Economic Systems Ohio Wesleyan University Goran Skosples 9. Germany

1 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  __________________

2 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 

3 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

4 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)

5 Prior to unification

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7 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

8 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  output (9/89 – 9/90: -51%) +  unemployment (peaked at 21%)  supply (cost): ___ nominal wage + ___ productivity outdated capital – requiring ___ investments excessive ____________  demand (price): inflow of western goods (cheaper) negative ____________________ dissolution of the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)

9 Evaluation of Unification

10  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

11 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 (2 nd after China)  CA surplus  services lagging manufacturing (financial, etc)  bubble in the property market?  “coordinated market economy”

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