While the economy in the communist Eastern Germany was severely strangled by the Soviet Union after WWII, Western Germany made a quick economical recovery, intensely supported by the United States of America. The German Federal Republic rose to rank three in terms of total economic output – after the USA and Japan – and rank two in world trade volume, making it the major powerhouse in Europe and one of the world’s leading economies. The German economy has an almost unprecedented international focus. Companies generate almost a third of their profits through exports, and almost one in four jobs are dependent on foreign trade.
Germany’s “social market economy” is basically liberal with little state intervention, however, with a social element to buffer the hardships of capitalism and to assure that workers will also benefit from economic progress. A “social partnership” between trade unions and employers was intended to ensure a high degree of social harmony. Over time, however, the term “social” began a life of its own and – pushed by the powerful trade unions – shifted the West German economy towards an enormous social welfare system that has become one of the most expensive in the world today. The major share of the social welfare duties has to be paid by the employers making labour more and more expensive. As a consequence, many companies left Germany during the last few years to erect cheaper production facilities in Asia and eastern Europe.
With the collapse of the communist eastern part of Germany (the so-called “German Democratic Republic”) and the subsequent reunification in 1990, Germany had to take over a completely run-down and uncompetitive economy. To facilitate the recovery of the East, West Germany had to make enormous financial efforts. Still today, more than 80 billion Euro are pumped into the new federal states annually, a heavy additional burden for the nation. Other major economical problems are the emptied state pension funds, the enormous numbers of employees in the public service sector including their pensions and the ever rising costs of the public health system.
Germany’s economic growth rate has meanwhile come to a standstill and the number of unemployed people rose to over 5 million. This puts the German Government under enormous pressure. The “Agenda 2010″ reform package was launched to restore competitiveness, cut the costs of the health and social welfare system and make the labour market more flexible. However, due to little cooperation of the trade unions and the rivalry between the ruling and the opposition parties, progress is very slow. A change of government with the next elections is obvious.