Political Economy of Germany

Political Economy of Germany, what accounts for the enduring economic success of Germany? Is the 'social market model' still a characteristic of the German political economy?

"German Economic Miracle", is the phase often used to describe the country that has managed to rise from ashes. Germany presently occupies the status of the country possessing largest national economy in European Union that positions it as the world’s fourth-largest economy on the basis of its Nominal GDP. However, what makes the country’s success even more remarkable is the transformation that the country has undergone from the debilitated state the allies left it in after the country’s defeat in the Second World War. The country was further divided into two parts- East Germany and West Germany and managed to become unified again only in the late 20th century. Through this all the rise of the nation as the most successful economy in Europe is indeed remarkable, its economic model worth study.

The country’s economic reconstruction in the post-war period, as well as its current economic success, has been attributed to various structural reforms introduced by its polity makers in the 21st century. A peculiar form of the political-economic system identified as ‘Soziale Marktwirtschaft,’ or ‘Social market economy’ characterizes Germany’s economic framework. This form of political-economic system is a product of a politically motivated merger of two different approaches to economic order and policymaking.

Two contradictory principles, one based on the liberal tenets of the free market economy and the other on the ‘social’ dicta that aim to modify the outcome produced by the interactions of different actors in a market economy ensured through various redistributive and social security measures policies are balanced together in this system. Germany economist Ludwig Erhard has been credited with the introduction and implementation of these reforms (Witt, 2002, p.366). These structural reforms thus introduced were characterized with the fusion of ideas from liberal thought, principles of social welfare and corporatism under the border framework of a social market economy.

The different social, political and economic transformation that characterized the country since its unification in 1870, especially its experience under a Nazi regime and the devastation it suffered under the Allies after the Second world war plays a very significant role information of its present, ‘Social market economy’. The study of the country’s historical transformation will also help in our understanding of the way these two contradicting principles are introduced in the country’s structural framework.

Historical Evolution of Germany:

As late as around 1815, after the defeat of Napoleon at the battle of Waterloo, the German Confederation was formed. The Confederation has included within it thirty-nine states; the state of Austria was also a part of it. It was formed with the aim of establishing and maintaining the internal and external security of its various federating units (Gunlicks 2003, p.8). Hence, the industrial revolution in the country materialized almost a century later than it did in other European countries. Prussia initiated the concept of a common market in within the confederation in 1818. This resulted in abolishment taxes and levies that regulated the movement of goods between the various German principalities. Through the introduction of Customs Union in the nation of Austria was excluded from the confederation.

For decades later until about 1860’s, Germany made a moderately successful attempt at imitating the form of industrialization that had expanded through entire Europe. In 1866, the war was fought between two major German states of Prussia and Austria where the victory of Prussia resulted in the defeat and complete exclusion of Austria from the German Confederation. This war then resulted in the reconstruction of the Confederation into North German Federation that included within its structure more than twenty German states that were dominated by the state of Prussia. Later in 1870, the states in the North German Federation together with four other sovereign South German states a united German state was formed for the first time (Gunlicks 2003, p.8) It was in the unified nation of Germany that major industries were established and this thus heralds the beginning of industrialization of Germany.

After Germany’s defeat during the First World War and later under the Nazi’s in the Second World War, the nation-state underwent another significant transformation. It suffered severe devastating losses during the war and also its territories were given to the Soviet Union and Poland. Later, the cold war that followed resulted in a clear division and demarcation of the nation into two parts; the one of which was called West Germany that was under the influence of the capitalist economic system that was structured around parliamentary democracy while the other part was called as East Germany, it was under the influence of Soviet Union and was politically dominated by the left.

German during the cold war era:

West Germany and its Social Market Economy:

The social economic system ‘Social Market Economy’ adopted by West Germany was severely influenced its experience of the Great Depression during the 1930’s that produced mass unemployment among its citizens and created severe economic hardship for all. This is often argued to be a major reason that contributed to the rise of Nazism. Thus, this motivated the architects of Germany’s economic constitution to give importance to the inclusion of social ethos as a significant moral imperative within its structure (Witt, 2002, p.365).

Hence, though influenced by the western notion of liberal capitalist economic system, its past experiences demonstrated to the nation the significance of ensuring equal redistribution of resources. Its experience under an authoritarian Nazi state also taught the nations the perils of a centralized state system. Hence, though provided with the function of introducing various social retributive policies and program, the function of the state in the capitalist market was restricted at protecting the competitive environment of the market economy from the monopolistic or oligopolistic tendencies of any actor in the market economy including to protect the market from a more interventionist’s state. The function of state also extended at maintaining economic stability. The state was also entrusted with the task of establishing a substantial network of social services guaranteed to its citizens that included within it various programs and social benefits on issues likes health, unemployment, pension etc. West Germany also developed a system that assured high wages and social benefits these elements of its Social Market Economy have been further carried over into the unified state of Germany.

However, the remarkable economic performance achieved by the nation cannot be attributed to just the structural reforms introduced to restructure its economic system. Some external factors have also contributed to ensuring its economic growth. The most significant factors of which were the large unemployed labor forces that included the soldiers and individuals displaced as the result of the war played a significant role in rebuilding the country’s economy. Along with it, West Germany also benefited out of the joint economic planning that was introduced for various regions of the country that was then occupied by the American, British and French forces, it produced a vital and essential currency reform within the region that introduced the Deutsche mark in June 1948. Also, the Marshall Plan introduced by the United States for the economic reconstruction of the countries affected by the war also helped the country to a great extent.

Hence, Ludwig Erhard conceptualization of a socially responsive market economy based on free trade liberal values and further assisted by aid provided through the Marshall Plan created an ideal framework around which the economy of West Germany was reconstructed. Its spectacular success has also been referred to as the ‘Wirtschaftswunder’ or the economic miracle of the 1950s. From the period of 1951-1961 West Germany gross national product (GNP) increased by 8 percent per. The country economy continued to improve even after suffering from some setbacks. The country’s economic development continued even after its unification with East Germany as long as in 1992. Around this period the nation of Germany had already emerged as one of the largest economies in the world and was considered to be a significant factor in world trade. The nation developed into an export-oriented economy its position further improved with the formation of European Economic Community (EEC) produced by the Treaty of Rome in March 1957.

East Germany:

East Germany under the influence of Soviet Union structured its economy on the basis of a communist form of a state-controlled and centrally planned economic system of production and distribution. Along with major industries, the state machinery also managed to establish complete control over land and the notion of private property and ownership of resources underwent a significant transformation. Around, 1949 the new state also became a member of the Council for Mutual Economic Assistance an association of states under the influence of Soviet Union (Solsten, 1999).

The concept of planned development was first introduced with the formulation of Five-Year Plan of 1951. The planned development however proved incapable of achieving its aims. The Second Five-Year Plan of 1956 was introduced to intensify the process of achieving nationalization of major industries and introduced the process of collective production. Private farmers who resisted collectivization were arrested (Solsten, 1999). The production continued to decline and the planned economy was soon perceived to be a failure against the capitalist model of open market economy introduced by West Germany.

Economic Policies of German Post-Unification:

Around 1989-90, the Berlin Wall that divided East Germany from West Germany fell and the country of Germany was unified. The system of Social Market Economy introduced in West Germany was also introduced in the East. During the process of unification, the economic growth achieved by West Germany was much more significant than that achieved by East Germany. This proves to be a significant problem for the unified nation of Germany, as it then had to work towards improving the deteriorating social, economic conditions of the former region of East Germany ((Solsten, 1999). And over a period of time, the situation improved.

The country continued to grown economically under the framework ‘Social Market Economy’ however, arguments have been made that it had to a great extent diverted from its theoretical framework and the link between theory and it’s practical application has been missing. It has also suffered from the period of economic of stagnation and at regression. The situation was especially grave during the global financial crisis. The country’s economic policy based on the liberal market economy made it vulnerable to the 2009 recession and in 2011 during the euro crisis. However, the country soon managed to recover itself and reconstruct its economy.

Germany managed to performed sig­nificantly better other European Union members and has emerged into the largest economy of the EU. Its autonomous financial institutions have also helped maintain the country’s economic stability. Also, its recent economic success cannot be attributed only to the country’s structural framework but the economy’s actors also played a significant role in its advancement. The orientation of its major industries and firms to not restrict itself to Europe but to invest in Global trade has significantly influenced the country’s economy (Bastasin, 2013).


Though the country’s economic growth has been significant, the extent and the scope of the state’s social programs have placed the country at a competitive disadvantage with respect to the states of Eastern Europe and Asia. Its labor costs are high as compared to other states and it isn’t just because of the high wages in the country but also because of the social costs that a citizen has to shoulder. Thus, in the recent period, its policy and reforms are undergoing some major amendments and reforms. The important issue here is about the process and methods that could be applied to achieve a more redistributive form of social order.

Thus, German companies and German workers must decide whether they would like to sacrifice the various social security programs that remain at the core of the revered social market economy or to risk losing out in the increasingly intense global competition of the 1990s and beyond. The German hasn’t yet managed to solve this problem, but it is increasingly gaining more importance than it earlier did  (Solsten, 1995).


Books: Gunlicks, A., 2010. The Länder and German Federalism. Manchester University Press.

Articles: Ebenstein, W., 1946. Federalism in Germany.

Witt, U., 2002. Germany's" Social Market Economy": Between Social Ethos and Rent Seeking. The Independent Review, 6(3), pp.365-375.

Websites: Solsten, E. ed., 1999. Germany: a country study. Diane Publishing. http://countrystudies.us/germany/

The Industrial Revolution of Germany http://www.sjsu.edu/faculty/watkins/germany.htm

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