Germany’s economy in desperate need of change

Germany's economy has fallen on hard times with no end in sight. Gross domestic product (GDP) growth for 2005 is estimated to remain at the paltry 1 per cent rate it averaged during the entire decade of the 1990s, while unemployment has remained consistently above 10 per cent.

The stagnant economy is due to the government's decision to return to a social market economy, says Bob Formaini of the Federal Reserve Bank of Dallas.

By contrast, after World War II, West Germany experienced unprecedented economic growth in a free market economy:

  • From 1950 to 1974, citizens enjoyed a 5.7 per cent average growth rate – per capita GDP actually tripled.

  • The unemployment rate was 2.5 per cent, and more than 8 million new jobs were created.

    However, in the late 1960s, German policymakers began adopting price controls and market regulations based on "Schmollerism" – social market economic beliefs that ultimately ended Germany's economic success.

  • "Schmollerism" is considered to be a "third way" between capitalism and communism and is the same ideology embraced by German economic policy from 1880 to 1948.

  • From 1913 to 1950, for instance, Germany averaged only 0.3 per cent growth.

    Germany's economy will not recover unless it returns to a free market economic model similar to that of post-war West Germany, says Formaini. Reforms should include removal of strict government controls and regulations, reducing the high tax burden and government spending on social programmes and freeing labour markets.

    Source: Bob Formaini (Federal Reserve Bank of Dallas), Germany: Doomed by Schmollerism Ludwig von Mises Institute, November 4, 2005.

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    FMF Policy Bulletin/ 15 November 2005
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