Economic Systems

Ohio Wesleyan University

Goran Skosples

9. Germany

2

The German (Rhine) Model Germany: Europe’s largest economy

GDP per capita: $_________ (US = $_________)

Social market economy

• government owns _______________

principles of consensus, group action, and long-term consequences

• coordination and following gov’t guidance

• the German constitution (Basic Law) explicitly lays out the economic and social goals

market principles subject to social regulation __________________

3

The German (Rhine) Model

roots of the welfare state ________________

• gov’t funded soc. security, health insurance, and worker compensation

______________

• many companies privately owned- no need to appease the _______________

• financing by local banks rather than capital markets- no desire for large leverage (debt) - modesty

• Oligopolistic markets

4

The German (Rhine) Model Mitbestimmung (___________________)

• Large firms required by law to have equal representation on their boards for both management and labor- workers have a say in the firms’ operations

- work councils + election of workers to company supervisory boards

• ensures that workers’ rights and jobs will be protected when decisions are made about where and what to produce

• motives: peace between labor and management, reducing output lost to strikes, moderates wage demands to keep inflation in check

5

The German (Rhine) Model

Labor market

• high skilled labor

• dual-system of vocational training- classroom instruction + work experience

- technical colleges vey important

• worker loyalty

• Agenda 2010 (in 2003)- structural reforms to ↑ growth + ↓ unemployment

- wage _________________

Banking system - three pillars• private, cooperative, public (Savings + Landesbanken)

6

Prior to unification

7

Prior to unification

8

Reunification (1990)

high hopes:

1. existing institutions in FRG – political, legal, regulatory framework

2. the best performing socialist economy – highest efficiency and productivity

rapid transformation – Big Bang

currency unification

Treuhandanstalt - privatization

Mezzogiorno problem

9

Consequences for the East output (9/89 – 9/90: -51%) +

unemployment (peaked at 21%)

supply (cost):• ___ nominal wage + ___ productivity• outdated capital – requiring ___ investments• excessive ____________

demand (price):• inflow of western goods (cheaper)• negative ____________________• dissolution of the Council for Mutual Economic

Assistance (CMEA)

10

Evaluation of Unification

11

One of the original members of the ECSC (1951)

European Union (1993)

The euro (1999/2002)

• single currency + unified monetary policy

• ECB in _______________

Large benefit from the euro (_______________)

• low ______ growth

• should show solidatity?

Reluctant to help Greece?

• German politics preference for consensus

EU and the Euro

12

Germany today unemployment: ___________

standard of living higher in the west that the east

dislike for inflation

Europe’s locomotive

consumption held low (austerity) low debt/GDP

strong exports (2nd after China) CA surplus

services lagging manufacturing (financial, etc)

bubble in the property market?

“coordinated market economy”

13