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Government Subsidies

The Länder are not alone in subsidizing or supporting certain industries: the federal government does it to a massive and increasingly significant degree. Despite Germany's commitment to a social market economy, exceptions to market principles existed in West Germany and are proliferating in united Germany. German economic institutes and experts have repeatedly warned that authorities at various levels have supported many economic activities that should long ago have been discontinued or compelled to become competitive. Federal and Land authorities have ignored the complaints of the economists but have usually promised to reduce or eliminate subsidies as soon as feasible.

Before unification, the West German government and various Länder supported a number of industries and services, such as coal, steel, aerospace, shipbuilding, and agriculture, with the federal government supporting activities across the board and the Länder supporting locally important and influential industries. Between 1970 and 1989, the total volume of subsidies, including those paid through the European Community (EC--see Glossary), rose from DM12 billion to over DM45 billion. The level of subsidies rose almost uninterruptedly, even after Kohl assumed office and his government had committed itself to reducing them. Although some categories of subsidies--for example, those for agriculture--were not fully under West German but rather under EC control, even the portion specifically designated for German farmers also rose by 250 percent during the 1980s. Overall, the federal government provided about one-third of total West German subsidies. The other two-thirds came from the Länder and the localities. During the late 1980s and early 1990s, the total has generally averaged around 6 percent of West German GDP, although it has risen because of unification.

Despite the concern expressed about West German subsidies, a 1990 Organisation for Economic Co-operation and Development (OECD--see Glossary) survey of Germany concluded that German subsidies were not unusually high by the standards of the EC. The OECD described them as being around the average for OECD countries. Separate International Monetary Fund (IMF--see Glossary) and Ministry of Finance studies reached a similar conclusion, indicating that West Germany was actually somewhat below the average among EC members in the level of subsidies.

Although such conclusions might have offered some comfort as a matter of general policy, it remains true that some German industries--especially in the traditional coal and steel complex--are dependent on subsidies to such an extent that they would have to be closed if they no longer benefited from government support of one kind or another. But subsidies are also often paid even to some of the largest and most profitable German concerns, such as Daimler-Benz, Siemens, Bayer, and Volkswagen, for special production or research lines. Those companies have usually stated that the subsidies cover only a minute part of their expenditures.

After unification, the combined subsidies of western and eastern budgets rose even higher, and the new all-German government has found itself compelled to provide even more subsidies in order not to permit an excessive level of structural unemployment in the former East Germany. Official East German statistics suggested that the level of subsidies in the GDR budget was 30 percent, but in reality the level may have been much higher because of the generally low level of productivity in the GDR. Although no total figures for German subsidies have been available in the confusion and diversity of programs since unification, the government has already promised to keep a number of unprofitable East German ventures (such as the steel complex around Eisenhüttenstadt and the shipbuilding docks around Rostock) in production until they become competitive--which will not be for decades, if at all.

Government Expenditures and the National Debt

Beyond subsidies, German politicians, businessmen, and economists have consistently had difficulty calculating the most suitable role for the state in the German economy. Many economists believed that the role of the state had become too large in West Germany during the 1970s because of government ownership of large companies, because of subsidies, and because of the high social welfare programs established by the SPD-led governments. The right level after unification is even more difficult to define and to agree upon, because eastern Germany will need much more infrastructure construction and many more social programs than western Germany for many years to come.

As a share of national income, German government expenditures at all levels were 15 percent before World War I, 25 percent during the interwar period, 35 percent around 1960, 48 percent in 1975, and about 50 percent by 1980-81. The government's share of spending, although worrisome to the West Germans, still remained lower than that of several other European states, such as Sweden, the Netherlands, France, and Belgium. West Germany and Britain were the only major European states to reduce government spending as a share of GDP during the 1980s. But their government share still remained higher than that of two principal competitors, the United States, at about 37 percent, and Japan, at about 33 percent. The German share has risen well over 50 percent again during the early 1990s because of the costs of unification, and there is little if any prospect that it will decline again until the end of the decade.

Despite the declining deficits of the 1980s, the cumulative public-sector debt of various levels of German government has grown during virtually the entire existence of the Federal Republic. During the 1960s, the total debt doubled. During the 1970s, it doubled every five years. The growth rate in debt began to slow after the first years of the 1980s, but it began to rise rapidly during the 1990s as a result of unification. By the end of 1989, the West German government said that the total public-sector debt in Germany was DM1,020 billion, or 45 percent of what was then West German GDP. By the early 1990s, however, that figure had risen by several 100 billion deutsche marks and was estimated to be almost DM1.5 trillion, or 50 percent of united German GDP. It rose to over DM1.6 trillion by the end of 1993 and is expected to rise to over 60 percent of GDP by the mid-1990s and then to begin to decline slowly after that. Interest payments on the public debt have become the second largest single line item in the German budget, absorbing 14 percent of the budget.

Data as of August 1995

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