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Social Market Economy

Germany's economic growth during the first decades after the war at times overshadowed its marked success at joining the international community. In 1945 the country's economy was shattered. A good part of what survived was later dismantled and carried off by the victorious Allies. Within Germany there was much argument about how to rebuild the economy and what its nature should be. Socialist politicians argued for a central distribution system, extensive state controls, and the nationalization of banks and industry. Their main opponent was Ludwig Erhard, a liberal economist appointed to head the office of economic affairs in the Bizone, who later became minister for economics and ultimately FRG chancellor (1963-66), succeeding Adenauer.

Erhard's concept of a socially responsive market economy based on free trade and private enterprise, aided by the infusion of capital through the Marshall Plan, proved to be the ideal basis for the strong recovery of the West German economy, culminating in the economic miracle (Wirtschaftswunder ) of the 1950s (see The Social Market Economy, ch. 5). In some areas, for instance in housing and in agriculture, prevailing circumstances required the introduction of price controls and subsidies. Controls to prevent the formation of cartels and to foster monetary stability also remained the state's responsibility. The state likewise furthered the accumulation of private capital and protected ordinary citizens by establishing a generous system of social services that included statutory health, unemployment, and pension insurance programs.

West Germany's economy functioned very well for several decades, and the country became one of the world's wealthiest (see The Economic Miracle and Beyond, ch. 5). Thanks to the strong social welfare component and the system of codetermination, which gave workers in factories some say about their management, West German industry enjoyed a long period of labor peace. The export-oriented economy received another boost with the creation of the European Economic Community (EEC--see Glossary) by the Treaty of Rome in March 1957. West Germany was one of the EEC's founding members.

Ludwig Erhard and the Grand Coalition

Konrad Adenauer assumed the chancellorship of the newly founded FRG in 1949, at the age of seventy-three. From the beginning, his primary foreign policy goals had been the achievement of German reunification through a policy of strength, the building of strong relations with the United States, and reconciliation with France.

Until the elections of 1961, Adenauer had enjoyed the support of a healthy CDU/CSU majority in the Bundestag. Various domestic issues and very likely also the Berlin crisis, however, reduced the CDU/CSU's strength in the Bundestag and forced the formation of a coalition government with the FDP. The work of this government was impeded by differences of opinion from the outset. Following the resignation of FDP cabinet members in protest over a controversy surrounding the arrest of Rudolf Augstein, editor of the newsmagazine Der Spiegel , for allegedly having reported classified material concerning NATO exercises, the working climate of the coalition deteriorated. Forced to accept the resignation of his powerful minister of defense, Franz Josef Strauss, who had had Augstein arrested, and facing an erosion of support within the CDU, Adenauer resigned on October 15, 1963.

Ludwig Erhard succeeded Adenauer as chancellor. Under Erhard's leadership, the CDU/CSU-FDP coalition remained in power until 1966. Erhard's more liberal economic policy toward the East European states that maintained diplomatic relations with East Germany made maintaining the Hallstein Doctrine difficult. In addition, his position of favoring close coordination of German foreign policy with the United States was resisted by the "Gaullists," even those in his own party, who favored a continuation of Adenauer's close relations with France.

The CDU/CSU did well in the elections of 1965, but relations with the FDP had deteriorated. A recession and a budget crisis caused the FDP to drop out of the coalition. Erhard ruled with a minority government for a short time, but after the opposition's significant gains in several Land elections, his party formed a new coalition government with the SPD. Erhard resigned as chancellor in November 1966, less successful in that position than he had been as the "father of the economic miracle."

When the CDU/CSU entered into a coalition with the SPD in December 1966, West Germany was experiencing unprecedented economic troubles. High unemployment, a relatively high budget deficit, and an unexpected rise in support for right-wing groups, such as the National Democratic Party of Germany (Nationaldemokratische Partei Deutschlands--NPD), brought West Germany's largest parties together to form what was called the Grand Coalition. Kurt Georg Kiesinger (CDU), who had served as minister president of Baden-Württemberg, was appointed chancellor; Willy Brandt (SPD), the governing mayor of Berlin, became vice chancellor and minister of foreign affairs; and Karl Schiller (SPD) was appointed minister for economics. Considered by many as "unnatural" because the coalition partners came from opposite ends of the political spectrum, the coalition was seen as a temporary solution needed to gain the cooperation of the trade unions and stabilize the economy.

Data as of August 1995

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