Social Education 57(4), 1993
1993 National Council for the Social Studies

The Economic Development of
Postwar Germany

Desmond Dinan
It is difficult to appreciate today the extent of Germany's devastation at the end of World War II. Recent television news coverage of Vukovar, the town in eastern Croatia almost completely destroyed during a three-month Serbian siege, offered an idea of what Germany, and most of continental Europe, looked like in 1945. Six years of intensifying aerial bombardment-culminating in such atrocities as the destruction of Dresden in February 1945-and six months of a bitterly contested Allied invasion-culminating in the Battle of Berlin in April and May 1945-had turned the most industrialized and populous parts of Germany into an immense Vukovar.
Theodore White (1978, 422), the famous U.S. journalist, gave the following eyewitness account of a visit immediately after the war to the strategically important Ruhr region, one of the most heavily bombed sectors in Germany:

[It] was the most thoroughly destroyed place that I had ever seen except for Hiroshima-worse than Tokyo, worse than anything in China. For miles around, the ground had been churned by Allied bombings and even was like a panorama of waters, hurricane-lashed; except that the waves and troughs were made of earth, frozen to immobility by peace. By any standard, but especially given the extent of wartime destruction, the Federal Republic of Germany's economic development has been extraordinary. Until the economic effects of unification became apparent in 1991 and 1992, Germany had an enviable record of generally sustained growth, high employment, and low inflation. Despite recent shock waves, Germany's ability to bear the heavy burden of unification is testimony to the country's resilient economy and robust currency.

An economic downturn throughout Western Europe contributed to, and in turn was exacerbated by, Germany's post-unification problems. Throughout the postwar period, Germany's and Western Europe's economic development have been inextricably connected. European integration provided the framework for Germany's emergence in the postwar period as an independent polity with a powerful economy. It is impossible, therefore, to divorce postwar Germany's economic history from the development of European integration.

The Marshall Plan
In the immediate aftermath of World War II, the most important question for the victorious Allies was not whether such a heavily damaged region could ever recover, but whether it should ever recover. Germany's future lay entirely in the Allies' hands, and Germany's former enemies had little sympathy toward the country. Twice in as many generations, the Allies thought, Germany had instigated European wars that had become global conflicts. To prevent the recurrence of further conflict, U.S. Secretary of the Treasury Henry Morgenthau argued, Germany's surviving factories should be scrapped and the country completely "pastoralized." So virulent was Allied hatred of Germany by 1944 that the so-called Morgenthau Plan for a brief moment, (during the Quebec Conference), became official U.S. policy.

A number of developments shortly after the war made nonsense of the Morgenthau Plan and caused a radical revision of U.S. policy toward Germany. First, U.S. officials realized that resentment toward the Versailles treaty, the punitive postWorld War I settlement, had contributed to the rise of fascism in Germany and to the outbreak of World War II. It would have been foolish for the Allies to risk fueling future German resentment by pursuing an equally harsh arrangement after 1945. Second, humanitarian concern not only to prevent mass starvation and destitution in Germany at the war's end but also to allow Germans to pursue a decent standard of living soon influenced Allied policy. Third, a revival of German industry and commerce would help offset the cost of occupation.

The onset of the cold war in Europe was a fourth reason why the United States abandoned its punitive policy toward Germany. As the war came to an end, barely concealed animosity between the United States and the Soviet Union rapidly came to the fore. Fueled by economic, political, and military rivalry in the guise of an ideological crusade, the cold war divided the continent into a U.S.-dominated West and a Soviet-occupied East. The strategic fault line ran through Germany and resulted in the country's partition until 1990. Under the circumstances, West Germany's economic development was clearly in the interests of the United States. An economically strong West Germany could bolster Western Europe's defenses and undermine support for indigenous Communist parties.

Probably the best-known international initiative ever undertaken by the United States, the Marshall Plan was the antithesis of the Morgenthau Plan. Named after then U.S. Secretary of State George Marshall, the plan sought to rebuild Western Europe economically, without distinction between former friend or foe. The plan, however, ran into the major obstacle of French intransigence. As Germany's closest Western neighbor, France had suffered far more than the United States from German aggression, and was far less inclined toward reconciliation. Moreover, France's own plan for postwar economic development presupposed that Germany would not be reindustrialized for a long time to come. Thus France opposed German economic recovery because of a genuine fear of German resurgence, and because of the consequences for France's own economic recovery.

This put France in a double dilemma: how to win Marshall Plan assistance for itself but not for Germany, and how to maintain U.S. friendship (the United States was then the most powerful and influential country in the world) while maintaining a harsh policy toward Germany. U.S. patience with France was wearing thin, and Washington made clear to Paris that Germany would have to be included in any plan for Western Europe's economic development. After much soul searching and policy planning, France came up with a solution that provided the framework for West Germany's, and Western Europe's, extraordinary postwar economic progress. The proposal was to combine both countries' coal and steel sectors within a framework of functional economic integration.

The Schuman Declaration
French Foreign Minister Robert Schuman unveiled his famous declaration at a press conference in Paris on 9 May 1950 (see box). Jean Monnet, a brilliant French official with a lifelong commitment to Franco-German reconciliation and European integration, had devised the plan to pool production of coal and steel under a single supranational authority. At that time, coal and steel were the essential ingredients of economic reconstruction and future prosperity. Thus Schuman's short, simple statement outlined a strategy to reconcile German economic recovery and French national security in the context of European integration. The Schuman Declaration resulted first in the European Coal and Steel Community (1952), and later in the European Atomic Energy Community (1958) and the European Economic Community (1958). Today, these three communities are known collectively as the European Community.

The Schuman Declaration created the climate in which West Germany's economic miracle flourished. That evocative phrase describes Germany's extraordinary recuperation from the devastation of 1945. Weakened by hunger and shocked by the trauma of defeat and occupation, Germans toiled tirelessly to clear rubble, remove wreckage, reopen roads and railways, and rebuild houses, schools, and hospitals. Despite the terrible extent of wartime destruction, a surprising amount of industrial capacity remained relatively intact, ready to be restored. Having gradually regained their strength and self-esteem, by the early 1950s Germans were ready to launch their country on the road to full economic recovery. The European Coal and Steel Community gave them the ability to do so; prevailing cheap labor and the economic effects of the Korean War also helped to fuel the boom.

With an initial membership of France, Germany, Belgium, the Netherlands, Luxembourg, and Italy, the European Coal and Steel Community included a supranational High Authority, the institutional depository of shared national sovereignty over the coal and steel sectors. The High Authority was responsible for formulating a common market in coal and steel, and for such related issues as pricing, wages, investment, and competition. As Monnet (1978, 329) saw it, the ECSC's purpose was not "to substitute the High Authority for private enterprise, make possible real competition throughout a vast market, from which producers, workers and consumers would all gain."

The European Coal and Steel Community disappointed ardent Euro-federalists, both in its conceptual framework and actual operation. It was an unglamorous organization that inadequately symbolized the high hopes of supranationalism in Europe. Yet the ECSC performed a vital purpose in the postwar world, in terms of German economic development, Franco-German reconciliation, and European integration. According to John Gillingham (1991, 297-98), a noted scholar of European reconstruction, the ECSC

served in lieu of a peace treaty concluding hostilities between Germany and Western Europe. This was no grand settlement in the manner of Westphalia or Versailles. The agreement to create a heavy industry pool changed no borders, created no new alliances, and reduced only a few commercial and financial barriers. It did not even end the occupation of the Federal Republic....By resolving the coal and steel conflicts that had stood between France and Germany since World War II, it did, however, remove the main obstacle to an economic partnership between the two nations. These were by no means inconsiderable achievements.

Toward a More Comprehensive Economic Community
In a effort to relaunch the movement for European integration in the mid 1950s, the six ECSC countries considered forming a more comprehensive economic community. They proposed abolishing quotas and tariffs on intracommunity trade, establishing a joint external tariff, unifying trade policy toward the rest of the world, devising common policies for a range of socioeconomic sectors, and organizing a single internal market. The advantage of a common market in industrial goods was obvious to Germany, although Economics Minister Ludwig Erhard feared that it would be protectionist and, therefore, would distort world trade. Except for agriculture, Erhard's concerns were unfounded. In any event, as Franco-German reconciliation lay at the proposed Community's core, and the Community held the key to Germany's postwar rehabilitation and economic development, Chancellor Adenauer grasped the proposal's importance and overruled Erhard's objections.

In March 1957, the six ECSC member states signed the Treaty of Rome and launched the European Economic Community. An extremely buoyant European economy saw the EEC off to a strong start when it began operating in January 1958. The first four years were the Community's "honeymoon...a time of harmony between the governments of the member countries and between [Community] institutions" (Marjolin 1989, 110). The treaty included a specific timetable for establishing a customs union by lowering and ultimately abandoning industrial tariffs between the six member countries. The first intra-EEC tariff reductions took place, on schedule, on 1 January 1959. As other rounds of tariff and quota cuts followed, the EEC simultaneously started to erect a common external tariff. So successful were these first steps toward a customs union that the Community soon decided to accelerate its planned implementation. Eventually the customs union came into being on 1 July 1968-eighteen months earlier than stipulated in the Treaty of Rome.

From Boom to Bust: Germany in the 1960s and 1970s
As an emerging industrial giant, Germany benefited enormously from the explosion of intracommunity trade that followed the gradual implementation of the customs union. Between 1958 and 1960 alone, trade between the six member countries grew by 50 percent. The 1960s was a decade of extraordinarily high and sustained rates of economic growth in Germany and throughout Western Europe. Mirroring a similar development in the 1980s, following the launch of the European Community's single market program, economic growth was as much a result of "the increased activity of businessmen [as of] the actual reduction of tariffs. As soon as managers were convinced that the common market was going to be established, they started to behave in many ways as if it was already in existence" (Pinder 1962, 41).

In the early 1960s, the EEC's newly established Common Agricultural Policy replaced Germany's customs duties, quotas, and minimum prices for agricultural products with a Communitywide system of guaranteed prices and export subsidies. The purpose of the CAP was to increase the EEC's agricultural productivity, ensure a fair standard of living for farmers, stabilize agricultural markets, and guarantee regular supplies of food. The number of German farmers continued to decline, but the CAP offered a reasonable living to those who stayed on the land.

In the 1960s, Germany, more than any other Community country, enjoyed rapid economic development, a healthy balance of payments, and stable prices. Only twenty years after the end of the war, Germany's economy had developed remarkably. A strong work ethic, harmonious labor relations, good management, sound investment, growing domestic and international demand, and a reputation for product reliability and durability characterized the manufacturing sector. Machine tools, cars, household appliances, chemicals, and pharmaceuticals were the leading industries.

The 1960s epitomized a golden age in Germany's economic development. It was a decade of soaring growth rates, ample employment, and relatively low inflation. The German economy became the driving force within the Community. In the early 1970s, however, the global economic bubble burst. Fiscal and monetary strains in the United States and Europe caused the postwar system of fixed exchange rates to collapse. President Richard Nixon's suspension in August 1971 of dollar convertibility compounded the prevailing sense of uncertainty and apprehension. The 1973 war in the Middle East and subsequent oil embargo produced sluggish growth and spiraling inflation and sent Western Europe into a recession. A robust economy and resilient currency helped Germany weather the storm, but the country's rate of economic growth declined while unemployment and inflation increased.

Commitment to the Goal of Economic and Monetary Union
Just as Germany's immediate postwar economic development must be understood in the framework of European integration, so too must Germany's response to the challenges of the 1970s be seen in the context of the European Community. At a summit meeting in 1972, Community leaders committed themselves to the goal of Economic and Monetary Union by the end of 1980. Continuing exchange rate fluctuations and divergences of member states' monetary and economic policies soon made that goal impossible to attain. Throughout 1973, soaring inflation, rising unemployment, yawning trade deficits, and a worsening oil crisis started to undermine Community solidarity.

Economic and Monetary Union was an early and inevitable victim of the ensuing disarray. The "snake," a device intended to keep the Community's currency fluctuations within an agreed tunnel, did not last long. Community currencies wiggled in and out of the snake, with the mark, buoyed by Germany's low inflation and large trade surplus, pushing through the top and the French franc and Italian lira, weakened by their countries' high inflation and large trade deficits, falling through the bottom.

It was not until the end of the decade that the Community established a zone of relative monetary stability, thereby helping member states to fight inflation and recover economic growth. Based on a proposal by Chancellor Helmut Schmidt, in March 1979 the Community launched the European Monetary System, with a parity grid and a divergence indicator based on the European Currency Unit. Given Germany's relative economic and monetary well-being, the mark inevitably played the part of a reference currency.

The consequent fall in inflation and stabilization of prices among the participating states brought the Community back to where it had been in the 1960s, before the collapse of the Bretton Woods system (a fixed system of currency parities pegged to the dollar whose value was linked to the price of gold). That, in turn, allowed the Community to direct its attention to the unfinished business of establishing a barrier-free, integrated market. With a quasifixed exchange rate regime operating in the community, member states were able to devise a program in the mid-1980s to bring about the free movement of goods, services, capital, and people. As Peter Ludlow (1982, 82) has observed, the European Monetary System "was a precondition for...[EC] 1992. Had the EMS not been created and functioned so well, the [single market program] could not have been contemplated, let alone implemented."

Germany was one of the prime movers behind the European Community's program to achieve a single market by 1992. As the Community's industrial giant, Germany had much to gain from a frontier-free market of approximately 350 million people. German manufacturers had already established a strategic alliance with the EC executive commission, and were at the forefront of efforts to promote intra-European collaboration in the high-technology sector. In 1985, the commission produced the so-called White Paper, a list of approximately three hundred legislative measures that the Community would have to enact in order to complete the single market. These directives covered the remaining physical barriers that prevented free movement of people and goods in the EC, the differences in national technical standards that hindered the free movement of goods, and the discrepancies in indirect tax rates between the member states that continued to inhibit trade.

The Cost of Non-Europe to the European Community
To quantify the cost to the European Community of maintaining a fragmented market, the Commission initiated a research program on the cost of non-Europe. Based on data from Germany and three other Community countries, independent consultants assessed the costs and benefits of maintaining the status quo by analyzing the effects of market barriers and by comparing the Community with North America. The gist of the commission's findings was that existing physical, technical, and fiscal barriers to trade cost the Community 3 to 6 percent of its gross domestic product, or a total of $250 billion, annually.

Despite protestations to the contrary, German business was not unanimous in its support of the single market program. Some manufacturers feared the consequences of market liberalization, preferring the protection of nontariff barriers and strict public procurement regulations. The alcoholic beverage industry, for instance, had hidden behind a German law of 1562 prohibiting the sale of imported drinks that did not meet minimum alcoholic content and purity requirements (Reinheitsgebot). In 1979, however, the European Court of Justice ruled that Germany could not discriminate against Community products that met standards set in member states where they were manufactured. The court's landmark case allowed the commission to develop the principle of mutual recognition, thus avoiding the otherwise impossible process of harmonizing in detail the member states' diverse product standards.

Free movement of goods throughout the Community, which the principle of mutual recognition makes possible and the single-market program attempts to implement, clearly benefits Germany. Enterprises already manufacturing and marketing in a large market (Germany is the most populous Community country) will have a manifest advantage in a larger, integrated European market. In anticipation of such advantages, German enterprises of all sizes threw themselves wholeheartedly into the single market program, preparing for the eventual removal of remaining trade restrictions.

German Unification and Maastricht
Under the auspices of the European Monetary System and the single market program, Germany's economy developed steadily in the 1980s. Perhaps the only major problem was the cost and scarcity of labor. Low (and sometimes negative) population growth, together with Germans' unwillingness to perform menial labor, led to an influx of hundreds of thousands of "guest workers" in the 1960s, 1970s, and 1980s, which in turn aggravated social tension. At the same time, high wages for skilled workers, generous conditions, and a liberal welfare system drove up the cost of German labor and, by definition, German products. By the end of the 1980s, especially because of a drastically declining dollar, it seemed that German products might price themselves out of the international market. Structural unemployment, by German standards, had also reached a considerable volume and proved to be tenacious.

By that time, the success of the single-market program convinced the Community to revive the quest for Economic and Monetary Union. In 1989, Jacques Delors, President of the European Commission, presented a plan for economic and monetary union to Community leaders. The plan outlined three stages, culminating in irrevocably fixed exchange rate parities, with full responsibility for economic and monetary policy passing to EC institutions. As a staunch supporter of European integration, Chancellor Helmut Kohl endorsed the Delors Plan and supported calls for an intergovernmental conference to determine the treaty revisions necessary to achieve Economic and Monetary Union.

Revolution in Eastern Europe in 1989 and German unification in 1990 raised member states' concerns about the future of European integration and the extent of Germany's commitment to the Community. Germany itself was in no doubt about the depth of its economic and political integration in Western Europe, but appreciated neighboring countries' concerns. The intergovernmental conference on Economic and Monetary Union, therefore, opened in December 1990 in tandem with an intergovernmental conference on European political union. Both conferences ended a year later at the Maastricht Summit.

The Maastricht Treaty provisions on Economic and Monetary Union adopted the three-stage process outlined in the Delors Plan. Stage one (then in progress) involved the establishment of free capital movement in the Community and closer monetary and macroeconomic cooperation between the member states and their central banks. Stage two, a transitional stage of intensified economic and monetary coordination, will begin in January 1994. Monitoring of member states' policies based on broad guidelines laid down by the Council of Ministers, and treaty constraints on member states' budget deficits, will facilitate economic policy coordination. The European Monetary Institute, intended to help coordinate the member states' monetary policies, will become operational at the beginning of the second stage.

Stage three will begin on 1 January 1999 at the latest. If a majority of member states (possibly excluding Britain and Denmark, if they exercise the option they won at Maastricht to opt out of economic and monetary union) meet the convergence criteria earlier, it could begin on 1 January 1997. When stage three begins, the European system of central banks, consisting of the European Central Bank and the member states' central banks, will start to function, the European Currency Unit will become a currency in its own right, and rates at which member states' currencies are to be irrevocably fixed to each other and to the European Currency Unit will be determined.

The intergovernmental conferences leading to the Maastricht Treaty took place in the warm afterglow of German unification. At the April 1990 Dublin summit, Community leaders welcomed imminent unification as a positive factor in the development of Europe as a whole and the European Community in particular, adding that it would contribute to faster economic growth in the EC. Indeed, unification caused a massive increase in public spending and initially buoyed the German economy with growth rates of 4.5 percent in 1990 and 4.8 percent in the first half of 1991.

The negative economic consequences of unification, however, became fully apparent after the Maastricht Summit. Chancellor Kohl had rushed headlong into unification for understandable political reasons, but either ignored or failed to grasp the enormous economic cost. The German Democratic Republic was bankrupt, with few sellable assets, and soon became a millstone around united Germany's neck. Between 1989 and 1992, Germany's budget deficit expanded from barely 1 percent of gross domestic product to 7 percent; inflation rose from 1 percent to 4 percent.

Previously, the German economy had been the engine of Community growth; suddenly Germany became an anchor dragging the Community's economy down. Fearful of rising inflation, the German central bank pursued a tight monetary policy which, because of the mark's predominance in the European Monetary System, kept interest rates high throughout Western Europe. At the same time, economic divergence in Western Europe made Economic and Monetary Union seem more remote than ever and caused severe strains in the European Monetary System. Contrary to its original purpose, the EMS had become a fixed-rate system instead of a system of fixed but adjustable rates. The fundamental weakness of the Italian economy, and the weakness of the British economy, plus the unacceptably high parity at which sterling had joined the system in 1990, caused both countries to withdraw their currencies from the EMS in September 1992.

The German government and parliament remained steadfast in their support for both the European Monetary System and economic and monetary union. Yet, popular attachment to the mark, which had become a potent symbol of the country's postwar economic power, caused widespread antipathy in Germany toward the Maastricht Treaty. Such popular unease about the treaty is palpable throughout the Community. Reasons vary from country to country, but as a result, economic and monetary union looks increasingly unlikely to happen by the end of the century.

Germany's current economic problems are serious. Fear of inflation keeps interest rates high, depresses investment, and increases unemployment. Reunification is a huge drain on the public purse and deepens the budget deficit. A strong mark raises the cost of German exports, which in any case are declining because of excessive demand in the east.

What does the future hold? Like the rest of the European Community, but more so because of unification, Germany is coming to terms with the post-cold war international system. There is a danger that regional blocs, managed trade, and creeping protectionism will characterize that system economically. The state of U.S.-EC trade relations and the current round of General Agreement on Tariffs and Trade negotiations are especially worrisome. Given the nature of Germany's postwar economic development, it is imperative that European integration continue, and that the international system remain open. Germany's greatest contribution to its own and to its neighbors' future economic development would be to press for greater openness, particularly in the direction of improving relations with Central and Eastern Europe, despite the hard times that lie immediately ahead.

Gillingham, John. Coal, Steel and the Rebirth of Europe, 1945-55. Cambridge: Cambridge University Press, 1991.Ludlow, Peter. The Making of the EMS. London, England: Butterworths, 1982.Marjolin, Robert. Architect of European Union: Memoirs. London, England: Weidenfeld and Nicholson, 1989.Monnet, Jean. Memoirs. Garden City, N.J.: Doubleday, 1978.Pinder, John. "Implications for the Operation of the Firm." Journal of Common Market Studies 1 (1962): 23-35.White, Theodore. In Search of History: A Personal Adventure. New York: Warner Books, 1978.Suggested Reading
Bulmer, Simon, and William Patterson. The Federal Republic of Germany and the European Communities. London, England: Allen and Unwin, 1987.Giersch, Herbert, Karl-Heinz Pague, and Holger Schmieding. The Fading Miracle: Four Decades of Market Economy in Germany. Cambridge: Cambridge University Press, 1992.Hardach, Karl. The Political Economy of Germany in the Twentieth Century. Berkeley: University of California Press, 1980.Leaman, Jeremy. The Political Economy of West Germany, 1945-85. New York: St. Martin's, 1988.Schweitzer, Carl-Christoph, and Detlev Karsten. The Federal Republic of Germany and EC Membership Evaluated. New York: St. Martin's, 1991.Desmond Dinan is Director of the Center for European Community Studies at George Mason University in Fairfax, Virginia. He is also Deputy Director of the International Institute and a history professor at George Mason University.