A Brief History of the German Economy

Last month, Ontarrio posted “Germany is Booming” and addressed Germany’s trade surplus and the rising tensions between Deutschland and President Trump. Trump has considered trade restrictions and even tariffs to alleviate this “unfairness,” but what if instead of getting-even we decided to take a lesson from the German economy? In order to do this, we must first understand their history…

Germany carries one of the most unique economic histories in the modern era; escaping financial disaster not once, but twice, in the 20^th century following the defeats of WWI and WWII. Left in rubble and a deep sense of shame, Germans were driven to by a desire of salonfähig, meaning to “be fit to be invited to a civilized party” again. As new buildings and infrastructure began to grow, so too did their economy.

In the wake of WWII, Germany was divided into East and West while it’s most important city, Berlin, was cordoned from the rest of society. The result of this political division was a decentralized economy. Unlike many other major European counties such as the United Kingdom or France, where the majority of economic activity is congregated in one or two major cities, Germany had a number of mid-sized towns that dispersed the economic activity throughout the land. While there are returns to density, such as bigger cities being more productive than smaller ones, density also carries along costs like higher rent and housing prices, increased cost of living and traffic congestion.

Once the Berlin Wall fell, the German government worked hard to bring East Germany back up to speed. With this, came a huge economic boom because of the massive infrastructure investments being made in the East. However, once the euro was embraced in the European Union, the overvalued currency made German exports more expensive and began to drag the German economy, inspiring Germans to move their capital elsewhere in Europe. This blow to the manufacturing sector made unemployment even worse – nearly 12% by the early 2000’s.

It wasn’t until 2003, when the Hartz Reforms were introduced, that their economy started a turnaround. While the polices themselves were not popular at the time, it allowed the manufacturing sector to flourish. This created a unique situation where small- and medium-sized firms (typically family owned) in the many mid-sized towns became international successes. Not only that, but the workers of these firms were highly paid and protected by unions and work councils because in German culture, CEO’s are more willing to grant decision-making power to lower management and often include union representatives on the board of the company.

Germany’s trade surplus hit a record high of nearly $300 billion last year and has become a major source of pride it’s citizens. Their adaptive system has allowed for the retention of manufacturing jobs as German labor has been resilient to changes in technology by such practices as voluntary wage cuts. Jeromin Zettelmeyer, former senior official in Germany’s Ministry for Economic Affairs, summarizes the German narrative, “It is true that the success of Germany in export markets is a national prerogative, that so many jobs depend on them. As a result, you tend to have unions both at the company level and sector unions that are happy to prioritize competitiveness over wage increases.”

Comparing the German economy to that of the US, we can observe that Germany’s comparative advantage is in manufacturing (hardware) while the US holds a comparative advantage in Information Technology (software). So, what lessons could the US learn from Germany? Are companies like Google or Apple carrying too much of the weight or is the US dynamic enough to maintain its competiveness in a globalized market?

If you’re interested in learning more and diving even deeper into Germany’s economic history, check out the Freakonmics Podcast episode below: