Germany’s social market economy – a successful model based on principles and embedded adaptation mechanisms

IMG_5877 (Kopie) The story of Germany’s social market economy is a story of success, but also one of overcoming hurdles, adapting to challenges over time and – paradoxically- holding on to tradition while allowing everything to be overhauled and modernized. Professor Karl-Heinz Paqué, former State Minister of Finance of Saxony Anhalt, Dean of the Faculty of Economics and Management at the Otto von Guericke University and Michael Theurer MEP, Chair of the Committee on Budgetary Control, discussed the features of Germany’s social market economy and debated whether it could serve as a blueprint for Europe.

Karl-Heinz Paqué gave a short overview of the history of the German social market economy. In the aftermath of WWII, Germany set up a social market economy, based on the principle of competition, a social state and responsible social partners (employers’ associations and trade unions). This was a sharp contrast to the economic model that existed during the Weimar Republic, which contributed to Germany’s fall into a deep recession paired with hyperinflation and led Germany down its troublesome political path. For a large part of the second half of the 20th century, the structures set up in post-war Germany allowed it to emerge from total destruction to become the “Wunderkind of Europe”. Particularly two aspects have guaranteed Germany’s success. Those are its traditionally strong industrial base and the hidden champions – long term oriented, innovative family businesses and entrepreneurs.

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Michael Theurer MEP and Prof. Karl-Heinz Paqué debating

The tide turned, however, in the 1970s after the oil crisis and reached its climax in the 1990s when Germany’s economy seemed overburdened with the effects of globalization and the reunification, Paqué recalled. With emerging industries worldwide on the rise, Germany’s economy was seeing unprecedented competition, particularly in the sectors of production and technologies. Reunification was both a political, fiscal and social burden and left Germany weakened by staggering unemployment – five million people being without a job. The question now being asked was: can Germany still be saved?

But the system adjusted. The high unemployment rate left the work force no other choice but to accept employment under less favorable conditions than before. The power of the cartels of social partners in the collective bargaining process was broken. The subsequent liberalization of the labor market and more regionalized collective wage agreements drove down labor costs. While for the affected employees this experience was one of hardship, in the long run this “adjustment through the back door” allowed the German economy to overcome this crisis, Paqué said.

The admirable resilience of the German social economic model is constantly being achieved through flexibility and adaptability. While change has been gradual, noteworthy examples for its achievements include the overhaul of the unemployment system (“Hartz” Reforms), the introduction of a flexible work time system (Zeitarbeit), the liberalization of shop opening hours and the adjustment of the pension system (Renteneintritt mit 67).

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Prof. Karl-Heinz Paqué in a vivid discussion with former EU-DG Alexander Schaub

“Germany, however, cannot rest on its laurels,” Theurer cautioned. The German economy’s ability to adjust in the past is no guarantee that it will be able to do so in the future. “Its social market economic system is neither foolproof nor a blueprint for Europe, Paqué stressed. It took crises and hard lessons to be learned for Germany’s economy to adapt and to improve. “Applying the cookie-cutter system and imposing Germany’s model on other European countries,” Paqué noted “but those EU countries who overcame the crisis least shaken were those that stayed true to their traditional sectors, but innovated and integrated them into the world market.” Decentralization also plays a role: countries with decentralization both within their economy as well as on the state level have resisted the latest crisis better, since internal competition strengthens domestic sectors for international competition.

“What is needed is a common growth policy – a moderate convergence track,” Theurer added. The European Union will lose credibility if we can’t offer people a perspective for growth. We focus too much on the stabilization of the Euro instead of dealing with real economic problems, open society and social mobility.  “In 1957 Ludwig Erhard wrote ‘Wohlstand für alle – Prosperity for everyone’, which is still a liberal vision and if we don’t think we can achieve this for all of Europe, for Germany, Greece, Italy and Spain, than we can go home,” Theurer concluded his plea.

Susan Schneider