NCPA - National Center for Policy Analysis

Germany Rethinking Economic Model

June 10, 1996

Germany's economic miracle of the 1950s and 1960s led to high living standards and international envy -- even from the United States. Germans settled issues of the distribution of wealth in a collegial manner, by forging agreements among employers, unions and the government. But now, Germans are running into problems because of this good corporate citizenship.

While Americans have responded to the pressures of a global economy with painful economic and social cutbacks, Germans haven't. The country has a high unemployment rate and investors are moving their money out of the country. Some German observers believe their country needs a little American-style disagreement to replace their agreeable style. Where did the German economy go wrong when it was apparently going so right?

  • The post-war social market economy designed by Ludwig Erhard was geared toward one thing: restraining wages.
  • Corporate earnings, therefore, were reinvested, not paid to workers as bonuses and raises, thus producing Germany's economic miracle.
  • High-paying jobs and social peace soon followed.

What was forgotten along the way was that the economy's success depended on people putting something into the system first. Instead, they began to make demands on the system, and because consensus meant avoiding all conflict, that usually meant wage increases. What can be done to reverse the trend?

  • Germans need to relearn the lesson that wages should be determined by productivity, not by committee fiat.
  • The concept works in the U.S., which has suffered painful layoffs but which has an unemployment rate of 5.4 percent compared with Germany's 10 percent.
  • German companies must be given flexibility and be freed from government policies mandating hiring, firing, wages -- even laws restricting the hours some stores can remain open.

German Chancellor Helmut Kohl is moving in the direction of greater economic flexibility. Proponents of his actions believe they are the best chance for the country to rediscover the roots of its economic successes. Social peace is worth a lot, they argue, but it isn't worth stagnation.

Source: Klaus Freidrich (Chief Economist, Dresdner Bank Group), "The End of Germany's Economic Model," Wall Street Journal, June 10, 1996.


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