The German Model, Modell Deutschland: The German Experience with Globalization

By: Kenan Kabbani

Introduction:

Globalization is the process with which nations connect and intertwine on a variety of planes. It extends beyond the economic global market integration that is often associated with it to include increased political, military, and socio-cultural integration and amalgamation. Globalization is not just a static existence, but it is also dynamic: ebbing and flowing in phases throughout history. Today, nations exist in a state of globalization, of which the Pax-Britannica of the Victorian era, the second most globalized age in history, could have only dreamed. However, such integration has not come without drawbacks. Many nations have struggled to come to terms with what globalization will mean for their societies and citizens, and how their nation will embrace or reject the ideas of globalization in either a wholesale or piecemeal fashion. To that end, rising inequality and populist backlashes have soured the taste of the economic prosperity brought by globalization in developed economies and have brought fears of backsliding into a less interconnected world. However, one nation which has undoubtedly seen a great benefit from globalization but is now struggling to assess its consequences is Germany.

Germany is a nation that breaks standard assumptions. It is a high-income European country with a high standard of living, yet it avoids many of the issues that have plagued other developed European economies. Unlike other developed economies, who are typically consumer economies that import goods and export services, Germany’s production exceeds its consumption, and it is an exporter of goods and an importer of services. It is an economy that is primarily export-driven. Despite its comparatively small population (roughly 82 Million), it rivals export giants such as China in terms of goods exported. It has maintained, on average, a lower unemployment rate in comparison to its European neighbors. Additionally, unlike other export-oriented economies that devalue their currencies to cheapen their exported products, Germany has historically maintained a stable currency and resisted urges to devalue it. It is easy to see that Germany has embraced globalization; however, they have done so in a unique manner that can seem perplexing.

            This article will seek to explain the German phenomenon, beginning with a section providing a brief understanding of Germany’s history following the capitulation of Nazi Germany into the modern-day. This section will provide necessary information regarding the formation of German institutions and policy traditions. It will function as a description of what kind of a nation Germany has built following the Second World War. Here the primary issues discussed are the recovery phase immediately following the war, followed by the efforts of German policymakers to forge new institutions and a new German identity while drawing upon and adapting from historical lessons. Afterward, there will be an observation and analysis of how Germany has embraced globalization, primarily focusing on Economic and Human globalization. This section will seek to showcase the most critical ways Germany has connected with the rest of the world economically and on a human level. The returns of Germany’s investment into a globalized world will also be analyzed, to see precisely how Germany has benefited, and how well the spoils of trade have dissipated throughout the echelons of German society. Beyond the economic realities of Germany’s experience, there also lies the political aspects of globalization for Germany: why has Germany chosen the path of globalization, and more specifically, why have they chosen to interact with it in the manner that they have? What are the political forces at play behind the veil of economic prowess? Additionally, what backlashes has Germany experienced politically towards these decisions, and how do those backlashes pose challenges for Germany’s continued global engagement and globalized position?

History of Germany Since 1945:

            Germany in 1945, would have been unrecognizable to anyone from the 21st century. A destroyed, disheveled, and ravaged nation, Germany exited the Second World War lacking direction and strategic vision after such complete and utter destruction (Henderson, 2002). The following short laundry list of Germany’s issues in this period reveals its compromised position. Germany suffered an enormous loss of life (specifically among the male, working-age population), an issue compounded by the departure of 18-20 Million foreign forced laborers who were previously operating many of Germany’s factories during the Nazi Regime (Henderson, 2002; Nazi Forced Labor – Background Information, 2018; Eichengreen & Ritschl, 2009). During the war, it had suffered critical infrastructure damage as a result of allied bombing (Eichengreen & Ritschl, 2009). Cities suffered significant damage, with upwards of 20% of the hosing destroyed. Germany was occupied, suffered rampant inflation, and lacked an official currency (the Deutsche Mark was not introduced until 1948). It also experienced food and raw material shortages (Henderson, 2002; Eichengreen & Ritschl, 2009). Finally, it was forced to pay significant amounts of war reparations. The situation was, in short, bleak.

To make matters worse, the western occupation zones of France, the UK, and the US merged into a western-backed government, and the Soviet occupation zones became a Soviet satellite state: effectively partitioning Germany into two ideologically competing states, West and East Germany (Laar, 2010). West Germany could rely on access to other industrialized western markets and aid from their western allies in the form of loans, loan forgiveness and delaying of war reparation payments, as well as economic development programs (such as the Marshall Plan) (Henderson, 2002). East Germany could not rely on such aid. In fact, from its foundation in 1949, East Germany was burdened by Soviet war reparations, which reached approximately $10 Billion (Naimark, 1995). This severely weakened the economy of the new nation. Despite East Germany being the wealthiest member of the Eastern Bloc, the economic disparity between it and its western counterpart became increasingly difficult to ignore as the cold war progressed (Laar, 2010). The GDR’s economic woes were compounded by significant brain drain in the form of defections to the west. During its 41-year existence, 3.8 Million East Germans fled to the west, decreasing the East German population from approximately 19 Million to a little over 16 Million by the time reunification occurred (Laar, 2010). This prompted East Germany and USSR to tighten border controls and build the infamous Berlin Wall blocking off West German-controlled West Berlin from East German-controlled East Berlin, an area where the highest volume of defections to the west took place (Laar, 2010).

            West Germany was, comparatively, in a much better situation. As mentioned above, West Germany benefited from access to other industrialized western nations and their markets, the loan and economic development programs fostered by the United States, such as the Marshall Plan and access to the historically industrious regions of the Rhine river valley and southern Germany (Henderson, 2002; Eichengreen & Ritschl, 2009). Additionally, West Germany benefited from several other advantages over its eastern counterpart: it was the recipient of much of East Germany’s brain-drain in the form of East German refugees/defectors, it thrived under politically competent leadership in the form of Chancellor Konrad Adenauer, and Economics Minister Ludwig Erhard, and it enjoyed political independence following 1949 (Eichengreen & Ritschl, 2009; Laar, 2010; Henderson, 2002). The East was also ‘independent’ following 1949. However, the Soviets maintained considerable control over political decisions (Laar, 2010).

Under the leadership of Konrad Adenauer and Ludwig Erhard, West Germany was able to rebuild quickly and experienced record economic growth in what became known as the Wirtschaftswunder, or Economic Miracle (Henderson, 2002; Eichengreen & Ritschl, 2009). Several vital factors powered this decade of economic prosperity. The first was the establishment of a stable national currency, the Deutsche Mark, to replace the Reichsmark that existed under the Nazi Regime, and that continued to circulate in the immediate post-war period (Henderson, 2002; Eichengreen & Ritschl, 2009). Learning from the lessons of the 1920’s hyperinflation episode, Erhard and other German economists were keen on keeping the national currency stable and sought to prevent devaluations (Henderson, 2002).

The second was the rebuilding of capital stock. Germany, before the war, was already an industrialized nation (Eichengreen & Ritschl, 2009). As such, Western Germany already had all the components of an industrialized and developed economy: skilled labor (which was consistently increasing due to refugees and defectors from East Germany and the forced relocation of Germans from the former eastern territories of Germany), high technological development, and strong government institutions (legal systems, bureaucracy, etc.) (Eichengreen & Ritschl, 2009; Perkins, Radelet, Lindauer, & Block, 2013). All that was missing was the capital stock, which had been destroyed during the war. To that end, loans, such as those administered as part of the Marshall Plan and a high savings rate, helped offset the cost of reacquiring capital stock (Perkins, Radelet, Lindauer, & Block, 2013). Although the total amount of loans given to West Germany was less than other participants of the Marshall Plan, such as the UK, Germany was aided through many relief efforts by the allies; such as the GARIOA program (Government Relief in Occupied Areas) which was administered by the Americans (Stern, 2006). It is important to note here that, although the Marshall Plan and GARIOA were aid programs, they were not gifts. Rather, these were loans that had to be repaid (Stern, 2006).

The third factor was the creation and support of a social-market economy, also referred to as Rhine Capitalism, Modell Deutschland (German Model), or coordinated/organized market economy (Allen, 2004). This economic system emerged from the Freiburg Economic School and was championed by Erhard, Adenauer, and later by Chancellors Willy Brandt and Helmut Schmidt (Allen, 2004). On a fundamental level, the system sought to reintroduce fundamental market incentives to the West German economy, which had been absent under the Weimar and later Nazi eras (Allen, 2004; Henderson, 2002). These incentives included the combating of inflation (aided by the establishment of the Deutsche Mark), removal of price controls, and a reduction of the high taxes implemented under the Nazi regime (Henderson, 2002; Allen, 2004). The system combined these market practices with a robust social safety net designed to mitigate some of the adverse effects of market economies, such as inequality (Allen, 2004). On a more detailed level, however, the system differed from its Anglo-American laissez-faire counterpart in that the social-market economy was primarily about the fostering of relationships, not deals (Allen, 2004). Christopher Allen, of the University of Georgia, explains how the German system operated on consensus and cooperation between all actors of an economy:

“ First of all, it was a system and not just a collection of firms and/or discrete policies. It has been a pattern of running a capitalist democracy in which business, labor and the government work together to develop consensual policy solutions to national, regional, state-level and local issues. The Germans have spoken of their “social” (not “free”) market economy because there has been a deeply entrenched belief that business must share in the responsibility of providing a stable order, both for the economy and — indirectly — for society.” 

(Allen, 2004, p. 4)

Fundamental to this system of cooperation, Allen continues, is the perception of regulation and its roles (Allen, 2004). Here, the German system sees regulation as a referee or rules committee, setting the rules of the game and outlining the border of the playing field within which the economic actors can play (Allen, 2004). The German word for this concept, Rahmenbindungen, or framework regulation, further paints the idea of regulation forming a frame around the area of acceptable behaviors (Allen, 2004).

In contrast to the laissez-faire model, the government-market separation was not as clear and dichotomous (Allen, 2004). Instead, the German model sought to create a looser framework for the public and private sectors. The German model, subsequently, appeared externally rigid but internally, it behaved flexibly. An example of the integrated level of cooperation is the apprentice programs (Dualsystems) which produced a highly skilled workforce, and which was supported by local and national governments, as well as labor and business organizations (Allen, 2004). Additionally, the existence of workers councils, which held seats in supervisory boards and allowed workers to have early and easy access to the company’s performance and decisions, bargained management directly and influenced their decisions, as well as served to oppose potentially damaging issues (Allen, 2004). Here a sense of social responsibility to society at large was engrained in an institutional, corporate tradition (Allen, 2004). Allen states, “In typical German annual reports, for instance, employees and the public at large were referred to as the major stakeholders in the company. Stock owners of any kind were rarely referred to at all.” (Allen, 2004, p. 6). Labor organizations also served an important function (Allen, 2004). National, state and local level industry and sector labor organizations (Verbände) informed policymakers and industrial leaders of issues in their sector via their research branches, as well as negotiated with national and local governments (Allen, 2004). These organizations were instrumental in maintaining the cooperative nature of the German economy (Allen, 2004).

            The theme of “framing” and not “directing” through regulation allowed for the German financial sector to function universally, i.e., that they were not forced to serve “narrow realms” such as commercial loans and mortgages, but instead they could serve all functions (Allen, 2004, p. 9). This was made possible due to less speculative behavior in the German financial system and an increased emphasis (done in close cooperation with labor and industry organizations) on long-term investments (Allen, 2004).  The establishment of these institutions within a social market economy contributed considerably to West Germany’s post-war growth (Allen, 2004). The result was a consistent increase in living standards and GDP for a little over a decade and a half. While other nations such as the UK and France struggled economically in this time, West Germany prospered (Eichengreen & Ritschl, 2009).

Lastly, labor shortages (caused by loss of life) were offset by the adoption of the Gastarbeiter, or guest worker system (Oezcan, 2004). This system introduced laborers from mainly European nations, but also North African nations, on temporary work visas, bringing much-needed human resources into the West German economy (Oezcan, 2004). These Gastarbeiter were brought into West Germany through a series of bilateral agreements between West Germany and other nations, which allowed German firms to recruit within these nations (Oezcan, 2004). In chronological order: Italy, Spain, Greece, Turkey, Morocco, Portugal, Tunisia, and Yugoslavia all signed Gastarbeiter treaties with West Germany (Oezcan, 2004). In the current day, however, the specific programs of Gastarbeiter have been made obsolete by the Schengen zone, which allowed free movement of labor among the member states (European Union, 2019). Gastarbeiter communities have either returned home or have become permanent residents/citizens of Germany (Oezcan, 2004).

It would be impossible to speak about West Germany and its economic success without also mentioning the instrumental impact of the EU and its predecessors. What would later become the EU was at first an amalgamation of economic and political cooperation treaties starting from the 1950s (European Union, 2019). The foundations were laid in 1952 with the European Coal and Steel Community (ECSC), an economic endeavor to coordinate Marshall Plan funds and integrate two key industries: steel and coal (Stern, 2006; European Union, 2019). These industries were key for waging war, and it was thought that if such key national industries were bound together, it could reduce the chance of a war (European Union, 2019). The founders of the ECSC were France, West Germany, Italy, Belgium, Luxembourg, and the Netherlands (European Union, 2019). In 1957, with the Treaty of Rome, this idea was expanded with the establishment of the European Economic Community (EEC), a European customs union, as well the European Atomic Energy Community (or Euratom) (European Union, 2019). In 1967, the Merger Treaty established the European Communities, bringing all three institutions (Euratom, EEC, and the ECSC) together under the control of a merged commission (European Union, 2019). Throughout the 70s and 80s, more nations joined the European Communities including Spain and the UK (European Union, 2019). Then, in 1985, the Schengen Agreement was created, removing borders among the member nations (European Union, 2019). In 1992, the Maastricht Treaty established the European Union and set in place endeavors to expand into the former communist Eastern Bloc (European Union, 2019). A decade later, in 2002, the Eurozone was created, replacing the multiple national currencies (such as the Deutsche Mark) of those nations that wished to join (European Union, 2019). Since then, 13 more members joined the Union, mostly former Eastern Bloc states such as Croatia and the Czech Republic (European Union, 2019). The EU’s commitment to the free movement of goods, people and capital has allowed trade to flourish among the member states.

The EU and its predecessors (the European Communities) played a crucial role in Germany’s economic growth by providing several critical services, the first and most important being the removal of trade barriers (European Union, 2019). The customs union removed trade barriers within the Union, allowing German businesses to sell to a much broader market without any additional cost (European Union, 2019). The European Common Market’s consumers number over 503 Million consumers, 340 Million of which live within the Eurozone (Eurostat, 2019). That is significantly higher than Germany’s domestic market of only 82 million consumers. In effect, the common market acts as an extension of the German domestic market. The introduction of a common currency has also helped facilitate trade by removing another form of Non-Tariff Barriers: exchange rates, further cementing the conception of an expanded domestic market (European Union, 2019). Additionally, the EU’s free movement policy within the Schengen Area has allowed Germany to attract skilled foreign labor with relative ease, helping it stay innovative, as well as reduce the adverse effects of their aging population (Eurostat, 2019; Camdessus, 1997). All these services provided by EU membership has allowed Germany to increase its export of manufactured goods to their European neighbors.

Retrospectively, it is easy to see the path the two Germanies took. In the decades after partition, West Germany continued to grow and connected further with its western European neighbors. It grew economically and improved its living standards (Eichengreen & Ritschl, 2009). Of course, there were some slowdowns and adjustments (Allen, 2004). However, German social-market institutions proved incredibly robust and flexible at adjusting to new situations, despite the predictions of many (Allen, 2004). During this time, German policymakers had to resist the “Siren Song of Deregulation” of the 1980s and 1990s that influenced many of their western allies, such as the UK and the US, and which threatened to undermine the German Model (Allen, 2004, p. 19). Despite these challenges, West Germany continued to grow. East Germany, however, stagnated (Henderson, 2002). Much like the other nations of the Eastern Bloc, it was unable to produce the same kind of consistent economic growth as the west and it continued to be a nation strangled under the boot of Soviet influence.

In 1989 the situation in the eastern bloc was no longer sustainable. Under pressure of domestic protests and movements (such as the Solidarity movement in Poland), many members of the Warsaw pact rescinded their membership (Encyclopaedia Britannica, 2019). East Germany also experienced these domestic pressures (Encyclopaedia Britannica, 2019). In what is known as the peaceful revolution, protesters in the second half of 1989 were successful in their calls for reform (Encyclopaedia Britannica, 2019). New East German leadership attempted to placate the protesters by implementing, among other things, emigration and travel reform which removed many of the restrictions upon leaving East Germany (Encyclopaedia Britannica, 2019). An error made by an East German official during a televised announcement of the reforms leads to a misunderstanding among East Germans that the changes were effective immediately (Encyclopaedia Britannica, 2019). As a result, instead of the orderly lines at designated checkpoints that the East German government was expecting, tens of thousands of East Germans flooded to the checkpoints along the Berlin Wall, demanding to be let through while citing the official’s words (Encyclopaedia Britannica, 2019). The Border-guards, unaware of the announcement televised mistake, eventually acquiesced when higher authorities could not be contacted for confirmation (Encyclopaedia Britannica, 2019). This iconic moment of East Berliners joined by West Berliners under the shadow of the Brandenburg Gate symbolized the beginning of the end for both the Eastern Bloc as well as the Cold War (Encyclopaedia Britannica, 2019). A year later in 1990, the West German Chancellor, Helmut Kohl, would facilitate the reunion of the two Germanies (Encyclopaedia Britannica, 2019; Allen, 2004). A year after that merger, 1991, the USSR would dissolve into its component republics. The Cold War was over (Encyclopaedia Britannica, 2019).

Reunification itself proved to be a complicated issue for the Kohl government. Switching a country from a command economy to a market economy is no easy feat, and compromises had to be made between long-term benefits and short-term stability (Allen, 2004). To this end, the West German government took to work reeducating East German labor to work in an export economy and set about rebuilding and updating infrastructure through a series of solidarity taxes (taxes levied on west German citizens), government spending, and private investment (Allen, 2004). However, the Kohl Government underestimated the costs of the reintegration and the social-market institutional system which had served West Germany so well proved challenging to export to the east (Allen, 2004). The 90s in Germany was thus marked by rather high unemployment rates and overall low economic prospects (Allen, 2004; Trading Economics, 2019; WDI, 2019). The reintegration initially drained and slowed down the German economy as West Germany took on the unproductive elements of the East and sought to repair crumbling infrastructure and struggled to establish the institutions needed for the social-market economy (Allen, 2004).

The 2000s showed more promising prospects. Germany began looking towards the expanded economic opportunities associated with the European Common Market to increase its exports and reinvigorate its economy. Germany fully capitalized on its now reunited population (now numbering 80 million, the largest in the EU), its high savings rate compared to other industrialized nations, and its broad industrial base to expand and grow (Tilford, 2019). In the period leading up to the 2008 recession, Germany’s GDP almost doubled (1.9 Trillion in 2000 to 3.75 Trillion in 2008) and trade as a percentage of GDP rose from 60.3% to 80.9% (WDI, 2019). Although unemployment averaged 9.1% during this time, rising to over 11% before decreasing to 2000 levels of around 7% and 8%, economic growth was undoubtedly occurring (WDI, 2019; Engbom, Detragiache, & Raei, 2015). In 2003-2005, a series of labor reforms called the Hartz Reforms revitalized the German labor market’s flexibility and reduced unemployment (Engbom, Detragiache, & Raei, 2015). During this time, Germany solidified its position as the undisputed European economic powerhouse.

The 2008-2009 economic crisis was particularly strong among many European countries. However, by comparison, Germany was not as severely affected. Unemployment only blipped up briefly from 2008-2009, increasing a mere 0.2%, before returning to its downward trend (Trading Economics, 2019; WDI, 2019). Trade also suffered in the immediate aftermath of the crisis. Trade as a % of GDP decreased by 10%, and GDP decreased by 500 Billion USD (-6% shrinkage) (WDI, 2019). However, overall, Germany’s recovery was incredibly quick, with most metrics returning to their pre-crisis levels by 2011 (WDI, 2019; Federal Ministry for Economic Affairs and Energy (BMWi), 2019). In 2010, for example, the German economy grew by 4.2%, and GDP returned to 2008 levels by 2011 (Federal Ministry for Economic Affairs and Energy (BMWi), 2019; WDI, 2019).

However, what followed the 2008-2009 recession was more damaging for Germany. Not in the form of macroeconomic indicators, but instead in the form of stability and the viability of the EU, Germany’s largest market. As a result of the dire situation in many EU nations following the 2008-2009 recession, EU member states’ debts increased drastically (Alessi & McBride, 2015). Several nations, in particular, Portugal, Italy, Ireland, Greece, Spain and Cyprus, were unable to repay their government debt or bail out their bankrupt institutions (Alessi & McBride, 2015). The Eurozone’s structure as a monetary union, but not a fiscal union, severely hampered and restricted these nations’ recovery efforts (Alessi & McBride, 2015). For a while, there was a real fear that these nations might irreversibly damage the integrity of the Eurozone (BBC, 2015). There were even thoughts that Greece, the country most severely affected by the crisis, might leave the Eurozone (BBC, 2015). This placed a significant strain on Germany and the other more stable members of the Union, who tried to alleviate the situation by providing cheaper loans to these nations on the condition that they undergo structural reforms (Alessi & McBride, 2015). These structural reforms took the form of austerity measures to reduce government expenditures with the ultimate goal of reducing government debt/GDP ratio (Alessi & McBride, 2015). These measures, however, often had the effect of exacerbating the dire situations and delaying recovery (Alessi & McBride, 2015). As a result, the EU and Germany received much criticism for this policy of austerity, especially from the Greeks who the policy severely affected (BBC, 2015). Tensions rose between the indebted and struggling nations of the union and those more prosperous members, further destabilizing the EU and the Eurozone.

The Eurozone, as previously mentioned, is paramount to Germany’s export economy and a significant contributor to Germany’s success. 67% of all German trade is conducted within the European continent and EU members are consistently some of Germany’s largest trading partners (Federal Ministry for Economic Affairs and Energy (BMWi), 2019). Germany’s export-driven economy is greatly assisted by the reduction of trade barriers and the single currency of the EU. As such, it is within Germany’s interests to maintain the EU and the Eurozone at all costs. This explains their behavior with regards to the Euro crisis, whereby they expended significant political and economic resources in an attempt to prop up the weaker members of the Union. German efforts to stabilize the Union were undermined, however, as a new crisis that emerged just as the Euro crisis began to level out.

 The European migrant crisis was a sudden spike of migrants, immigrants, and asylum seekers arriving at EU nations starting in 2015 (Diez, 2019). Many of these migrants were from war-torn nations such as Iraq, Syria and Afghanistan (Diez, 2019). Many of the countries that were most severely affected by this crisis were those very nations who were hardest hit in the Euro crisis such as Greece and Italy (Diez, 2019). Due to an agreement among EU nations that was signed in the 1990s called the Dublin Agreement, the nation where an asylum seeker landed was obligated to handle their asylum application (Diez, 2019). However, the number of individuals arriving overwhelmed these nations they found it increasingly difficult to processes the asylum claims^. Many migrants, seeing the inability of these Mediterranean nations to handle their application, ignored the Dublin Agreement and continued onwards to EU nations with better economic prospects such as Germany and Sweden (Diez, 2019). This effectively rendered the Dublin Agreement ineffective (Diez, 2019). Germany’s response to this deteriorating situation was to accept a larger share of asylum seekers to help remove the stress this influx created on the already strained smaller EU members along the Balkan path used by the migrants. Germany and Sweden quickly became the largest hosts of asylum seekers (Diez, 2019).

The result of these two crises was the further destabilization of the Eurozone and EU, despite Germany’s efforts to patch the situation (Diez, 2019). The Euro crisis sparked many debates about the viability of the Eurozone project, sowing the seeds for the plethora of Eurosceptic parties that emerged during this period, including the Alternitiv für Deutschland (AfD) in Germany (Diez, 2019). On the other hand, the populist backlash against the migrant crisis, and Chancellor Angela Merkel’s perceived handling of it, sparked an increase in xenophobia and anti-immigration movements across Europe, Germany included. In both cases, German intervention sought to preserve the stability of the EU/Eurozone, and in both cases, Germany and the EU suffered consequences to those decisions.

Indications of Globalization in Germany:

            Nations can engage with globalization through a variety of means: Integration with the world market via removing trade barriers and capital flow restrictions, removing barriers to travel and immigration/emigration, and interaction with international and supranational organizations, to name a few (Keohane & Nye, 2000). These are often grouped into categories such as economic globalization, political globalization, technological globalization, and human globalization (Keohane & Nye, 2000). These categories help form an understanding of how a nation has globalized, not just whether it has or not. For Germany’s globalization experience, it is critical to look at economic globalization and human globalization.

Economic Globalization:

Figure 1.1: Germany’s Net Trade Balance in Current USD. (WDI, 2019)
Figure 1.2: Trade as a % of German GDP, compared to US, UK, and Chinese Trade as a % of GDP. (WDI, 2019)
Figure 1.3: German GDP in Current USD. (WDI, 2019)

Beginning with Economic Globalization, which measures involvement in global economic affairs, Germany has exhibited consistent and increasing integration with international markets (Keohane & Nye, 2000). This is partly owing to the adoption of interdependence, which West Germany adopted with the founding of the ECSE and ECC. Overall, by every economic metric, Germany has embraced economic globalization and has embraced an export-oriented economy (Weiß, Sachs, & Weinelt, 2018; Volkswirtschaftlicher Argumentendienst:, 2009).

Germany’s trade profile is incredibly diverse. It is the third most complex economy according to the Organization of Economic Complexity (OEC) and is second only to China in terms of total export volume (OEC Germany, 2017). Germany engages in approximately $1.3 Trillion worth of exports and $1.08 Trillion worth of imports (OEC Germany, 2017). Its primary exports are high-end manufacturing goods, transportation (cars, automotive parts, etc.), chemical and pharmaceutical products (OEC Germany, 2017). This is indicative of Germany’s developmental level. As a high income developed nation, it specializes in capital intensive products and utilizes its skilled labor pool to produce these products efficiently (Becker & Muendler, 2014). Its primary imports also consist of manufactured goods, transportation, and chemical products (OEC Germany, 2017). However, a more substantial portion of Germany’s imports consists of raw materials, foodstuffs and animal products, and textiles when compared to their exports (OEC Germany, 2017). In terms of trade per region, Europe is Germany’s primary market for both imports and exports. 66% of German exports go to Europe and 67% of its imports originate from Europe, with the second-largest regions being Asia and North America (OEC Germany, 2017; Federal Ministry for Economic Affairs and Energy (BMWi), 2019). Germany’s primary trading partners tend to be other wealthy and developed economies, especially other EU member states (OEC Germany, 2017). However, that percentage has been decreasing, as Germany’s share of trade with non-EU nations has increased in the last decade (Federal Ministry for Economic Affairs and Energy (BMWi), 2019).

Looking at Figure 1.1, a clear pattern emerges, with the rises and descents of the graph correlating with both EU and European milestones as well as world economic milestones. An apparent bump in the net trade balance can be seen in 1985 that lasts until the reunification of the two Germanies in 1990. This bump correlates with the establishment of the Schengen Area, which increased trade by removing many of the travel and trade restrictions between the signatory countries (European Union, 2019). The downward slump in 1990 correlates with the slowdown following reunification (Allen, 2004). After 2000, net exports increase after the adoption of the Euro, which removed exchange rates between the Eurozone members, a Non-Trarriff Barrier (NBT), to trade (European Union, 2019). The next noteworthy change in the graph is the noticeable drop following the 08-09 recession. An understandable drop, as many export partners suffered tremendously following the recession and could no longer afford to purchase as many German products. This is evident by the significant drop in foreign demand for German goods and services, as outlined by the Federal Statistical Office of Germany and the Bundesbank (Federal Ministry for Economic Affairs and Energy (BMWi), 2019). Domestic consumption also decreased as Germany’s Economy was affected by the German financial system’s ties to debt-ridden EU nations and the US (Marsh, 2011). The fact that Germany also was affected by the 08-09 recession further demonstrates the German Economy’s integration in the global market.

            Germany’s Economic Globalization is further reinforced upon looking at how important trade is to Germany’s GDP, visualized in Figure 1.2. In 2018, trade (both imports and exports) encompassed over 87% of German GDP (WDI, 2019). This enormous figure is especially impressive when considering that Germany’s counterparts in size and trade volume cannot match it in this regard. The UK is comparable to Germany in terms of size (landmass & population) and development (GDP/c) (WDI, 2019). However, the UK’s share of GDP to trade hovers just above 61% (WDI, 2019). China and the US, Germany’s two counterparts in terms of exports (China is the top global exporter with Germany tailing it in second place and the US in third), hover at 38% and 27% respectively (WDI, 2019; OEC Germany, 2017; OEC USA, 2017; OEC China, 2017). These nations match Germany’s total trade volume (CHN: $2.41 Trillion. GER: $1.33 Trillion. USA: $1.2 Trillion), however, rely more heavily upon their domestic markets (the US especially) for their GDP figures (OEC China, 2017; OEC USA, 2017; OEC Germany, 2017). In contrast, the entire German economy is targetted towards exports and more specifically: the export of manufactured goods, with 56% of manufacturing jobs being tied to globalization (OEC Germany, 2017; Volkswirtschaftlicher Argumentendienst:, 2009; Nardis, 2010; Federal Ministry for Economic Affairs and Energy (BMWi), 2019).  According to the German Bundesbank and the World Bank, Germany possesses a trade deficit in services, and their net trade in goods and services is lower than that of goods alone by approximately $20.7 Billion (Federal Ministry for Economic Affairs and Energy (BMWi), 2019; WDI, 2019). This is somewhat unusual for developed high-income nations as their export surplusses tend to be in services primarily and capital intensive manufacturing secondarily. Indeed, many of Germany’s neighbors’ competitive advantage seems to lie in services, as that is the only field where they possess a trade surplus with Germany (Germany Trade Statistics, 2019). Nations such as France, Italy, and Spain all have trade surplusses with Germany in services, which are offset by their deficit with Germany in terms of goods (Germany Trade Statistics, 2019; Federal Ministry for Economic Affairs and Energy (BMWi), 2019). From this observation, it is evident that Germany has invested in its competitive advantage of capital intense manufacturing primarily, and services secondarily.

            The changes in Net Trade (as visualized in Figure 1.1.) are mirrored by the fluctuations found in the GDP. Again, in Figure 1.3., the increase in GDP around 1985/1986 reflects the adoption of the Schengen zone. As for the reunification downturn, the slowdown was not reflected as quickly in Figure 1.3 as with Figure 1.1. Initially, GDP increased in 1990-1992. However, soon after in the mid to late 90s, the issues surrounding the reunification (such as high unemployment) caught up with Germany’s GDP figures (Allen, 2004). Figure 1.3 also reflects the increased economic activity following the 2001 Euro adoption. The correlation between Germany’s net trade figures and GDP, the increases and decreases that align with European and world events, suggests that Germany is integrated into the international economic sphere.

Figure 1.4: FDI in Germany, measured in current USD (WDI, 2019).

Additionally, Germany has attracted considerable quantities of Foreign Direct Investment (WDI, 2019). At its highest point in 2007, it reached over $89 Billion (WDI, 2019). Except for a short period of negative FDI in the early 2000s (presumably from the dotcom bubble), investment has remained positive. One possible reason behind this positive FDI is the fact that Germany has been a remarkably stable and consistently democratic nation for the entirety of the period that the data covers. As Nathan Jensen suggests in his analysis of Democracies and FDI, democracies can attract more FDI due to being more credible when making agreements, and are less likely to nationalize or otherwise expropriate the foreign firm’s investment (Jensen, 2003). The general tendency to adhere to the rule of law, as well as the lack of corruption, certainly helps in conducting business (Jensen, 2003).

Human/Labor Globalization:

            The other interesting and important type of Globalization that is relevant to Germany is that of the more Human kinds of Globalization: how accepting is a nation to foreigners, to free travel, to immigrants and to allowing emigration. In a sense, this is similar to Keohane & Nye’s description of social and cultural globalization (Keohane & Nye, 2000). However, for the purposes of this paper, the idea will be restricted to refer to the movement of humans across borders, specifically labor. A useful metric for this is immigration and emigration values. In this regard, Germany again is in a unique position. As previously mentioned, during the Wirtschaftswunder period, a system of temporary workers was introduced that brought workers from Italy, Greece, the Former Yugoslavia, Spain, Portugal and Turkey to work temporarily (usually a few years) in Germany (Oezcan, 2004). This system of migrant workers establishes historical precedence of turning to immigration, even temporarily, to solve labor shortages. Currently, Germany is the third most popular immigration destination, and over 12 Million inhabitants come from an immigrant background (Migration Policy Institute, 2015). Immigration itself has fluctuated quite drastically over the decades, with some decades seeing a net negative immigration rate (Migration Policy Institute, 2015). However, the most recent data point from the Migration Policy Institute shows that from 2010 until 2015, Germany accepted 1.25 Million Immigrants (Migration Policy Institute, 2015). As for emigration, there are currently 4 Million Germans living outside of Germany (Migration Policy Institute, 2015).

This open acceptance of immigration and willingness to allow emigration to other nations is partially a result of Germany’s EU membership. As previously mentioned, the EU seeks to facilitate the free movement of goods, capital, and people (European Union, 2019). As a result, any citizen of one EU nation can freely move to any other EU nation to work or reside and vice versa without having to go through many of the legal and bureaucratic hurdles commonly associated with immigration (European Union, 2019). However, EU membership is not the only driving factor behind this attitude towards migration. Germany is currently experiencing extremely low birthrates which have slowed population growth to a crawl (WDI, 2019). Averaged the last 50 years, Germany’s population growth is approximately 0.2% (WDI, 2019). This low population growth has led to an aging population (Camdessus, 1997). Accompanying this demographic change are fears of the increasing tax burden as well as decreased economic performance, all of which are caused by a shrinking working-age population. The German demographic concerns have factored into policy decisions that encourage immigration from both EU and non-EU nations (The Economist, 2019).

Figure 1.5: German Unemployment Rate (WDI, 2019; Trading Economics, 2019; Penn World Table version 9.1, 2019)

It is also important to note that Germany’s labor shortages have been especially noticeable among skilled workers (Brunello & Wruuck, 2019; World Politics Review, 2018). The increased economic activity of Germany following the Eurozone introduction and the renewed flexibility in the labor market following extensive reforms in 2003-2005 (the Hartz Reforms) have caused a consistent downward trend in unemployment (Engbom, Detragiache, & Raei, 2015; Camdessus, 1997). As of 2018, unemployment sits at 3.3% (WDI, 2019; Trading Economics, 2019). This has caused Germany to seek labor from within the EU, but also increasingly from outside it (The Economist, 2019). However, the increased labor market flexibility provided by the Hartz Reforms has come at the cost of a reduction in wages and social benefits for long-time workers and much of the reduction in unemployment can be attributed to short-term employment (Engbom, Detragiache, & Raei, 2015).

The Reasons Behind German Globalization:

            It is clear by looking at Germany’s indicators with regards to economic performance as well as immigration statistics that Germany has embraced those two forms of globalization, economic and human. According to the KOF Swiss Economic Institute’s Globalization Index, Germany scores 88.69, well above the global average (Gygli, Haelg, Potrafke , & Sturm, 2019). By all accounts, Germany is a globalized nation (Weiß, Sachs, & Weinelt, 2018; Gygli, Haelg, Potrafke , & Sturm, 2019). However, what are the reasons behind German policymakers’ decision to open up Germany to globalization? Here the German experiences preceding, during, and immediately following the second world war, as well as their historical involvement with the EU, play an essential role. Additionally, the economic strengths of Germany and its demographic changes have contributed to shaping that decision. 

            The German experience of the second world war, and the resolve to never allow such an experience to repeat itself, propelled post-war Germany to pursue several policies that paved the way later on for the acceptance of globalization. The most important of these was the building of strong democratic institutions. Germany today stands as a beacon of democracy in the old world. It frequently is seen at the top of several indexes such as the Economists’ Democracy Index and Transparency International’s Transparency Index, where it is considered a full-democracy and is ranked 11th least corrupt nation respectively (Transparency International, 2019; Burrows, 2019). This strong democratic tradition has led to a more open approach to globalization, especially when those standing to gain from it, such as the German industrial sector and the skilled workers employed in that sector, benefitted from the opening of markets (Becker & Muendler, 2014). The early adoption of ideas of interdependence paved the way for Germany’s involvement with the EU’s predecessors (European Union, 2019). The ECSE, ECC, and especially the EU have been a driving force behind the removal of all trade barriers from tariffs and quotas to customs and visas (European Union, 2019). This is the German economy’s single most important asset, and something German leadership has gone through significant pains to preserve in recent years. The future of the EU and Germany’s economic health are subsequently heavily intertwined.

            Additionally, the experience of inflation under Weimar and Nazi Germany propelled post-war Germany to maintain a stable national currency (Camdessus, 1997). This, coupled with the adoption of the flexible social-market economy, allowed German industry to compete with their neighbors and on the international stage reliably (Camdessus, 1997). The transportation, chemical, pharmaceutical, and machine industry sectors of Germany, have been Germany’s largest source of exports (OEC Germany, 2017). The high savings rate and subsequent reduced domestic consumption forced these and other German industries to seek external markets (Tilford, 2019). The flexibility of the labor market in Germany, when compared with their neighbors, allowed German companies to remain competitive and produce a vast quantity of goods (Engbom, Detragiache, & Raei, 2015). These well-paying export competing sectors were able to win over the import-competing sectors of the economy.

            Lastly, Germany’s history of immigration, both temporary and permanent, to offset labor shortage has encouraged Germany to remove barriers to immigration. Germany’s World War Two loss in human life pushed Germany to adopt the Gastarbeiter system to fill empty mines, rebuilt factories, and to help reconstruct and improve upon destroyed infrastructure (Oezcan, 2004). Today, the low unemployment rate of 3.1% and shrinking workforce, the result of low birthrates and exacerbated by an aging demographic, have pushed Germany to not only turn to immigration once again to solve its labor issues but to also seek out non-European labor sources (Brunello & Wruuck, 2019; The Economist, 2019). The acceptance of migrants, refugees, and over 1.25 Million immigrants have helped alleviate some of the strains caused by labor shortages (Migration Policy Institute, 2015; Thelen, 2018). Fixing, or at least mitigating the lack of labor, especially skilled labor, could potentially give the German economy a good boost and help off-set the adverse effects that a lowdown of globalization has on trade, and subsequently, Germany’s export margins (The Economist, 2019; Brunello & Wruuck, 2019). 

Backlashes and Resistance:

            Although globalization has undoubtedly benefited Germany by improving its economic prosperity as well as providing a solution to its demographic issues, there have been several noteworthy backlashes in recent years. These backlashes have come in the form of populist movements and a marked decline in election performance by Germany’s two largest traditional parties: the Christian Democrats (CDU/CSU) and the Social Democrats (SPD). The populist backlashes have primarily manifested in the form of Eurosceptic and anti-immigration movements. There is often significant overlap between these two kinds of movements, as they both arose during the same period: The Euro crisis and the Migration crisis. The anti-immigration movements, especially, have become increasingly worrisome in recent years.

            The most successful of these movements is that of the Alternative for Germany party (AfD), a nationalist, right-wing populist party with ties to other far-right organizations (Mudde, 2017; BBC, 2017). This party began shortly after the Eurozone crisis as a Eurosceptic movement and was based upon doubt that many Germans had about the Eurozone’s viability (BBC, 2017; Mudde, 2017). Additionally, it criticized the EU for a perceived lack of democracy and accountability in its institutions, a point that other Eurosceptics have also made; they instead argue for a return of sovereignty to national governments (BBC, 2017). This movement initially struggled to achieve electoral success, not passing the 5% threshold for participation in the Federal Parliament of Germany, the Bundestag (Der Spiegel, 2013). Their support in EU and state elections was stronger in this initial phase. In the 2014 EU elections, they secured seven seats (European Parliament, 2014). In EU elections, due to the lack of a qualifying threshold, smaller parties often find better electoral success than in National or State elections. Following the Migrant crisis, the AfD adopted a hardline anti-Islam and anti-immigration position (BBC, 2017). Since that policy change, their popularity has risen steadily in both national, regional and EU elections (BBC, 2017; Mudde, 2017; Der Bundeswahlleiter, 2017). They are now the third-largest party in the Bundestag and have seats in every state parliament (Mudde, 2017). The states in which they perform best are in the former East German states (sans Berlin): Brandenburg, Thuringia, Mecklenburg-Vorpommern, Saxony-Anhalt and especially Saxony (Mudde, 2017). Here, the AfD has frequently earned above 20% of the vote share and is the second-largest party in many of these states’ legislative bodies (Mudde, 2017).

            In addition to the AfD, other right-wing movements have been seeing moderate success in Eastern Germany. Right-wing populist movements such as Pegida (Patriotische Europäer gegen die Islamisierung des Abendlandes, or: Patriotic Europeans against the Islamization of the Occident), who emerged following the refugee crisis, have held large public marches in the Saxon city of Dresden, Leipzig, and Chemnitz (BBC, 2019). The movement Der Dritte Weg (The Third Way) has also held anti-immigration marches in Saxony as recently as May of 2019 (BBC, 2019). The state of Saxony is the most affected by this populist surge, with the state’s capital city of Dresden declaring a ‘Nazi emergency’ in November of 2019 (BBC, 2019). AfD membership has been openly connected to many of these organizations, such as Pegida (Connolly, 2018).  In addition to marches and election victories, there has been a recent increase in far-right violence across Germany (Bundesministerium des Innern, 2018; Koehler, 2018).  In June of 2019, a Hesse State Politician was assassinated by a far-right extremist, the first political assassination in Germany in decades (Der Spiegel, 2019). Then, in October, a far-right shooter attacked a synagogue in Halle, killing two individuals (Tagesschau, 2019). Violence perpetrated by the radical right rose significantly following the migrant crisis from an average of under 1000 attacks before the crisis to over 1600 in 2016 (Koehler, 2018). These movements, their electoral successes, their marches, and the attacks of some of their members have in the past few years, have threatened the renowned reputation of the political stability of Germany.

The rise of these movements, although sparked by the migrant crisis, may be correlated with the rise of inequality. The gains of globalization have not been distributed very evenly across income groups and geographical regions. The states of former West Germany have benefited more from globalization than those of former Eastern Germany, where unemployment and GDP/c are still lower and the GINI coefficient higher than that in the west, despite the approximately 30 years of reintegration (Bundeszentral für politische Bildung, 2013; Bundeszentral für politische Bildung, 2013; Sachverändigrat, 2014/2015). Additionally, Germany’s overall Gini Coefficient has been increasing, although slightly, since the 1990s (Sachverändigrat, 2014/2015; Grabka, Goebel, Schröder, & Schupp, 2016; WDI, 2019). Today it stands at around 31.7, whereas in 1988, it stood at 28.61 (WDI, 2019). This is still below the US’s Gini Coefficient, which stands at 41.5 (WDI, 2019). It seems the failures of reintegration have manifested in the form of extremism.

In addition to the extremism of the eastern states, voters seem to have responded to economic frustrations by turning away from Germany’s traditionally dominant parties. The vote share of the two major parties in Germany, the SPD and CDU/CSU have been declining in the past decade. The CDU/CSU have declined from 41.5% in 2013 to 32.9% in 2017, a significant drop (Der Bundeswahlleiter, 2017). The SPD’s story is even more dire, their average of 36.9% the three elections held in the 1990s to 23% in the last three elections. The 2017 election was their worst performance since 1949, where they received a mere 20.5% of the vote (Der Bundeswahlleiter, 2017). At the same time, smaller third parties have spiked in popularity. The AfD, as previously mentioned, has seen considerable electoral successes. In 2017 they rose to become the third-largest party at 12.6% of the vote (Der Bundeswahlleiter, 2017). The FDP saw similar success in 2017, rising to 10.7%, despite not passing the 5% Bundestag hurdle in 2013 (Der Bundeswahlleiter, 2017). Die Linke (The Left), and Bündnis90/Die Grünen (The Green Party) also earned respectable vote shares, 9.2% and 8.9% respectively (Der Bundeswahlleiter, 2017). The decline of the two traditional heavyweights of German politics and increased party fractionalization within the Bundestag is even increasingly evident in the 2019 EU elections, the most recent elections in Germany (Mudde, 2017; European Parliament, 2019). In the 2019 EU elections, minor parties soared at the expense of the CDU/CSU and SPD (European Parliament, 2019). The biggest winner from this election was undoubtedly the Green Party, who doubled their seats and picked up many of the former SPD strongholds in West Germany as well as CDU/CSU positions in Bavaria, Baden-Württemberg and Schleswig-Holstein (European Parliament, 2019).

Challenges Ahead/Conclusion:

Moving forward into the next decade, Germany faces several significant issues that could jeopardize, or at least undermine, its export-oriented economic model. The integrity of the EU has been weakened by a decade of crisis. The Eurozone still has many of the underlying issues that contributed to the Eurozone crisis and the migrant crisis has proven to be an incredibly divisive issue within the EU and has further exposed the EU’s struggle of maintaining internal cohesion. Additionally, the wakes of the Brexit ship could prove to water down economic progress on the continent, not to mention the example it sets for the various Eurosceptic movements across Europe.

Additionally, by some analyses, Germany’s export economy might be contributing to Europe’s economic woes by suppressing growth (Nardis, 2010). Domestically, the crises, as mentioned above, are bolstering the political backlashes against globalization. The rise of populist movements and the diminishing influence of the traditional German political parties threatens the stability of German democracy, rocking the EU ship at its very core. Additionally, although the benefits of globalization are considerable, their benefits have not been evenly distributed, especially among the former eastern German states. The extensive immigration has not reversed Germany’s aging and in fact, only halted the population decline experienced in the early 2000s, doing little to reverse it. Lastly, globalization has experienced somewhat of a slowdown (The Economist, 2019). US Trade wars have slowed the world economic engine and the ripple effects may hit Germany due to their extreme reliance on trade (Tilford, 2019; The Economist, 2019). Brexit has not helped in this regard either, as the potential of a no-deal exit leaves many fears of severe economic consequences on both sides of the channel (Tilford, 2019). In short, despite the impressive performance and the aura of an Economic Juggernaut that Germany has, its position is somewhat precarious (Tilford, 2019). Should German policymakers be unable to rectify the issues plaguing Germany, its performance and image may suffer.

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