Skip to Main Content
Have library access? Log in through your library
The German Economy

The German Economy: Beyond the Social Market

Horst Siebert
Copyright Date: 2005
Pages: 416
  • Cite this Item
  • Book Info
    The German Economy
    Book Description:

    In this book, one of Germany's most influential economists describes his country's economy, the largest in the European Union and the third largest in the world, and analyzes its weaknesses: poor GDP growth performance, high unemployment due to a malfunctioning labor market, and an unsustainable social security system. Horst Siebert spells out the reforms necessary to overcome these shortcomings. Taking a broader view than other recent books on the German economy, he considers Germany's fiscal policy stance, product market regulation, capital market, environmental policy, aging and immigration policies, and its system for human capital formation as well as Germany's role in the European Union, including the euro zone.

    Germany's system of economic governance emerges as a common theme as Siebert examines why this onetime economic powerhouse is today a faltering giant. He argues that what Germany needs, above all, is a market renaissance; that it must throw off the shackles of its social welfare economy and of its hallmark consensus approach, whereby group-based cooperative decision-making has undermined competition and markets. In doing so he examines both the country's social security system and its labor market, including trade unions. His focus throughout is on Germany's present concerns, foreseeable future problems, and long-term policy issues.

    The definitive word on the postwar German economy to the present day,The German Economyis essential reading for economists and finance professionals as well as students, researchers, and others interested in modern-day Germany and its place and prospects at the heart of Europe.

    eISBN: 978-1-4008-5165-2
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-xii)
    Horst Siebert
  4. CHAPTER ONE Basic Features of the German Economy
    (pp. 1-23)

    Germany is an open economy with a strong industrial base, producing about a third of its gross domestic product for export. It is also an economy in which social protection and the state play dominant roles. These two characteristics establish the central theme that will be encountered throughout this book.

    Because of its openness, Germany is influenced both by the intense competition on the world product markets and by the competition among locations for the internationally mobile capital and technology that abound on the world’s factor markets. Economic decisions in Germany are therefore subject to the country’s need to compete...

  5. CHAPTER TWO The Social Market Economy
    (pp. 24-37)

    Germany has developed its own, unique institutional approach to running the economy, encompassed under the concept of the “social market economy.” This must be understood as an economic order attempting to meld the market approach and competition with social protection and equity. Soziale Marktwirtschaft is seen as an institutional arrangement whose main targets are, on the one hand, individual freedom and choice, and efficiency through decentralized autonomy in a competitive order, and on the other, equity and social protection.

    Germany’s “social market economy” has its roots in the country’s historical experience. The immediate historical background can be found in the...

  6. CHAPTER THREE The Weak Growth Performance
    (pp. 38-68)

    Germany experienced a low GDP growth rate in the period 1995–2003. Whereas the stagnation of 2001–2003 was strongly influenced by the worldwide decline of economic activity, the poor growth performance for the period since 1995 as a whole has to be traced to other factors. The German economic engine seems to have lost its dynamics. The labor force is not being fully utilized; the rate of capital accumulation is slower than in the past; innovation is centered on improving existing products along traditional trajectories but is not focused on new technological horizons; human capital formation is not organized...

  7. CHAPTER FOUR The Labor Market: High and Sticky Unemployment
    (pp. 69-113)

    The poor growth performance of the German economy from 1995 to 2003 is partly linked to the high unemployment the country experienced during this period, with 4.4 million officially unemployed in 2003 and 1.6 million more in labor market schemes of different sorts. An important economic resource—labor and human capital—was being wasted, and the economy’s production capacity was not being fully utilized. Unemployment has ratcheted upward since 1970. Apparently, Germany reacts to shocks with an increase in persistent unemployment. The institutional setup for the realm of labor is malfunctioning. This is at the heart of Germany’s economic woes....

  8. CHAPTER FIVE The Social Security System under Strain
    (pp. 114-153)

    The reform of the social security system and the welfare state is Germany’s other major structural policy issue (along with the reform of the labor market). Clearly, the social security system has hit a financing constraint. Even without the problems of an ageing population it would not be sustainable in its present form, and it definitely can no longer be financed in an ageing society. Moreover, it has a negative impact on the labor market, i.e., on labor demand, on labor supply, and also on the equilibrating mechanism that has to bring labor demand and labor supply into balance.¹


  9. CHAPTER SIX Ageing as a Challenge over the Next Forty Years
    (pp. 154-165)

    Germany is one of the countries that will be most profoundly affected by the ageing of its population, even more so than France, the United Kingdom, and the United States. This will markedly change the country’s economic conditions in the coming decades. The social security system will be put under additional strain. A growing conflict between the generations will have to be resolved. With a decrease in the labor supply and possibly an increasingly risk-averse society, the prospects for economic growth will deteriorate. As a result of these conditions, Germany’s political economy will change.

    According to Germany’s tenth official population...

  10. CHAPTER SEVEN Germany: an Immigration Country
    (pp. 166-180)

    In an ageing society like Germany, immigration is an important issue. Immigrants can make up for the decrease in the workforce, augment the contribution base of the social security system (and so, of course, receive benefits from it), ease bottlenecks in the labor market, and fill those jobs that Germans are no longer willing to take. But there is also the issue of how integrated foreigners are into German society, and how much integration Germany as an immigration country requires from its immigrants. This issue is at the heart of Germany’s debate on its immigration policy. In a way, Germany...

  11. CHAPTER EIGHT Regulation of Product Markets
    (pp. 181-202)

    The regulation of markets is an important aspect of German economic policy. We have already seen how it affects the labor market, including the considerable impact that the social security system and social welfare have on unemployment. The institutional setup of other important factor markets, the market for financial and physical capital, and the market for human capital, are still to be discussed. Environmental policy, the topic of the next chapter, is another relevant aspect of regulation, one that is somewhat idiosyncratic to Germany. In this chapter we consider the regulation of the product market. This relates to product market...

  12. CHAPTER NINE Environmental Protection: a German Topic
    (pp. 203-212)

    In the last four and a half decades, since the 1960s, environmental quality has been a specific concern in Germany. In 1970 the first Ministry for the Environment, then still coupled with agriculture, was introduced in Bavaria. The immediate stimulus for taking up environmental policy was a visible deterioration of the environment, with air polluted and fish dying in the rivers. New property rights for using the environment as a receptacle of waste were defined, and environmental quality improved.¹

    However, the opportunity costs of improving the environment cannot be neglected, especially if Germany as an open economy follows the first-mover...

  13. CHAPTER TEN The Capital Market and Corporate Governance
    (pp. 213-243)

    Germany’s bank-based financial system relies on bank-intermediated products and only to a lesser extent on capital market processes. Moreover, one of the pillars in the three-pillar system (see below), the savings banks, is publicly controlled, and a second one, the cooperative banks, has a special statute. Neither of these pillars risks coming under the control of the capital market through the usual possibility of a change in ownership. As for the financing of firms, bank credits are far more important relative to market products, i.e., equity and bonds, than in the United States and the United Kingdom. Moreover, banks so...

  14. CHAPTER ELEVEN Human Capital and Technology Policy
    (pp. 244-260)

    Technological advances and human capital ultimately determine a country’s competitiveness. Germany’s system of human capital formation, however, though having an asset in its vocational training programs and in a highly and broadly qualified workforce, has come under severe criticism. Its university system is not competitive internationally. Its school system is wanting. The orientation of politics in this sector, so important for the dynamics of an economy, has led the government not to challenge students to strive for excellence, and not to exploit to the full all talent available in the country, but instead to produce graduates with relatively similar sets...

  15. CHAPTER TWELVE The Fiscal Policy Stance
    (pp. 261-291)

    Germany’s fiscal policy condition has deteriorated since 2001. From 2002 to 2004, the budget deficit exceeded the Maastricht limit of 3 percent of GDP in all three years. Tax revenue remains way below expectations, the strategy of budget consolidation has been abandoned, and the public’s confidence in the government’s fiscal policy is in jeopardy. As in other policy areas, major reforms are required to effectively institute the structural features needed to redress the situation. The high debt-GDP ratio limits the maneuvering space of government, the revenue-sharing mechanism prevents a competitive federalism, and the finance minister has to pick up the...

  16. CHAPTER THIRTEEN Germany in the European Union: Economic Policy under Ceded Sovereignty
    (pp. 292-324)

    Like the other member states of the European Union, Germany has given up sovereignty in a number of policy areas and subjected itself to joint decision-making at the European level. This means that many policy instruments are no longer available nationally. From a historical perspective, the number of such instruments that are no longer at the disposal of German politicians and policy-makers in other EU countries as a result of ceding national sovereignty to the EU level is quite impressive. This trend is manifest in many policy areas, including monetary policy, trade policy, the more important part of competition policy,...

  17. CHAPTER FOURTEEN The System of Governance in Germany’s Social Market Economy
    (pp. 325-364)

    Germany has developed a system of governance in which, besides markets, non-market mechanisms play an important role in finding a consensus and solving economic issues. Markets are used as a coordination and allocation device, but they are replaced in part by the decision-making of social groups and by informal personal relationships. This approach to governance includes the social partners, that is the trade unions and employers’ associations, in wage formation; it involves banks, workers, and trade unions in the governance of firms through codetermination, where in addition block-holders have strong positions; and it brings the workers’ councils into the operation...

  18. CHAPTER FIFTEEN The Need for a Renaissance of the Market Economy
    (pp. 365-377)

    Looking at Germany’s poor performance in terms of high unemployment, low economic growth, the near-insolvency of the social security systems, and the deterioration of the public finances, it must be concluded that the country needs a major change—an institutional big bang, similar to the Erhard reform of western Germany in 1948. The task of restructuring Germany would be much easier if the country were in a win-win situation, in which not only would the country’s economic position improve as a consequence of measures taken, but all groups would benefit from the change. Unfortunately, Germany is not in such a...

    (pp. 378-392)
  20. INDEX
    (pp. 393-403)