economy, with the main role in finance and credit being played by commercial and savings banks while other forms of credit are secondary. Banks provide most of the country's investment capital because of the high German savings rate and because most Germans prefer to put those savings into banks rather than into stocks or bonds. As with many other German economic phenomena, this bank role is not new. Banks have played a central role in German financial and economic history since the Middle Ages.

German banks function as universal banks, able to offer a full range of banking, saving, foreign exchange, and investment services to their depositors and clients. They hold funds or other assets, broker securities, underwrite equity issues, give advice on asset placement, manage accounts, and so on. About one-quarter of German banks are commercial. Most of the remainder are savings banks, mainly owned locally or regionally and operating under public statutes, or cooperatives that perform such specialized services as agricultural, crafts, or mortgage lending.

The three best known and most important German universal banks--the Deutsche Bank, the Dresdner Bank, and the Commerzbank--are omnipresent throughout unified Germany and have immense influence. These banks opened hundreds of new offices in the east during unification and sent large staffs of bankers to manage offices and to train permanent personnel there. In effect, they were the principal agents for control of Germany's economic unification.

But the "big three," as they are often known, are not the only large banks in Germany. A number of other banks, including regional banks, are even more important than the big three within their areas of operations. The DG Bank, which operates out of Frankfurt am Main, has a higher nominal capital stock than that of the Commerzbank. The Westdeutsche Landesbank, headquartered in Düsseldorf and owned in part by the Land of North Rhine-Westphalia, has a higher nominal capital stock value than that of the Deutsche Bank. The value of the combined nominal stock of the three major banks in Bavaria is even higher, and those banks have helped finance the economic boom in southern Germany. Other major banks exist in other Länder , often owned in part by the Länder themselves with additional capital coming from state-wide savings associations or other local institutions. An important element in the German savings system is the Postbank, the postal savings bank, with 27,000 employees. Almost one in three Germans has an account in the Postbank, using it for savings and for personal financial transactions such as paying monthly bills in preference to bank accounts. The Postbank has 24 million savings accounts and hopes to branch into other areas of financial services.

The most important and most controversial aspect of German banking is the role that banks play as shareholders and policy makers in the country's industrial firms. It has been estimated that banks directly or indirectly hold more than 25 percent of the voting capital in one-quarter of Germany's largest corporations and hold about 28 percent of all seats on the supervisory boards. The banks are empowered to vote not only their own shares but also, by proxy, shares that they hold for their clients. Although there are indications that the banks' ownership proportion of major firms has been reduced over time as other sources of investment funds have become more available, the combined influence and presence of the banks is considerable. They are even said to pool information on the basis of which they steer investments throughout the economy.

According to a Commerzbank listing of ownership of 10,000 large West German companies, the Deutsche Bank owns shares in seventy-seven different firms, the Dresdner Bank in fifty-five, and the Commerzbank in forty-eight. Other smaller banks are also widely invested. The Commerzbank listing did not show the bond or loan holdings of the banks or the votes they exercised in proxy, but it did show that in pure ownership terms alone the banks have a strong voice in a significant number of major German companies. The positions that the banks hold could afford wide opportunities to influence industrial decision making, although they are not the kinds of true monopoly positions that earlier German cartel arrangements offered.

A mid-1980s study by the government agency that examines potential monopolies, the Monopolkommission, looking only at major companies, concluded that the three major banks could vote well over three-quarters of the shares of many major German corporations and that all banks together had even greater voting authority. The power of the banks also is evident in the seats they hold on the boards of the country's most important corporations, with bank presidents or representatives sitting on the boards of every major German firm.

The banks do not appear to want to seize industrial power or make production decisions. They would be hard put to exercise monopoly power, and their actions on individual boards are clearly subject to enough scrutiny--at least by other board members--that improper actions would become widely known. German business is prepared to accept the power and influence of the banks and to see it perpetuated. Nonetheless, the direction of bank influence probably adds a conservative element to German economic decision making because banks traditionally prefer to avoid risk-taking in favor of slow but steady dividends and debt repayment. They also could be accused of becoming new masters of German cartel-like structures, with banks directing separate firms toward similar policies even if the firms themselves are not colluding.

The role of the banks in the economy has raised questions. Some political figures, including FDP leader Otto Lambsdorff, have charged that the banks have accumulated excessive power. Newspapers and magazines, including business journals, periodically make the same charge. But there are no indications that the system is changing or will change in response to those criticisms. One could even argue that it is more pervasive than ever, as banks now also play roles in managing former East German firms that were privatized with western bank funds.

Germany - Tourism

Germany is a principal attraction for foreign tourists, and the Germans themselves are among the world's most enthusiastic tourists. Although Germany attracts millions of foreign tourists, German tourists every year spend tens of billions of deutsche marks more than foreign tourists spend in Germany. In fact, tourism constitutes a major drain on German foreign exchange.

The areas that attract the most tourists to Germany are the Alps, the Rhine and Moselle valleys, and several large cities, especially Berlin. But those are not the only attractions. Music festivals such as those at Bayreuth and Munich draw many tourists. So do some of the old German medieval cities like Rothenburg ob der Tauber and Dinkelsbühl. Because of the wealth of hiking and bicycle trails, many tourists come to the Black Forest and to other German woodlands and mountains. Since unification, tourists have increasingly visited the former East German states and especially the Baltic beaches and such cities as Leipzig and Dresden.

Unlike Austria or Spain, Germany does not regard tourism as a major source of foreign exchange. Hotel stays by foreign visitors to Germany do not rise above 15 percent of total occupancy, as opposed to the two-thirds levels that they reach in those countries. But as many as 1.5 million jobs in Germany are connected in one way or another to the tourist industry.