German Economic Miracle

Causes of the German Economic Miracle

The German Economic Miracle or "Wirtschaftwunder" was also referred to as the "Miracle on the Rhine" by the British newspaper "The Times". This referenced the industrial heartland of West Germany, the Rhine, responsible for much of the industry. The growth truly began in 1948 but was not stimulated by one single factor. Let's examine some of the critical causes of Germany's Economic Miracle.

Ludwig Erhard and the German Economic Miracle

Given the dire situation, new schools of economic thought were always going to have traction in Germany after World War II. The Freiburg School of Economics is a political philosophy that originated in 1930 at the University of Freiburg. It was built on principles of ordoliberalism.

When Ludwig Erhard became Director of the Economics Council in the Western occupation zone in 1948, he had the trust of the Allies because of his anti-Nazi views. Coupled with this, there was no question over his loyalty to Germany as he was a veteran of World War I. Therefore, the Allies were willing to allow him to put some of his notions into practice. Let's look at an overview of the three key facets that helped kickstart the economic boom:

• Replacement of the Reichsmark with a new currency known as the Deutschmark. This stopped the black market, and, despite the initial colossal decrease in value (93%), money was again the primary agent of trade.
• Removal of the price controls set in place by the Nazis and continued by the Allies. This control and the use of rationing for food continued after World War II, with some Germans only getting 1 000 calories per day!
• Slashing taxes. The average West German earning 2 400 Deutschmarks was getting taxed for 85% of their earnings. Erhard's policies meant that this dropped to 18%. He also encouraged a flat tax rate for companies, encouraging private enterprise.

Fig. 2 - Ludwig Erhard, who became Chancellor of Germany, in Holland in 1964

The Marshall Plan

When it became apparent that it was just a matter of time before Germany lost the war in 1944, the United States devised the Morgenthau Plan. It aimed to turn Germany into an agrarian state which could not mount a conflict. However, this was later discarded when deemed too harsh. The mistakes made with the Treaty of Versailles after World War I were all too recent. However, the United States was also acutely aware of the Soviet threat once the war was over and feared that the Morgenthau Plan would help the Communists overtake Europe.

The Marshall Plan was more important as a symbolic gesture from the United States to involve a disgraced nation at the European table. It was the first significant step in a series of important economic ties that helped the West German economy to flourish. However, it also isolated the Eastern bloc countries and deepened nascent Cold War mistrust.

Since the atomic bomb ended World War II in 1945, posturing began between the ideologies of the United States and the Soviet Union. The United States' intervention was informed by the domino theory. The polarising effects of this could be seen in the food shortages in Soviet-backed East Germany after splitting the nation into East and West in 1949.

Collaboration and Exports

In addition to the Marshall Plan, the establishment of a forerunner of the European Union in the same year led to the involvement of Germany in the Organisation for European Economic Collaboration. This opened the door for participants to trade freely and stimulate the recovery of European markets. In many ways, the chance for Germany to collaborate with European partners was far more important than the Marshall Plan.

Successes such as these made the animosity with which West Germany was viewed quickly forgotten. Although war reparations still burdened the German economy, their collaboration and strength of exports were considered vital. With the 1950s in full swing, West German war reparations were slashed by 50% and only paid if certain profits were reached to help their economy be more involved in tackling communism. As a result, their exports to the capitalist world were 3.6% of the total in 1950 and increased to 9.6% in 1959, the same as all of Germany before the war.

Gastarbeiter

The final important piece of the German Economic Miracle jigsaw came in the form of the foreign "Gastarbeiter" or "guest workers" who came in droves and worked for low wages. This programme started in 1955, but even before then, there was a steady stream of foreign workers; 10 million were added to the population from Eastern Europe in 1945². This was a new pool of cheap labour for the West German economy which significantly increased the workforce, though unemployment also remained high. Alt and Schneider argue that the German Economic Miracle may not have been achieved without these low wages. On top of this, before the building of the Berlin Wall in 1961, 4 million East Germans fled to West Germany for better economic prospects.

In 1955 West Germany decided to keep replenishing this workforce by formally introducing the "Gastarbeiter" program. This involved working with non-European Economic Commission nations and paying for transport to and from housing in Germany. In 1960 there were 300,000 guest workers who were mostly Italian. However, this increased to 4.5 million by 1972, and this time Turks and Yugoslavs accounted for the majority. "Gastarbeiter" now made up 12% of the total workforce. These initiatives meant the economy could grow without too much inflation because wages remained low.³

Results of the German Economic Miracle

Let's look at the outcome of the German Economic Miracle.

• In June 1948, the industrial input was half that in prewar 1936. It was already 80% by 1949.
• Industrial output increased by 125% from 1950 to 1960.
• The German economy grew by around 8% every year in the 1950s.
• Exports rose from 8.4 billion Deutschmarks in 1950 to 41.2 billion in 1959.
• The economy of East and West Germany became larger than the UK's in 1955.
• The per capita GDP surpassed the UK in 1970.
• As a key player in the eurozone, the German economy now represents the largest economy, with 28% of the total.
• It is now the world's third-largest economy for exports, behind the United States and China.

Fig. 3 - The German car company Volkswagen is number ten in the Fortune 500, a US list measuring total revenue