XII The Role of Fiscal and Structural Policies in German Unification Lessons from the Past Thomas Mayer The process of Gennan economic, monetary , and of economic policy was, therefore, to provide a secure social union (GEMSU) raises many questions about the and unobtrusive legal and financial framework within role for economic policy, both in influencing the overall which markets could operate efficiently. degree of resource use in the economy and in pursuing Ordnungspolitik, as this policy has been called, allo­ an efficientallocation of resources. This chapter analyzes cated clearly defined tasks to each aspect of economic these questions against the background of past experience policy, that is, monetary, fiscal, and structural policy. with economic policy in the Federal Republic of Germany The main task of monetary policy was to ensure stability (FRG). Three major periods of economic policymaking of prices and the currency. This required the establishment can be distinguished in the FRG: fTom 1948 until about of a strong and independent central bank that was legally the mid-1960s, a period of strongly market-oriented bound to pursue these objectives. Thus, the central bank's policies associated with Ludwig Erhard; from the mid- commitment to these objectives could not be overruled 1960s to perhaps the early 1980s, a period of Keynesian by the government. Fiscal policy was charged with the policies associated with Karl Schiller; and, since the role of providing a tax system that generated enough early 1980s, a revival of Erhardian ideas.' revenue (with as little distortion of market signals as possible) to finance expenditures for the classical tasks of government. There was no room in this concept for The Period of Liberalism: Financing the fiscal demand management policies and, in fact, the Essential Government Tasks general government accounts were in surplus during the 1950s and the first half of the 1960s (see Chart 11 in Economic policy in the FRG formally began in 1948 Chapter 11). Structural policies were seen as passive with the merger of the U .S., British, and French occu­ rather than active: the objective was to provide an pation zones into one united economic area and the economic structure that rewarded competitiveness and currency refonn. 2 The conceptual framework that gov­ facilitated structural adjustment in response to market erned economic policy, however, was developed much forces. Strong antitrust laws and laws that ensured fair earlier, in the writings of Ludwig Erhard and others, competition were essential to this objective. 4 before and during World War IL The writings of these this opportunity in order to refute the criticism sometimes directed economists reflected a reverence for market forces as the against it. Entrepreneurs will once more have to resolve the problem best guide to economic decision making. 3 The main task of producing for a market without any purchasing power i.e. devoid of sure sales." See Srandard Texrs of rhe Social Marker Economy: Two Cemuries of Discussion (Stuttgart: New York: Gustav Fischer. ' See Leslie Lipschitz and Thomas Mayer. "Accepted Economic 1982). p. 7. Paradigms Guide German Policies." IMF Survey (Washington), • Waiter Eucken, in an essay written in 1952 C'A Policy for November 28. 1988. pp. 370-74. Establishing a System of Free Enterprise"), described this policy in 2 See. for example. Thomas Mayer and Glinther Thumann, "Radical the following words: "The fundamcnral principle not only calls for Currency Reform: Germany. 1948." Finance & Developmem (Wash­ abstinence from certain economic acts such as government subsidies. ington). March 1990. pp. 6-8. the establishment of mandatory State monopolies. a general freeze on ' In a paper written in 1943-44 ("The Economic Needs of Postwar prices. prohibitions of imports etc. Nor is it enough simply to prohibit Germany"). Erhard emphasized the role of the private sector in the cartels, for instance. The principle is not primarily negative in nature. reconstruction effort as fo llows: "the State's economic power and There is. rather, a need for a positive economic policy aimed at initiative arc bound by strictly circumscribed limits so that trade and developing the marketing structure of unrestricted competition and industry will be largely left to their own devices in finding ways of thus at realizing the fundamental principle. This is also a field in providing a new basis for Germany's economic life by establishing a which the competitive system differs entirely from the policy of new gross national product. The private sector of the economy will laissez-faire, which in substance did not admit of any positive system enjoy a fresh opportunity to dcmonstnne its skill and it must seize of economic regulation." Ibid. p. I 16. 165 ©International Monetary Fund. Not for Redistribution XII • FISCAL AND STRUCTURAL POLICIES IN UNIFICATION This description of economic policy should not be policy issues and occasional modifications of the policy taken to suggest that the system was one of virtually framework when these were needed because of economic unbridled market forces. Indeed. economic policy was developments. The other economic policy institutions, constrained by social policy that ensured consensus the Ministry of Finance and the Deutsche Bundesbank, between the so-caJled social partners, organized labor had an essentially supportive role. To play this role was, and capital. In this sense, there was government inter­ however, not always easy. Monetary policy, for example, vention to influence market forces. But the intervention was often caught between domestic considerations and was not ad hoc or unpredictable; social policy consisted the external constraints imposed by the Bretton Woods of a set of rules-similar to the rest of the institutional system of fixed exchange rates, as the German target for and legal framework of the economic system-that set inflation often differed from those of trading partner the bounds within which market forces could operate. countries. In most cases, the record suggests that external In the thinking of the postwar German "Ordo-liberal" constraints prevailed over domestic objectives. 7 economists, the role of social policy was important, if The rejection of the notion that economic policy should not vital, to the success of economic policy. This view try to steer economic developments was reflected in the had historical roots. In postwar Germany, the memory relatively small size of government during the 1950s and of the close cooperation of big industry with the Nazi early 1960s. In 1955, the share of government revenue regime was still vivid. It was believed that the involve­ in GNP was 35 percent (more than I 0 percentage points ment of labor in industrial management, through workers· below the share in the mid-1980s, see Table A 15 in councils and economically strong trade unions, was Chapter Tl). The share of government expenditures in essential to the well-being of the young democracy and GNP was only 30 percent (almost 20 percentage points for economic prosperity. On economic grounds. social below that reached 30 years later), and the government policy was seen as helping to overcome the traditional accounts registered a considerable surplus. antagonism between capital and labor so as to foster a The noninterventionist paradigm of the 1950s and social environment conducive to a smoothly functioning early 1960s, supported by a favorable economic envi­ economy.5 The main instruments of social policy were ronment, was associated with a buoyant economy: real the establishment of comprehensive unemployment, health, per capita GNP growth averaged close to 7 percent and pension systems, as well as institutional regulations through the 1950s; unemployment declined from almost that allowed for the representation of labor in the main 2 million in 1950 to 300,000 in 1960; inflation was areas of industry. below 2 percent on average during 1950-60: share prices The combination of a market-oriented economic policy rose manyfold in the 1950s; and real interest rates on with an active social policy came to be known as Soziale government bonds averaged about 4\12 percent during Marktwirtschaft (social market economy). 6 The execution 1955-60. of this policy was fairly straightforward. Once the economic framework was in place, the Ministry of Economics, headed by Erhard, took over the role of the guardian of its principles. Day-to-day management was The Period of Keynesianism: Restoring not required, and the Ministry concentrated on basic Internal Equilibrium 5 In 1944. in "The Guiding Principles of the Liberal Programme," In the early 1960s, the Social Democratic Party (SPO) Wilhelm Ropke wrote. ·'If left to itself. a market economy is dangerous moved from the left toward the political center. In the and indefensible because it reduces people to a thoroughly unnatural area of economic policy, the old, more socialist existence which they then cast aside together with the free market which has become hateful. In other words. the market economy philosophy was replaced by a moderate Keynesianism. re quires a (·iml framework, which we may conveniently refer to in When the SPD formed a government with the Christian short as the anthropological-sociological framework. If this framework Democrats (CDU) in J 966, the ground was laid breaks down. then it is no longer possible to have a free market. In other words. market economy is not everything. lt has a special place for the application of these