Germany & Economic Stagnation in the Post-Millennium

Since the reconstruction of Germany in the 1950’s, the country had been continually expanding economically, until it had become a manufacturing power base in Europe, a country that can compete with countries the likes of the United States and Japan. However in recent years, German re-unification and changing global economic conditions have caused this economic growth to slow down, until it has become stagnated at the current point in time.

I will be looking at the different institutions present in Germany that have contributed to the country’s economic performance, how they actually helped, and why now certain institutions, and certain changing conditions, are now constraining the economic growth into utter stagnation.

Perhaps what differs Germany to many other countries is its constitution. Like many other countries, it guarantees the rights of its citizens. However, it goes one step further, committing private property for the public good. This has important consequences for the German economy and its society.

The main idea behind the German economic model is that it mustn’t be thought of as a “free market”, such as the economic models that can be seen in the United Kingdom and the United States. It should rather be more seen as a “social market”.

This enshrines the core of German economic ideology - that the economy and the society are interconnected and depend on one another. German businesses have the responsibility to the society to ensure stability and order to economy and the society. Society in turn, in the form of the government institutions and unions, has influence over the businesses and the management of them.

This model can be observed in the relations between the workers and the managers in a German company. In contrast to the UK’s battlegrounds between the unions and the employers, in Germany, both parties are considered as “social partners” – this means that both are integrated heavily together, and have an important standing in Germany’s economy and political infrastructure.

Unions are consulted and give feedback on the country’s vast and complex vocational education system. This system is co-ordinated not only by the government, but also by the industry and the unions themselves to decide on the curriculum of the system. Such a system, at the local level, can help tailor the skills of people taking vocational education to local companies’ needs. The fact that academic and technical institutions are separate, and both are valued at an equally high status, combined with the obsession in Germany on people having certificated, gives many people a good chance of receiving work by the time they’ve graduated.

Then there are the work councils. The work councils, who are workers elected by workers to represent them on the councils and ensure that their interests are put into consideration during decisions making. The councils have in their possession a wide range of information about the company and what state it is in. If there were to be any changes in the organisation itself, then management would be obligated to consult them first before taking any action.

Such integration allows all stakeholders in a company to reach general consensus on strategies for adaptation to change. This not only makes conflict resolution less of a hassle, but also allows real and effective organisational change within a company, making them highly flexible.

In the financial sector, there are a few very large banks that dominate it. Among these are Dresdner Bank, Commerzbank, and Deutcsche Bank. This is a result of the reconstruction of the country after World War Two, where large amounts of capital was required to be attained and allocated rapidly to the institutions and companies.

In contrast to the UK and US, the banks in Germany have a wide range of powers financially, and are allowed to own stock of companies as well as sit on their boards of directors. The emphasis is on long-term relationships between the company and the bank, so this leads to the sharing of investment risk when expanding into new ventures, and thus encourages German firms to research and innovate. The banks also go through stages of reform to adapt to change.

Such relationships are first built with trade associations helping firms and local banks develop strong and stable partnerships. Along with the banks, they also provide the firms with research and design funds.

With the banks, labour, and the firms in close partnership, they make a powerful economic power base. The idea behind the social market economy doesn’t only help to shape the relationship described just above, but it can also help to shape relationships between companies either in the industry, or even in the same geographic region of Germany.

Critics of the German model believe that the German firms lack the ability to be entrepreneurial because of their relationships. However, Germany’s model counters for this by having most of its small and medium size companies all belonging to trade associations. This way, they can be financed appropriately and they are stable, whilst still retaining the ability to adapt to change and be entrepreneurial companies. One example is the machine-tool industry that exists in the renowned and prosperous state of Baden-Wurtemberg.

This social market model has successfully allowed Germany survive many drastic changes through the latter half of the twentieth century. However, there is clearly something not right at the moment with the German model, as we can see now with Germany’s stagnated economy.

There are several reasons, the first of which is the state unification of East and West Germany. Socials tensions have arisen as a result – Germans in the East resent the gradual pace of change, which they feel has effectively relegated them to second-class economic citizens in the modern day Germany. Westerners resent having had to pay the price for unification, which has exceeded the numbers that was first predicted, and has resulted in higher taxes for Germany’s citizens.

The other implications is the current east-west divide present in wages, and the possibilities that companies may move to east, undermining the west in the process and its economic model.

The second problem is European integration. Among the European countries, there is a wide range of economic models that are followed. In France and Italy, they favour state intervention in the economy, whereas you see the opposite view held in the UK and the US. Germany’s social market happens to lie in between these two poles.

More likely or not, one style of economic policy will dominate how they interact with one another. Continuing European integration my shift the emphasis to or away from the ideas of the German economic model.

The last problem is ever changing global economy. No longer is the emphasis on manufacturing, but on information, and innovation based economies. If Germany truly wishes to effectively compete in the future, then it will have to adapt its economic and social institutions to suit the new economy of computers, biotechnology, electronic media, and telecommunications. Konrad Seitz, Germany’s ambassador to Italy suggested that they must re-direct their resources to shape the labour sector away from manufacturing and more to computers and services, by investing in research and design. They must also take similar suit in the education sector. The only other option for Germany is to become effectively “technologically colonised” (as Konrad Seitz coined it) by American and Japanese companies.

In conclusion, the German model is a unique model, following a socio-economic philosophy that integrates many sectors together to create powerful economic entities. The model has pointed out that it is not companies that compete with one another globally, but the socio-economic systems of the countries that the companies exist in.

However, it does have its flaws, as it is a system that has been developed with the focus on manufacturing, not on the technologies and the businesses of the new age of information. In the end, the question is, will it be able to adapt?

References:

Richard Whitley, European Business Systems: Firms and Markets in their National Contexts.
Garry Herrigel, Industrial Constructions
Kirsten Wever and Christopher Allen ‘Is Germany a model for managers?’ Harvard Business Review, September/October 1992.