Economic history of Germany

Medieval Germany, lying on the open Northern European Plain, was divided into hundreds of contending kingdoms, principalities, dukedoms/duchies, bishoprics/dioceses, and free cities. Economic prosperity did not mean geographical expansion; it 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.[11]

Towns and cities

Lübeck, 15th century

Cologne around 1411

Total population estimates of the German territories range around 5 to 6 million by the end of Henry III's reign in 1056 and about 7 to 8 million after Friedrich Barbarossa's rule in 1190.[12][13] The vast majority were farmers, typically in a state of serfdom under the control of nobles and monasteries.[14] Towns gradually emerged and in the 12th century many new cities were founded along the trading routes and near imperial strongholds and castles. The towns were subjected to the municipal legal system. Cities such as Cologne, that had acquired the status of Imperial Free Cities, were no longer answerable to the local landlords or bishops, but immediate subjects of the Emperor and enjoyed greater commercial and legal liberties.[15] The towns were ruled by a council of the - usually mercantile - elite, the patricians. Craftsmen formed guilds, governed by strict rules, which sought to obtain control of the towns; a few were open to women. Society had diversified, but was divided into sharply demarcated classes of the clergy, physicians, merchants, various guilds of artisans, unskilled day laborers and peasants. Full citizenship was not available to paupers. Political tensions arose from issues of taxation, public spending, regulation of business, and market supervision, as well as the limits of corporate autonomy.[16] Cologne's central location on the Rhine river placed it at the intersection of the major trade routes between east and west and was the basis of Cologne's growth.[17] The economic structures of medieval and early modern Cologne were characterized by the city's status as a major harbor and transport hub upon the Rhine. It was governed by its burghers.[18]

Hanseatic League

Main article: Hanseatic League

Main trading routes of the Hanseatic League

Jacob Fugger (right) and his accountant M. Schwarz

The Hanseatic League was a commercial and defensive alliance of the merchant guilds of towns and cities in northern and central Europe. It dominated marine trade in the Baltic Sea, the North Sea and along the connected navigable rivers during the Late Middle Ages (12th to 15th centuries).[19] Each of the affiliated cities retained the legal system of its sovereign and, with the exception of the Free imperial cities, had only a limited degree of political autonomy.[20] Beginning with an agreement of the cities of Lübeck and Hamburg, guilds cooperated in order to strengthen and combine their economic assets, like securing trading routes and tax privileges, to control prices and better protect and market their local commodities. Important centers of commerce within the empire, such as Cologne on the Rhine river and Bremen on the North Sea joined the union, which resulted in greater diplomatic esteem.[21] Recognized by the various regional princes for the great economic potential, favorable charters for, often exclusive, commercial operations were granted.[22] During its zenith the alliance maintained trading posts and kontors in virtually all cities between London and Edinburgh in the west to Novgorod in the east and Bergen in Norway. By the late 14th century the powerful league enforced its interests with military means, if necessary. This culminated in a war with the sovereign Kingdom of Denmark from 1361 to 1370. The principal city of the Hanseatic League remained Lübeck, where in 1356 the first general diet was held and its official structure was announced. The league declined after 1450 due to a number of factors, such as the 15th-century crisis, the territorial lords' shifting policies towards greater commercial control, the silver crisis and marginalization in the wider Eurasian trade network, among others.[23][24]

Between 1347 and 1351 Germany and Europe were haunted by the most severe outbreak of the Black Death pandemic. Estimated to have caused the abrupt death of 30 to 60% of Europe's population, it led to widespread social and economic disruption and deep religious disaffection and fanaticism. Minority groups, and Jews in particular were blamed, singled out and attacked. As a consequence, many Jews fled and resettled in Eastern Europe. The death of large parts of the population caused a major collapse of the labor force. Human power became a rare commodity and the social and economic situation of average workers improved for several decades as employers were forced to pay higher wages.[25][26]

Unlike most Western European countries, Germany as a domain of the Holy Roman Empire, which lacked a strong centralized leadership, did not embark on the exploration of the world during the 16th and 17th century Age of Discovery, nor did it establish a trading fleet, trading posts and colonies during the subsequent era of colonialism. As a consequence Germany's society remained stagnant as its economy played only a secondary role with limited access to international markets and resources, while in France, Britain and the Netherlands, worldwide trade and colonial possessions greatly empowered mercantile and industrial groups and led to the rise of a bourgeoisie, who was able to benefit from the new economic opportunities.[31][32][33]

An early Kemna plowing engine

Before 1850 Germany lagged behind the leaders in industrial development, United Kingdom, France and Belgium. However, the country had considerable assets: a highly skilled labor force, a good educational system, a strong work ethic, good standards of living and a sound protectionist strategy based on the Zollverein. By mid-century, the German states were catching up, and by 1900 Germany was a world leader in industrialization, along with Britain and the United States. In 1800, Germany's social structure was poorly suited to any kind of social or industrial development. Domination by modernizing France during the era of the French Revolution (1790s to 1815) produced important institutional reforms, including the abolition of feudal restrictions on the sale of large landed estates, the reduction of the power of the guilds in the cities, and the introduction of a new, more efficient commercial law. Nevertheless, traditionalism remained strong in most of Germany. Until mid-century, the guilds, the landed aristocracy, the churches, and the government bureaucracies had so many rules and restrictions that entrepreneurship was held in low esteem, and given little opportunity to develop.[41][30] The 1867 Passport Law let workers search for work in their own interest. Freedom of movement went hand in hand with destruction of guilds and freedom of entry into all occupations.[42]

From the 1830s and 1840s, Prussia, Saxony, and other states reorganized agriculture, introducing sugar beets, turnips, and potatoes, yielding a higher level of food production that enabled a surplus rural population to move to industrial areas. The beginning of the industrial revolution in Germany came in the textile industry, and was facilitated by eliminating tariff barriers through the Zollverein, starting in 1834. The takeoff stage of economic development came with the railroad revolution in the 1840s, which opened up new markets for local products, created a pool of middle managers, increased the demand for engineers, architects and skilled machinists, and stimulated investments in coal and iron.[43] The political decisions about the economy of Prussia (and after 1871, all of Germany) were largely controlled by a coalition of "rye and iron", that is the Junker landowners of the east and the heavy industry of the west.[44]

Coal

Historical coalfields of Western Germany, Belgium, The Netherlands and Northern France

The first important mines appeared in the 1750s, in the valleys of the rivers Ruhr, Inde and Wurm where coal seams outcropped and horizontal adit mining was possible. In 1782 the Krupp family began operations near Essen. After 1815 entrepreneurs in the Ruhr Area, which then became part of Prussia, took advantage of the tariff zone (Zollverein) to open new mines and associated iron smelters. New railroads were built by British engineers around 1850. Numerous small industrial centers sprang up, focused on ironworks, using local coal. The iron and steel works typically bought mines and erected coking ovens to supply their own requirements in coke and gas. These integrated coal-iron firms ("Huettenzechen") became numerous after 1854; after 1900 they became mixed firms called "Konzern".

The output of an average mine in 1850 was about 8,500 short tons; its employment about 64. By 1900, this output had risen to 280,000 and employment to about 1,400.[45] Total Ruhr coal output rose from 2.0 million short tons in 1850 to 22 in 1880, 60 in 1900, and 114 in 1913, on the verge of war. In 1932 output was down to 73 million short tons, growing to 130 in 1940. Output peaked in 1957 (at 123 million), declining to 78 million short tons in 1974.[46] By the end of 2010, only five coal mines were producing in Germany.

The miners in the Ruhr region were divided by ethnicity (Germans and Poles) and religion (Protestants and Catholics). Mobility in and out of the mining camps to nearby industrial areas was high. The miners split into several unions, with an affiliation to a political party. As a result, the socialist union (affiliated with the Social Democratic Party) competed with Catholic and Communist unions until 1933, when the Nazis took over all of them. After 1945 the socialists came to the fore.[47]

Chemicals

The BASF chemical factories in Ludwigshafen, Germany, 1881

The economy continued to industrialize and urbanize, with heavy industry (coal and steel especially) becoming important in the Ruhr, and manufacturing growing in the cities, the Ruhr, and Silesia.[55] Based on its leadership in chemical research in the universities and industrial laboratories, Germany became dominant in the world's chemical industry in the late 19th century. Big businesses such as BASF and Bayer led the way in their production and distribution of artificial dyes and pharmaceuticals during the Wilhelmine era, leading to the German monopolization of the global chemicals market at 90 percent of the entire share of international volumes of trade in chemical products by 1914.[56]

Trade unions in Germany have a history reaching back to the German revolution in 1848, and still play an important role in the German economy and society. In 1875 the SPD, the Social Democratic Party of Germany, which is one of the biggest political parties in Germany, supported the forming of unions in Germany.[61] However, according to John A. Moses, the German trade unions were not directly affiliated with the Social Democratic Party. The SPD leadership insisted on the primacy of politics, and refused to emphasize support for union goals and methods. The unions led Carl Legien (1861-1920) developed their own nonpartisan political goals.[62][63]

In the early 1930s, according to Gerard Braunthal, the three main trade unions (Allgemeiner Deutscher Gewerkschaftsbund, Allgemeiner freier Angestelltenbund, and Allgemeiner Deutscher Beamtenbund) failed to actively oppose Hitler in 1932-33. They minimized the threat in 1932 and opposed a general strike because it might spark a civil war. As the Nazis took power in 1933, the high unemployment had demoralized workers. Their historic faith in socialism gave way to a wave of nationalism. The leaders did not foresee how the Nazis would completely unseat them and suppress labor's aspirations.[64]

The most important labour organisation is the German Confederation of Trade Unions (Deutscher Gewerkschaftsbund – DGB), which represents more than 6 million people (31 December 2011) and is the umbrella association of several single trade unions for special economic sectors. The DGB is not the only Union Organization that represents the working trade. There are smaller organizations, such as the CGB, which is a Christian-based confederation, that represent over 1.5 million people.[65]

The merger of four major firms into the Vereinigte Stahlwerke (United Steel Works) in 1926 was modeled on the U.S. Steel corporation in the U.S. The goal was to move beyond the limitations of the old cartel system by incorporating advances simultaneously inside a single corporation. The new company emphasized rationalization of management structures and modernization of the technology; it employed a multi-divisional structure and used return on investment as its measure of success.[66]

Whereas Britain's share of world trade had declined between 1880 and 1913 from 38.2 per cent to 30.2 per cent, Germany's share had increased in the same period from 17.2 per cent to 26.6 per cent.[67] Between 1890 and 1913 German exports tripled and by 1913 Germany's share of world manufacturing production was 14.8 per cent, ahead of Britain's 13.6 per cent.[68] By 1913 American and German exports dominated the world steel market, as Britain slipped to third place.[69] In 1914 German steel output was 17.6 million tons, larger than the combined output of Britain, France and Russia.[68] Germany's coal production reached 277 million tons in 1914, not far behind Britain's 292 million tons and far ahead of Austria-Hungary's 47 million tons, France's 40 million tons and Russia's 36 million tons.[68]

In machinery, iron and steel and other industries, German firms avoided cut-throat competition and instead relied on trade associations. Germany was a world leader because of its prevailing "corporatist mentality", its strong bureaucratic tradition, and the encouragement of the government. These associations regulated competition and allowed small firms to function in the shadow of much larger companies.[70]

IG Farben factory in Monowitz (near Auschwitz), 1941

During the Hitler era (1933–45), the economy developed a hothouse prosperity, supported with high government subsidies to those sectors that tended to give Germany military power and economic autarky, that is, economic independence from the global economy.[87] During the war itself the German economy was sustained by the exploitation of conquered territories and people. "The economic recovery in the Third Reich, as measured by GDP, is well documented; real GDP grew by some 55% between 1933 and 1937."[88]

Physical capital in the occupied territories was destroyed by the war, insufficient reinvestment and maintenance, whereas the industrial capacity of Germany increased substantially until the end of the war despite heavy bombing. (However, much of this capacity was useless after the war because it specialized in armament production.)[89]

With the loss of the war, the country entered into the period known as Stunde Null ("Zero Hour"), when Germany lay in ruins and the society had to be rebuilt from scratch.

The first several years after World War II were years of bitter penury for the Germans. Seven million forced laborers left for their own land, but about 14 million Germans came in from the East, living for years in dismal camps. It took nearly a decade for all the German POWs to return. In the West, farm production fell, food supplies were cut off from eastern Germany (controlled by the Soviets) and food shipments extorted from conquered lands ended. The standard of living fell to levels not seen in a century, and food was always in short supply. High inflation made savings (and debts) lose 99% of their value, while the black market distorted the economy. In the East, the Soviets crushed dissent and imposed another police state, often employing ex-Nazis in the dreaded Stasi.[90] The Soviets extracted about 23% of the East German GNP for reparations, while in the West reparations were a minor factor.[91]

Even while the Marshall Plan was being implemented, the dismantling of ostensibly German industry continued; and in 1949 Konrad Adenauer, an opponent to Hitler's regime and the head of the Christian Democratic Union,[92] wrote to the Allies requesting the end of industrial dismantling, citing the inherent contradiction between encouraging industrial growth and removing factories, and also the unpopularity of the policy.[93] Adenauer had been released from prison, only to discover that the Soviets had effectively divided Europe, with Germany divided even further.[92] Support for dismantling was by this time coming predominantly from the French, and the Petersberg Agreement of November 1949 greatly reduced the levels of deindustrialization, though dismantling of minor factories continued until 1951.[94] The first "level of industry" plan, signed by the Allies on March 29, 1946, had stated that German heavy industry was to be lowered to 50% of its 1938 levels via the destruction of 1,500 listed manufacturing plants.[95] Marshall Plan played a huge role in post-war recovery for Europe in general. 1948, conditions were improving, European workers exceeded by 20 percent from the earning from the west side. Thanks to the Plan, during 1952, it went up 35 percent of the industrial and agricultural.[96][97]

In January 1946 the Allied Control Council set the foundation of the future German economy by putting a cap on German steel production. The maximum allowed was set at about 5,800,000 tons of steel a year, equivalent to 25% of the pre-war production level.[98] The UK, in whose occupation zone most of the steel production was located, had argued for a more limited capacity reduction by placing the production ceiling at 12 million tons of steel per year, but had to submit to the will of the US, France and the Soviet Union (which had argued for a 3 million ton limit). Steel plants thus made redundant were to be dismantled. Germany was to be reduced to the standard of life it had known at the height of the Great Depression (1932).[99] Consequently, car production was set to 10% of pre-war levels, and the manufacture of other commodities was reduced as well.[100]

The first "German level of industry" plan was subsequently followed by a number of new ones, the last signed in 1949. By 1950, after the virtual completion of the by then much watered-down "level of industry" plans, equipment had been removed from 706 manufacturing plants in western Germany and steel production capacity had been reduced by 6,700,000 tons.[101] Vladimir Petrov concludes that the Allies "delayed by several years the economic reconstruction of the war-torn continent, a reconstruction which subsequently cost the United States billions of dollars."[102] In 1951 West Germany agreed to join the European Coal and Steel Community (ECSC) the following year. This meant that some of the economic restrictions on production capacity and on actual production that were imposed by the International Authority for the Ruhr were lifted, and that its role was taken over by the ECSC.[103]

Economist Ludwig Erhard, was determined to shape a new and different kind of German economy. He was given the opportunity by American officials, who saw that many of his ideas coincided with their own. Erhard abolished the Reichsmark and then created a new currency, the Deutsche Mark, on June 21, 1948, with the concurrence of the Western Allies but also taking advantage of the opportunity to abolish most Nazi and occupation rules and regulations. It established the foundations of the West German economy and of the West German state.[104][105]

The German economy self-defines as a "soziale Marktwirtschaft", or "social market economy".[110] The designation emphasizes that the system as it has developed in Weimar days and after 1945 has both a material and a social—or human—dimension stressing freedom with responsibility.[111] The term "market" is of significance, as free enterprise is considered to be main driving force for a healthy economy. The state was to play only a minor role in the new West German economy, such as the protection of 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 policy 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 Ordoliberalism 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; singular, 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.[112] 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.[112] 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.

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.[113]

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. At the beginning of 1966, the West German government submitted a budget with a strong reduction in government expenses. In the months that followed, both Karl Blessing, the president of the Bundesbank and Erhard, the chancellor, called for a cooling off of the economy in fear of inflation. By mid-1966, the joint efforts worked, and the economy started to slow down.[114] 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. 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 late 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 the Wende (West Germany) (turning or 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 the 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 reunification 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 invested over 2 trillion marks in the rehabilitation of the former East Germany, helping it to transition to a market economy and cleaning up the environmental degradation. By 2011 the results were mixed, with slow economic development in the East, in sharp contrast to the rapid economic growth in both west and southern Germany. Unemployment was much higher in the East, often over 15%. Economists Snower and Merkl (2006) suggest that the malaise was prolonged by all the social and economic help from the German government, pointing especially to bargaining by proxy, high unemployment benefits and welfare entitlements, and generous job-security provisions.[115]

German bonds

Inverted yield curve in 2008 and Negative interest rates 2014-2022

  30 year

  10 year

  2 year

  1 year

  3 month

The German economic miracle petered out in the 1990s, so that by the end of the century and the early 2000s it was ridiculed as "the sick man of Europe".[116] It suffered a short recession in 2003. The economic growth rate was a very low 1.2% annually from 1988 to 2005. Unemployment, especially in the eastern districts, remained stubbornly high despite heavy stimulus spending. It rose from 9.2% in 1998 to 11.1% in 2009. The worldwide Great Recession of 2008-2010 worsened conditions briefly, as there was a sharp decline in GDP. However unemployment did not rise, and recovery was faster than almost anywhere else. The old industrial centers of the Rhineland and North Germany lagged as well, as the coal and steel industries faded in importance. The economic policies were heavily oriented toward the world market, and the export sector continued to be very strong.[117] Prosperity was pulled along by exports that reached a record of $1.7 trillion US dollars in 2011, or half of the German GDP, or nearly 8% of all of the exports in the world. While the rest of the European Community struggled with financial issues, Germany took a conservative position based on an extraordinarily strong economy after 2010. The labor market proved flexible, and the export industries were attuned to world demand.[118][119]

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