Roland Czada, Fernuniversität Hagen, Germany

Paper prepared for the twenty-third annual conference of the German Studies Association, October 7-10, 1999, Atlanta, Georgia. Session 83 "Sacred Cows and Gored Oxen: The German Economy in Flux" directed by Wade Jacoby.
 
 

In 1990 West Germanys Gross National Product amounted to 40.200 Deutschmarks per capita. The country was the richest in the European union at that time. One year later GDP in United Germany had dropped by 6.000 Marks to 34.990 Marks per capita. The country felt back to the 6^th rank in the European Union and to the 12^th rank among the OECD member countries. To be sure, this was only a statistical effect. To unite a poor country with a rich country means that the country as a whole becomes poorer on average. That is simply because the number of inhabitants grew much more than economic output. However, what does this mean for the social and political reality? At first sight it just means that there is a country with a rich part and a poor part. However, if the constitution of that country prescribes equally good living conditions among its constitutional states, as it is true for the German Basic Law, and if the national government is strongly inclined to close this social and economic gap, as it is true for all Governments and Parties in Germany, then the country has a serious political and economic problem. The political challenge then is to distribute wealth not only from one part to the other, but also to redistribute wealth between socio-economic groups.

Such redistributive policies included taxes, wages, social security contributions, welfare benefits, public infrastructure. Social security contributions of workers and employers made up a considerable part of financial transfers to the East at first. Unfortunately this way of helping the East Germans increased labour costs in general and thereby threatened the international competitiveness of the German Industry. Nearly all unification policies had one thing in common: Every solution to a problem caused new problems. Taxes had been raised more then twenty times since 1990 and the Government introduced a special solidary contribution to finance the economic recovery of East Germany. Fuel taxes have been and will further be raised in order to allow cutbacks of the previously blown up social security contributions.

The national and state governments, however, seized the lion’s share of unification costs by borrowing money at home and abroad. Public debts raised from 900 Billion Marks in 1990 to more than 2.000 Billion Marks in 1999. Germany is close the limits of public-spending set by the so called Maastricht-convergence criteria of the European Union; though its public debt per capita is still below the US-level. Tob be sure: the amount of public debt is not the main problem. The problem is that public debt doubled within a decade and that about half of this money was spent for consumtive expenditures, and not for investments. That means, if the government does not borrow money any more it has to cut social transfers or to raise taxes. The German government is going to do both. And that’s why recent elections showed losses of the Social Democrats and also losses for the Green Party who had won an overwhelming majority less than a year ago. The volatility of voting is just one sign for a general developmental trend, which I want to analyse now. This trend transforms the Federal Republic from a highly predictive governmental system and throroughly organized corporatist political economy into a system characterized by uncertainty and institutional change.

Traditional features of the German Political Economy

The governance of the German economy has long been described as "organized capitalism" (Winkler 1974) or "corporatism" (Berghahn 1988). Corporatist arrangements date back to the last century, when many sectors of the economy were cartelized, or even forced into syndicates by governmental order (Liefmann 1922). Cartelized capitalism was seen as an alternative to big trusts as experienced in the US at that time. During the interwar period German economists had long disputes about whether cartels or vertically integrated trusts were the right answer to uncontrollable business cycles and economic crises (Brüggemann 1976).

After WW II the Social Market Economy evolved as a system which was market-driven in principle but nevertheless embedded into an institutional framework of economic and social regulations mainly located on the sectoral or meso-corporatist level. These included codetermination on the supervisory boards of steel companies and codetermination through the re-establishment of workers councils on the plant level of all branches starting in 1952. And, for the first time, post-war Germany got an anti-trust policy. During the fifties and sixties, however, elements of organized capitalism survived in the network relations of financial and industrial capital holders - big banks and big firms had been closely interwoven. Banks held considerable shares of industrial assets and influenced industrial policies through interlocking directorates. The universal bank service allowed not only to hold shares of firms but also to lend money to the same firms. On this institutional background, the big banks could act as the "Prefects of German Capitalism" (Shonfield). As the postwar economy grew, industrial self- financing improved and, consequently, the importance of the banks as creditors of industry decreased. Simultaneously, the proportions of interlocking directorates of bank managers were legally restricted. An expanded representation of labor on the big firms' supervisory boards, provided for by the codetermination law of 1976, caused an additional loss of influence on the banks' side. After all, the structures and practice of industrial governance have been in constant flux. German corporatism and sectorally organized capitalism should not be equated with a static arrangement of political and industrial forces. To be sure, there have always been high degrees of path dependency but less institutional rigidity than one might assume at first sight.

A challenge to the "German Model".

During the seventies and early eigthies political scientists spoke of the "German model" (Scharpf 1987). It was characterized by collective bargaining autonomy and cooperative interest-group politics, industrial codetermination, monetary stability, free trade, competitiveness, and generous welfare-state provisions.

The "German Model" of the seventies was a variety of capitalism based some macro-economic concertation, sectoral self-regulation and industrial adjustment policies at the branche level, close bank-industry relations and cooperative works councils at the firm-level of the economy (Czada 1998). Additionally West Germany experienced an enduring anti-inflationary policy of its autonomous Bundesbank and industrial peace made possible by highly autonomous well-ordered institutions of collective bargaining. All this let to macro-economic economic stability, industrial modernization and a boost in industrial productivity which – in turn – allowed the allready well furnished German welfare state to further develop. We have to remind here, that during the seventies and early eigthies most western industrial economies suffered from strikes, militant labour unions, inflation an a productivity slow-down. In view of that, the economic success of the "German Model" rested not only on its own merits but also on the decline of other national economies. In those times the OECD recommended its memeber countries to imitate West-germanys institutions of social-partnertship and its macro-economic policy-mix.

The German Model came under minor stress during the eigthies when other countries, namely the United states and Britain, switched to monetarism and economic deregulation. Austerity measures and monetarist policies pressed labor unions to dispense with high wage demands, because - in the face of a tight money-supply – this caused economic recession and massive job losses. All over the World neo-conservative politicians learned how to discipline labour unions without having to let them participate in political and economic decision-making.

When the conservative-liberal coalition led by Helmut Kohl came to power in 1982, it largely imitated the neo-conservative agenda of Margaret Thatcher and Ronald Reagan. But the U-turn ("Wende") proclaimed by the new majority was a long time in coming. This was not least due to the institutional constraints of political reform in the German "semi-sovereign state", to refer to Peter Katzenstein’s interpretation .

Some minor deregulation of the labour market took place, the monopoly of the public service radio was abandoned, and some steps toward privatization and deregulation of the public telecommunications monopoly were taken. But these efforts remained fairly limited because, at that time the welfare state was not yet widely seen as being in a serious crisis. It was not before the end of the decade that public opinion began to take the globalisation issue serious, and traditional elements of the political-economic framework were successfully challenged. Additionally it became evident that industrial peace and low inflation rates would not continoue to be a monopolistic feature of the German Model. Nevertheless the German unions still spiritualized a logic of neo-corporatist exchange (Lehmbruch 1978), which let them hope to be rewarded for wage moderation and cooperative sectoral modernization policies.

And indeed, in 1989 the Council of Economic Advisors (Sachverständigenrat zur Begutachtung der wirtschaftlichen Lage) encouraged the unions to shift from qualitative to quantitative labor policies. Now the government waited for raising wages after the wage share had dropped to a historical low and company profits exploded during the eighties. Additionally the government announced considerable tax-cuts and reductions of social security contributions. A consolidated state-budget and surpluses of the social security schemes allowed for such a demand-led strategy of economic growth.

In autumn 1989, shortly after the council of Economic advisors confirmed governement plans to initiate an economic boom by cranking the consumtion level, the situation changed in a most dramatic manner. East Germany opened the Berlin wall. In 1990 German Unification policies, the modernization of East German industries demanded for investments and a renewed period of consumption abstinence. Tax cuts and reductions of social security contributions had to be abandoned in order to finance unification policies. Moreover: New low wage countries with considerable industrial prospects grew up in Eastern Europe. The predicament of the German Model began to show, slowly and insidous.

By becoming part of the highly industrialized Western European country, East Germany became a high-wage region with low industrial productivity. The monetary union exposed its industries to the global market. As a result, both politicians and managers found out how weak the productive base was compared to Western European standards. The GDR's national accounts and industrial statistics turned out to have been manipulated in order to misrepresent the country as a leading industrial economy. In fact, many, though not all, East German enterprises turned out to be worthless. The whole region was in danger of becoming an industrial wasteland - unable to compete with the low-wage countries neighboring it to the East or with its high-tech neighbors in the West. In order to maintain competitive jobs and homogenize standards of living in united Germany, the former socialist economy had to be completely modernized. In the face of this daunting task, which was initially considered a national duty, very few investors proved willing to buy firms in the five new German states despite the low prices the THA was asking for the firms. German federal and state governments had to support the THA's privatization policy by providing loans, guarantees, subsidies, social overhead capital, and other incentives in an effort to win over private investors. Altogether, more than 700 developmental programs were put into place to support the economic development of East Germany.

The complex task of unification management was based on a program of institutional transfer, which aimed at a rapid and comprehensive transformation of the former socialist East German economy into a capitalist economy; not in just any capitalist economy, however, but into the familiar patterns of the West German model. This included the transfer of political and administrative institutions, the law system, and all kinds of customary patterns of problem-solving; in short: the entire business culture of West Germany. As far as economic transformation is concerned, the Treuhandhandanstalt (the agency established as institutional trustee; hereafter referred to as the "THA" or the "Trust Agency") was at the center of this process. In March 1990, it took over the entire national economy of East Germany. This quasi-nongovernmental organization was set up by government order of the next to last Council of Ministers of the German Democratic Republic (GDR). Six months later, on October 3rd 1990, the GDR dissolved into the West German Federal Republic and, simultaneuosuly, the THA became a Federal Agency.

The last triumph of German corporatism?

On 20 February 1990 the West-German chancellor Kohl met about fifty leading representatives from business and labour for an exchange of views about the economic problems of unification. Some weeks later, on 9 March 1990 the (West-) "German Confederation of Labour Unions" (DGB) and the " Federal Union of Employer Associations" issued a "common declaration for a homogeneous economic and social order in both German states", pleading for a transfer of the West German labour relations system to East Germany. There was a broad consensus that within a united Germany its Eastern part should not become a low wage territory, as the European Comission suggested at first. As early as in February 1990, the European Commission came to the conclusion that the East German productivity gap could be offset by keeping labour costs lower than in West Germany. Otherwise the five new eastern federal states - Saxony, Saxony-Anhalt, Thuringia, Brandenburg and Mecklenburg-West Pommerania – were seen in danger of becoming industrial wastelands.

West German politicians, employers and labour unions preferred to adjust eastern wages to western standards. The strategy adopted was strongly indebted to former West German practices of a corporatist modernisation cartel. From the very beginning, unification policies aimed at a rapid and comprehensive transformation of the former socialist East German economy into a "replica" of the West German model. This included the transfer of political and administrative institutions, the law system, and all kinds of customary patterns of problem-solving; in short: the entire political system and business culture of West Germany to the new eastern states.

The consensus for a fast modernization track let to a series of agreements in early 1991 on an accelerated alignment of East German wage levels with Western standards, in particular to prevent a westward migration of the qualified labour force. On the other hand, in concert with the federal government, with the federal labour market authority, and the privatisation agency (Treuhandanstalt), the inevitable consequence of massive layoffs should be met by an active labour market policy, in particular by a strong effort of retraining and upgrading of qualifications.

When in summer 1992 the fiscal crisis of the unification process became evident, the national government propagated a "solidarity pact" (Solidarpakt) including the states as well as the peak associations. The solidarity pact have been interpreted as proof of the viability of the "German model" and as contradicting fromer predictions of a transformation of the "old Federal Republic" as a consequence of unification . However, the fate of the Solidarpakt does not support such optimistic appraisals: The unions rejected demands of the government to revise the agreements about an accelerated adjustment of East German wages to West German levels, and negotiations with the banking associations about a "solidary contribution" of the banks had only very modest results. Far from corroborating the vitality of the German model, the unification process developed into a catalyser of its crisis. Problems of of the Treuhandanstalt’s privatization policy further indicates such findings.

Outcomes of unification: "Model Germany" in crisis

The THA's actual task was not only to privatize, modernize, and close down, as stipulated in Paragraph 8 of the Treuhand-Bill of July 17th, 1990, but to introduce the whole economic frameword of rules of the so-called social market economy which has devolped in West Germany during the post war period.

Most of the directors of the THA's divisions were recruited from the West. According to the so-called "head-theory" of the THA's president Rohwedder, who was assasinated in April 1991, recruitment was a completely informal top-down process. The president together with a few colleagues chose the division-directors, who, in turn, chose the heads of departments and so forth. In this way the organization grew from zero to 3000 employees and additional 3000 advisors within one year [Folie: Beschäftigungsentwicklung].

Many division-directors of the Treuhandanstalt were chosen during regional meetings of businessmen - at round tables in hotels, clubs, associations, chambers of commerce. Rohwedder often met aspirants in airport lounges. The most important qualification he expected from the condidates was a practical knowledge of economic sectors, of the market and of the relevant big firms and key people. In short, directors should have a sense for the actual task as well as a perfect feeling for the game. Indeed, the THA looked for a certain habitus as defined by Bourdieu (1988, 786) as a "system of durable and transposable dispositions (schemes of perception, appreciation and action) produced by particular social environments, which functions as the principle of the generation and structuring of practices and representations".

These recruitment criteria did not only apply to the Treuhandanstalt itself but also to the supervisory boards of the Treuhand-firms. The white-collar workers were recruited according to the "head-theory" by one prospective chairman chosen by the central office. The blue-collar workers were recruited by unions and work-councils according to similar rules. The unions were just as anxious as the Treuhandanstalt not to allow substantial modifications of the West German industrial relations system.

Rhowedder, however, gave the order not to charge bankers with appointing the supervisory boards, and to prevent bankers from becoming chairmen of such boards. This had several reasons. Among them was the fear that the big banks could act as a second "Treuhandanstalt" due to their interlockings, and, thus, dictate the policy of economic transition. In particular, Rohwedder himself did not trust the industrial competence of German bankers, and his closest collaborators felt affirmed in this respect after several firms got into trouble, where, inspite of this policy, bankers had conquered the chairs of supervisory boards - as for instance in the case of Tridelta. Additionally, the THA had bad experiences with the big banks when it attempted to refinance itself on the German financial market after the Monetary union of Juli 1st 1990 and before the unification day of 3rd October 1990. Eventually the THA refinanced itself autonomously on global markets with the aid of the Deutschen Bundesbank. A further reservation against banks might have resulted from a then actual conflict between several steel firms, particularly Thyssen and Hoesch, the firm which was headed by Rohwedder, and the Deutsche Bank over a rescue package for Kloeckner, a major competitor of Thyssen steel.

The traditional German style of close cooperative links between the industrial and financial sectors of the economy has come under pressure since since long. Nevertheless: the holding of industrial shares by banks and the practice of close relations between firms and their "Hausbank" still exist. The Treuhandanstalt was keen to win banks as creditors of their firms to be privatized. But the banks refused to do this, saying that backing Treuhand-firms was too risky for them. Here we can see the conflict between incentives to act rationally according to a particular situation on the one hand and a principle of conventionality on the other. Conventionality in bank-industry relations had been questioned for decades and became further eroded during the economic reconstruction of the east German states.

The conflict between rational and conventional action characterized unification policies as a whole. Very often, situational factors and normative patterns interacted in such a way, that new solutions evolved. This is particularly true for the governance of the agrarian sector and for labour market policies. In farming, the eastern pattern of huge cooperatives will survive due to competitive advantages in productivity. The western ideal of family farms could not be transferred to east Germany. In the field of employment policies, completely new solutions resulted from the breakdown of the eastern labor market. In particular a "second" labor market originated from Mega-Employment-Companies with up to 20.000 employees each. The new paragraph 249h of the Federal Employment Act allows labour offices to co-finance jobs instead of paying compensatory unemployment funds. One can expect that the new regulations will spread to the western parts of Germany soon.

Since 1993, employment measures have been co-financed by the federal labour agency, the Treuhandanstalt, and east German states and cities. In several cases special employment companies have been established which are being administered by unions and the Treuhandanstalt together (e.g. Qualifizierungswerk Chemie, Sanierungswerk Braunkohle). Since the Federal Employment Act required lower than normal wages in those companies, the Treuhandanstalt - with the consent of the chemical and coal workers' unions - founded a special employers association to negotiate wage-contracts for these companies.

Altogether, the Treuhandanstalt and labor unions have had close relations in all fields of transformation policies. Four union representatives have been seated on the board of the THA by governmental decision. In more than ten bilateral agreements, the THA and unions both agreed on the furnishing of social plans. In one agreement on collective bargaining, the THA expresses its intention to prevent firm-level bargaining and press for industry-wide contracts. The background of this agreement was numerous firm-based contracts in which local managers conceded fantastic severance pay, golden handshake compensations up to 150,000 Marks, or life-long firm pensions. The local managers and local works councils really expected the Treuhandanstalt to pay these sums from the tax-payers money. Therefore, the Treuhandanstalt was rather grateful for the unions' willing to fight such tendencies, which could have resulted in a completly decentralized industrial relations system in Germany. In other instances, the Treuhandanstalt obliged foreign investors to join employers associations. In this way it could secure the established system of industry- wide bargaining. Indeed, several big investors - such as for instance Kwaerner shipyards of Norway - tried to introduce autonomous plant-level wage contracts, but could be stopped by the metal workers union together with the Treuhandanstalt. Nevertheless, in many smaller firms, works councils agreed to special wage and work regulations in order to prevent dismissals. Thus, the evolution of a decentralized industrial relations system cannot be ruled out in the long run.

New solutions in the face of new problems

In many fields conventional solutions which have been transferred to the east together with the west German rule system have proven to be inappropriate. Indeed, German unification policies adhered to old concepts and principles in view of new challenges. This may be interpreted as a rational choice in the face of uncertainty. One of the main features of unification was that most often things developed differently than originally been expected. In a turbulent environment, we encounter a variety of minor reactions on the operative level of unification policies - mostly with in the context of issue networks inititated by federal and state governments and the Treuhandanstalt.

In certain problem areas, such as for instance farming, labour policy and energy policy the established rules became controversial. Consequently those rules have been increasingly violated during the third phase of unification policies. Coping strategies, which took place on the operative level of policy-making and implementation, contradicted each other in some aeras. For instance, the decentralized approach of municipal energy policies came into conflict with the "electricity contracts" of 1990. These contracts had been negotiated between the big cartelized electricity companies, the last East German government, the Treuhandanstalt, and the West German government. Their aim was to transfer the cartelized West German system into East Germany. At the same time, in summer 1990, the parliament of East Germany passed a law on municipal assets (Kommunalvermögensgesetz). According to this law, local and regional facilities for generating and distributing electricity should have been turned over to cities and towns. The big energy companies, however, have claimed the same facilities with reference to the electricity contracts. The contradicting claims have been contested before the supreme court. Due to the confused legal situation, the supreme court judges tried to reach a negotiated solution. Now we have a mixed system, with many cities trying to operate their own electricity generating facilities and others will getting shares of the big companies in compensation for giving up their claims to operate their own utility companies. This pattern resembles that in North Rhine-Westphalia, except that municipal shares in the electricity sector will be real asset shares up to 49 percent in the east and not only special voting rights on general company meetings. One can also observe the building of consortia between energy companies and cities, which have been contested according to European anti-trust regulations by the European Commission. Actually such legal constructs have been introduced to arm the national electricity sector in the face of an already planned liberalization of European energy markets. The whole issue has shown a strong demand for new regulations which were expected to be introduced during the near future (see Burkhard Eberleins paper).

Similarly, many so-called "repair laws" have been passed to clarify intricate problems of economic transition. The most important ones regulated the allocation of property rights, legalized new forms of employment policies, or accelerated administrative procedures. The property rights question referred to the claims of public authorites like states and towns in relation to private investors, and to conflicting claims of former owners of industrial assets unable or unwilling to invest and present investors with superior concepts. The new property-allocation law (Vermögenszuordnungsgesetz) allowed the Treuhandanstalt to give priority to active investors. Former, pre-socialist property owners have been indemnified in such cases.

In conclusion, we can see an adaptive cycle starting with the explicit program "Facilitating unification by transferring the west German system to the new eastern states". In many instances this program failed due to the special challenges in the east. At first, in many cases, situational problems could be solved by utilizing the existing adaptive capacities of the west German system. Later, in some areas, the established rules came into question and were broken by local actors. Eventually, this caused contradictions and political conflicts which had to be "repaired" by new revised programms. In this way, the postwar German republic will eventually develop into a third republic. In many instances, this political and economic system will look like the second republic. In some sectors, however, new structures of governance will probably be established.

Causes and occasions of change

Besides the burdens of unification the German political economy had to cope with increased pressures from its international environment. During the seventies the fame of the "German Model" was based on its superior capacities to cope with suddenly confined distributional margins caused by the oil-shocks of that decade. During the eigthies rapid modernization policies, cuts in public expenditures and a new high of exports gave evidence of remarkable capabilites in this respect. Moreover, the advance of deregulation and privatisation in what traditionally were vital public services contradicts a view of German society and politics which has become popular in recent years. That view is dominated by stereotypes of widespread institutional rigidity due to either to the veto power of organised special interests or to mechanisms of institutional gridlock. Ongoing and sometimes rapid sectoral adustments indicates that the capacity of the German system for adapting to the challenges of globalisation is much larger than pessimistic scenarios would make us believe.

One cannot explain the current crises in Germany with problems stemming from globalization. Throughout the 90ties the West German political economy has been remarkably fit for the challences of globalization. Manufacturing productivity and exports are still above the OECD-average. Today the deregulation of the telecommunications sector is further advanced in Germany than in most other European countries, the deregulation of the electric utilities is well under way (see Burkhards paper for this topic). And these changes have by no means been put into question by the electoral success, in 1998, of the "red-green" coalition under chancellor Gerhard Schröder.

This however, does not mean that unification policies, its errors and failiures, have been the roots of all evil. Of cause the welfare-state has been oversized during more than a decade. There are urgent needs to reform the industrial relations-system as well as the educational system. The institutions of fiscal federalism are in a miserable condition. And – sooner or later - all this would have happened without unification as well. The contribution of unification to the crisis of the German Model was a rather specific one. Unification policies did not merely cause some of the problems but reduced the ability to solve any of them. If we assume that only a fraction of 1.000 Billion Marks spend for unification policies, could be used to cut taxes and increase wages as well as family allowances a new corporatist deal would not have a long time in coming. Of course successful economic resconstruction policies in East Germany could have had similar effects. Unfortunately East Germany is still in danger to become a region with excessive unemployment rates for a long time. Quite a few industrial cathedrals in the desert – icons of the German Model – don’t serve as a remedy.
 
 

Table 1: Unemployment by region (1998)
 

Saxony-Anhalt	25.0
Mecklenburg-Western Pomerania	23.9
Thuringia	23.1
Brandenburg	22.3
Saxony	21.8
Berlin	18.9
Bremen	17.5
Lower Saxony	14.1
Saarland	13.8
Hamburg	13.7
Schleswig-Holstein	12.7
North Rhine-Westphalia	11.6
Hesse	11.1
Rhineland Palatinate	11.0
Bavaria	10.0
Baden-Wurttenberg	8.8

Source: Ministry of Economics
 
 

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