German reunification: For a while, it looked like the fall of the Berlin Wall — 20 years ago on Monday — would undermine the German style of capitalism. But the Rhenish way — high wages, high technology, industrial cooperation and long term bank financing — seems to have passed the test.
The end of the old East German regime first caused political jubilation, and then economic fear.
The productivity of this 20 per cent of the unified nation’s population was only 35 per cent of western German levels.
By the mid 1990s, unification was often judged to be an economic failure. While the efficiency gap for those who had jobs narrowed steadily — the ratio of eastern to western productivity reached 80 per cent by 1996 — the national growth rate was slow and unemployment, especially in the old East Germany, was unacceptably high.
Critics said the German model was too rigid for the east and for a more competitive world economy. They advocated freeing up all sorts of markets — less restrictive labour laws, lower state benefits, less cartel-like behaviour in industries, more listing on stock markets.
Germany did change. Labour reforms made unemployment less attractive. The big banks sold most of their shares in leading companies and the government liberalised the financial system.
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But the dismantling of the Rhenish system didn’t get very far. It didn’t need to. The unemployment rate fell, in part because of the labour reforms.
The nation’s industrial prowess led to a trade surplus that is still running at 5 — of GDP. Growth picked up.
Unification hasn’t been a total economic success. Easterners are still poorer, despite receiving a disproportionate share of the government budget. But the decay has stopped getting worse.
The financial crisis brought a steep recession, but it undercut critics of the German way. The competitive style of capitalism seems to have its own problems. The German banks that suffered the most were those which strayed from the traditional lending businesses.
And Germany seems to be resilient. Export orders there are up and the unemployment rate is falling. Meanwhile, in the UK, Europe’s leading exponent of a more free-market approach, most indicators are still pointing down.
