Reviving Germany after the War: the Economics of Freedom

At the end of WW2, Germany was a devastated nation. The physical infrastructure was nearly nonexistent; the population lacked the millions who died during the war; the economy was barely functioning, and what little function it mustered was shackled by rigid regulations - regulations originally imposed by the Nazis and bizarrely kept in place by the victorious western Allies.

When the Allies began to turn over control of West Germany to the civilian government, debate arose among the Germans about the best way to revive the economy.

The Social Democratic Party (SPD) wanted to keep in place the wage controls, price controls, and high taxes imposed by the Nazis. They feared that deregulation would kill the tiny amount of economic activity which still took place.

By contrast, the Freiburger Schule (a group of economists known as the ‘Freiburg School’) favored deregulation. The Freiburg School had formed in opposition to the Nazis during the late 1930s. They saw a connection between personal political liberty and the free market.

This debate between the SPD and the Freiburg School occurred during Germany’s Stunde Null - the ‘zero hour,’ a historical reset as the nation restarted itself. Thomas Hazlett writes:

There wasn’t much in the program of the Social Democrats that the Freiburg School found to agree with. During the dark days of the Hitler epoch, a liberal resistance movement had developed at the University of Freiburg. Under the leadership of Walter Euken, it included Alfred Muller-Armack. Wilhelm Roepke and Ludwig Erhard. These men constructed one of the most comprehensive political-economic doctrines of this century: the Soziale Marktwirtschaft. The idea of a “socially conscious free market,” as the translation goes, was that totalitarianism is the evil to be most guarded against and that the only way to prevent tyranny is to promote freedom. The theory spread freedom across political and economic lines and espoused a policy of noncontrol - by either the State or individuals - of individual choice. The conclusion was that free markets, and only free markets, can provide human society with the incentives, efficiencies, and freedoms that can lead to a vital and progressive society.

The Freiburg School won the debate. Konrad Adenauer, elected in 1949, appointed Ludwig Erhard to deal with economic matters. Deregulation and tax cuts followed.

The free market approach energized the German economy. In 1945, many observers feared that Germany would permanently be relegated to a ‘third world’ status. By the late 1950s, Germany was one of the most powerful economies in the world, and the economic leader of Europe.

Historians use the word Wirtschaftswunder to describe this amazing recovery: an ‘economic miracle.’ But it was no miracle: it was the predictable and replicable results of the Freiburg School’s free market idea.

Leading from a Position of Economic Strength

During the first two decades of the twenty-first century, Germany has emerged into a pivotal diplomatic role in the world. Why this premiere?

At a time when the EU and the United States were wrestling with massive national debt and crippling trade deficits, Germany had worked to balance its budget, and enjoyed strong manufacturing and exporting sectors.

Other nations began to look to Germany, and to its chancellor Angela Merkel, because it was one nation which seemed stable while others were floundering. Greece, Italy, Spain, Portugal, and Ireland became symbols for the EU’s economic woes.

The United States expanded its national debt in the years after 2008, hobbling its opportunities to provide prosperity for its own citizens or leadership for other nations. Germany’s foreign minister, Frank-Walter Steinmeier, writes:

Some politicians, such as the former Polish foreign minister Radek Sikorski, have described Germany as Europe’s “indispensable nation.” Germany has not aspired to this status. But circumstances have forced it into a central role. Perhaps no other European nation’s fate is so closely connected to the existence and success of the EU. For the first time in its history, Germany is living in peace and friendship with France, Poland, and the rest of the continent.

Germany’s leadership in the EU, and in the world, shows the way for other nations to move toward fiscal responsibility. Balancing national budgets is one step. Austerity – the word itself has become a political symbol – in social spending is another step.

To the extent that other nations can adopt German national virtues – industriousness, diligence, punctuality, craftsmanship, thrift – to this extent they will enjoy prosperity and stability they are so eager to mimic.

The Euro Crisis: German Leadership

When an economic crisis emerged in the European Union (EU) during the first decade or two of the twenty-first century, the EU was unable to exert itself to address the situation.

The EU had spent much of its energy and political capital in an effort to admit and absorb new member states. It had needed to persuade the existing member states to accept the new members; it needed to organize the new members for the EU structure.

The existing member states were somewhat skeptical of the new members, yet the EU was simultaneously attempting to persuade the existing member states to increase their commitment, involvement, and integration into the EU.

In 2005, member states chose not to ratify a proposed EU constitution. This decision took some momentum away from the EU’s political progress. It also become more clear that some of member states were economically incompetent.

The fiscal weakness, and deceptiveness used in attempts to disguise that weakness, threatened the stability of the EU as a trading bloc, and threatened the stability of the euro as a currency.

Greece became the symbol for the crisis, although several other member states had also been irresponsible. Greece had continued unsustainable programs, like nationwide single-payer universal healthcare, which created a large national debt.

With the EU itself lacking political momentum and diplomatic capital, member states looked to other sources for leadership during the crisis. They looked to Germany, and to Germany’s chancellor, Angela Merkel.

Germany’s foreign minister, Frank-Walter Steinmeier, writes:

During the euro crisis, meanwhile, Germany was forced to confront the danger posed by the excessive debt levels of some Mediterranean EU states. The overwhelming majority of the eurozone’s members and the International Monetary Fund supported plans to demand that countries such as Greece impose budgetary controls and hard but unavoidable economic and social reforms to ensure the eventual convergence of the economies of the eurozone.

Why did Germany emerge, reluctantly and even unwillingly, as a world leader in this situation? Because Germany had proven its ability to manage its own economy.

Many ‘first world’ or ‘industrialized’ nations had lost ground in trade wars. Some east Asian nations gained ground by violating intellectual property rights, by inhumane ‘sweatshop’ labor practices, and by ‘dumping’ and ‘flooding’ markets with low-priced products – selling products below cost in order to drive competitors out of the market.

In these circumstances, Germany had found a way to continue a significant and strong manufacturing sector, and to make money by selling its products, in both domestic markets and in export markets:

Germany has merely held its ground better than most of its peers in the face of rising competition.

The other member states of the EU naturally turned to Germany for leadership, because Germany had shown that it was able to keep a healthy manufacturing sector, both in the face of the trend toward an ‘information economy,’ and in the face of fierce Asian competition.

Germany Takes the Lead

During the first two decades of the twenty-first century, Germany has played an increasingly central role in the world, both economically and diplomatically. One reason for this emergence is that both the United States and the European Union have faced challenges which have depleted their political capital.

The United States had spent its resources dealing with increased threats from the Muslim world, and, after 2009, an increasingly aggressive Putin in Russia. Chinese expansionism in the South China Sea also absorbed American attention.

The EU encountered the challenges of absorbing a few – perhaps a few too many – new members states into its economic community, while attempting to encourage its existing members to deepen their commitments to the EU. Voters in EU member states rejected a proposed EU constitution in 2005, while newer member states gradually manifested symptoms of economic incompetence.

With both the United States and the EU otherwise engaged, the nations of the world looked to Germany, and to its chancellor Angela Merkel, for leadership. German foreign minister Frank-Walter Steinmeier writes:

Against this backdrop, Germany has remained remarkably stable. This is no small achievement, considering the country’s position in 2003, when the troubles of the United States and the EU were just beginning. At the time, many called Germany “the sick man of Europe.”

In this condition, Germany was an unlikely candidate for leadership. Steinmeier notes that “unemployment had peaked at above 12 percent, the economy had stagnated, social systems were overburdened,” and the German government had shown a too-lenient policy toward Putin’s Russia. The German federal court system later found that Germany had lost 1.2 billion euros, as the German government and the Russian government had not equally shared the burdens of projects undertaken in allegedly ‘equal’ partnership.

Within a remarkably short time, Germany turned itself around. The election of Angel Merkel as chancellor in late 2005, combined with a series of legislative reforms designed to trim back a too-generous set of government ‘handout’ social programs, allowed Germany to show its strength.

Those reforms laid the foundation for Germany’s return to economic strength, a strength that has lasted to the present day. And Germany’s reaction to the 2008 financial crisis only bolstered its economic position. German businesses focused on their advantages in manufacturing and were quick to exploit the huge opportunities in emerging markets, especially China. German workers wisely supported the model of export-led growth.

Germany’s quick climb to the top is reminiscent of an earlier such ascent. In the mid-1940s, at the end of WW2, Germany was so economically devastated that many observers thought that it would be permanently relegated to a ‘third world’ status.

Yet within a decade, Germany had rebounded so quickly that it was known as the Wirtschaftswunder – the ‘economic miracle.’

The first two decades of the twenty-first century may one day be known as a ‘miniature’ version of that Wirtschaftswunder. Whether or not that happens, Germany has in any case provided needed leadership for the EU during times of economic and diplomatic turmoil.

The next challenge for the EU, and for the world, is to manage the danger coming from the Islamic world. The EU faces desperate refugees seeking humanitarian aid and fleeing from violence in Muslim countries.

But hidden among those displaced persons are also violent jihadi extremists. The EU must find a way to distinguish between the innocent refugees and the Islamic extremists: a way to help the former and shut out the latter.

For this next great task, the EU, the United States, and Germany – the entire world, really, – will need courage, creativity, and leadership.

An Unsought Crown: Merkel’s Role as World Leader; Germany’s Place as Global Power

In the years after WW2, many observers wondered whether Germany would be permanently relegated to a ‘third world’ status. Some, like U.S. politician Henry Morgenthau, even proposed turning the entire nation into farmland, bereft of technology and industry.

At the war’s end in 1945, Germany entered its Stunde Null - its ‘zero hour,’ a pause in world history, a historic reset, the near-total destruction finally complete, a despair-inspiring level of hardship, but also a chance to start over. Within a decade, the Wirtschaftswunder created one of the quickest economic rebounds in history, as the nation rebuilt itself with dizzying speed.

It was no “economic miracle,” but rather the predictable results of the policies put into place by Germany’s first postwar chancellor, Konrad Adenauer, and his appointee, Ludwig Erhard.

Adenauer and Erhard unleashed the industriousness of the people by cutting tax rates and deregulating the economy. The nation grasped the opportunity with industriousness and creativity.

The blossoming economy, however, had unintended consequences. Germany had no desire to be a world leader. After the trauma of WW2, the Germans rather wanted to attract as little attention from other nations as possible.

But other nations noticed. They noticed the enviable economic growth which the Germans created year after year. They noticed the technological advancements in many industrial sectors. They noticed how leaders like Adenauer built relations with former enemies.

Against its will, Germany was placed into a leadership role among the nations. As German foreign minister Frank-Walter Steinmeier writes,

As Germany’s power has grown, so, too, has the need for the country to explain its foreign policy more clearly. Germany’s recent history is the key to understanding how it sees its place in the world.

Unexpectedly and unintentionally becoming a leader, Germany has been expected to produce answers about global situations.

Germany’s world leadership is not the result of some grand plan to rise above other nations. It was the unintended byproduct of simply being responsible and providing for one’s own future.

Since 1998, I have served my country as a member of four cabinets and as the leader of the parliamentary opposition. Over that time, Germany did not seek its new role on the international stage.

Germany, for example, worked to avoid debt, both in the public sector and the private sector. It worked to keep strong manufacturing and export.

It turns out that by simply being responsible with your own country, you become a leader to the rest of the world: an example, a role-model. Steinmeier continues:

Rather, it emerged as a central player by remaining stable as the world around it changed. As the United States reeled from the effects of the Iraq war and the EU struggled through a series of crises, Germany held its ground.

Europe began to look to German leadership as many of the other EU nations dealt with self-inflicted damage in their own economies.

Money influences diplomatic relationships: in addition to economic guidance, other nations look to Germany to manage international relations, as Steinmeier writes:

It fought its way back from economic difficulty, and it is now taking on the responsibilities befitting the biggest economy in Europe. Germany is also contributing diplomatically to the peaceful resolution of multiple conflicts around the globe: most obviously with Iran and in Ukraine, but also in Colombia, Iraq, Libya, Mali, Syria, and the Balkans. Such actions are forcing Germany to reinterpret the principles that have guided its foreign policy for over half a century. But Germany is a reflective power: even as it adapts, a belief in the importance of restraint, deliberation, and peaceful negotiation will continue to guide its interactions with the rest of the world.

Becoming the chancellor of Germany means become an international diplomatic broker. Angela Merkel, chancellor since 2005, has had to face not only Germany’s challenges, but the world’s as well.

Writing about Chancellor Merkel’s time in office, Alan Crawford and Tony Czuczka note that

Barring an 18-month honeymoon period, Merkel’s time in office came to be defined by a continuous thread of unprecedented turmoil not of her making but which required her to act nonetheless. Her first term was dominated by the U.S. subprime-led banking meltdown and subsequent global recession, which led straight into the crisis in the euro area spreading from Greece that rocked her second term.

Within a few decades, Germany has gone from a postwar wasteland to a world leader. In 1945, the world looked at Germany with pity. In 2016, the world looks to Germany for answers.

In 1945, Germany was not expected to be able even to feed its own citizens. In 2016, Germany is expected to explain, and solve, the planet’s toughest problems.

Germany as a World Power; Merkel as a World Leader

In 1945, at the end of WW2, many observers wondered whether Germany would permanently sink to the level of a ‘third world’ nation. Some leaders, like Henry Morgenthau, proposed that all of Germany be turned into farmland, and be left without technology or industry.

Within a decade, however, Germany had left behind the postwar Stunde Null – a sort of historical pause in the wake of the war’s devastation and simultaneously a historic reset, a chance to start over, the ‘zero hour’ – and progressed toward its Wirtschaftswunder – its ‘economic miracle’ orchestrated by Konrad Adenauer and his appointee, Ludwig Erhard, who cut taxes and deregulated the economy, empowering the Germans to construct one of history’s most dazzling economic recoveries and breathtaking postwar reconstruction.

Eager to keep a low profile and shy about any form of assertiveness, Germany did not seek a leading role among the world’s nations. But the power of its economy, and the creativity and industriousness of its people, placed that role upon a hesitant and even unwilling Germany. Germany’s foreign minister, Frank-Walter Steinmeier, writes:

Over the past two decades, Germany’s global role has undergone a remarkable transformation. Following its peaceful reunification in 1990, Germany was on track to become an economic giant that had little in the way of foreign policy. Today, however, the country is a major European power that attracts praise and criticism in equal measure. This holds true both for Germany’s response to the recent surge of refugees — it welcomed more than one million people last year — and for its handling of the euro crisis.

Just as Germany was reluctant to assume a guiding role in the world, so was its chancellor, Angela Merkel.

Merkel’s style is calm, steady, and reticent. She hardly fits the romanticized notion of a world-historical leader. Yet history demonstrates that such people rarely correspond to this romanticized concept. Alan Crawford and Tony Czuczka write:

A scientist by training whose defining trait is caution, Merkel was forced to look beyond just Germany’s interests and to assume leadership in Europe. Thrust to the fore of policy making, she stepped up, slowly but with growing determination, to defend the euro she saw as the glue holding together the European Union (EU) that had been forged out of the ashes of war to stop the continent ever again descending into conflict. But how did the chancellor who came to office pledging to govern by means of many “small steps” come to take on the role of European savior? And what would the rest of Europe make of her prescription for Europe’s ills?

Germany did not seek a key role among the world’s nations, but by maintaining a consistent record of economic growth and productivity, Germany became a model to which other nations looked for counsel.

Merkel did not seek to be a world leader, but by demonstrating her abilities in global diplomatic relations, domestic policy, and party politics, she displayed the skills which caused other leaders to seek her guidance.

From the banking meltdown of 2008 to the subsequent Greece crisis, from Putin’s adventurism in the Crimean Peninsula to the ‘Brexit’ vote in 2016, Merkel has handled decisions with an unflustered proficiency which causes other world leaders to study her, and which caused the Germans themselves to forgive her for allowing a mass of dubious immigrants, posing as Syrian refugees, into the country.

Without seeking it, wanting it, or trying to get it, Germany and Merkel have obtained roles as a world leaders.

Postwar Economic Thought Develops

Following the end of WW2, Germany was in shambles, a country nearly totally destroyed. Millions of men had died in combat; millions of civilians had died at home from bombing raids; millions of Jewish Germans had died in the horrors of the Holocaust.

Physically, the nation was a wreck. Roads, water pipes, sewage pipes, telephone lines, bridges, railroads, and electrical power lines were greatly damaged in some places, and nonexistent in other places.

Economically, the nation had been ravaged by the viciousness of the Nazi government. High rates of taxation burdened the citizens, a centralized bureaucracy dictated the exact price for everything from bread to butter, wages for any job from surgeon to barber were determined by the central government, and large quantities of money had been printed rapidly.

Hitler’s government had inflicted economic atrocities: innocent civilians, in some cases, starved to death.

At war’s end, Germany began to regain its freedom. The Nazi oppressors were gone, and although the western Allies were at first hesitant, they eventually allowed German citizens to obtain the civil rights which they hadn’t had in over a dozen years.

(Sadly, the one eastern Ally - the USSR - kept Nazi policies in place in the eastern sector of Germany.)

As freedom reappeared in West Germany, so did debate. People finally had the liberty to express opinions. One question was about the future of the German economy.

The aftermath of Hitler’s dictatorship left the Germans facing massive inflation - the quick increase of prices, making it difficult for ordinary people to purchase the necessities of daily life.

Historian Thomas Hazlett describes the exciting intellectual discussions of the era:

Meanwhile, an exciting intellectual debate roared in the academic institutions and councils of government, exploding from its previously suppressed condition in an inflationary blast mirroring the flare-up of prices. Out of the haze of viewpoints emerged two predominant schools of thought: the Social Democrats and the “Freiburg School.”

The Social Democrats, whose party was known as the SPD, favored a return to the Nazi’s “national socialism,” with governmental control over prices and wages. The SPD wanted high taxes and government regulation of the marketplace.

The Freiburger Schule wanted to reduce the government’s control, and let ordinary people make decisions about how much they wanted to pay for products, and about which wages they wanted in their places of work.

It would be the Freiburger Schule which eventually won. Konrad Adenauer, Germany’s first postwar chancellor elected in 1949, appointed Ludwig Erhard, a leader of the Freiburg movement.

Quickly, Erhard set about reducing government regulations. The result was the Wirtschaftswunder - the “economic miracle,” which was no miracle at all, but rather the replicable and predictable laws of economics in action.

Soon, Germany’s economy was one of the strongest in Europe, and one of the strongest in the world, thanks to the concept of deregulation and lower taxes. From the horrors of wartime destruction, modern Germany had been reborn.