Economy 1966-89

• In 1965, the FRG experienced a recession. The signs of slowing growth rates had been evident for some time and wages were beginning to grow faster than productivity after 1958. This threatened price stability and risked inflation - prices had rise 4% by 1966. Government spending increased on social welfare and rearmament, and the federal government budget doubled between 1955 and 1965.
• As chancellor, Erhard was criticised for spending too much on:

  • modernising the FRG's railway infrastructure
  • US military hardware as a result of rearmament, which began in the mid-1950s
  • agricultural subsidies
• Due to economic problems, Erhard was forced to cut his spending plans by 10%. He even suggested German workers may need to work an extra hour per week. However, this proposal was rejected by German trade unions, which were demanding higher wages and a shorter working week. Erhard also raised interest rates.
• Policies to try and stop the recession were ineffective. The problem was that to pay for increased public spending and greater wage demands, the FRG would need to raise productivity and sell even more abroad. In December 1966, Volkswagen caused shock waves by introducing short-time working.
• In 1966, Erhard failed to convince the US government to reduce the FRG's financial contributions to support American forces and bases within the FRG, which brought further criticism of his government.
• There were disagreements between the FDP and CDU/CSU over how to deal with the recession. The FDP wanted further spending cuts while the CDU/CSU wanted to raise taxes. No agreement could be reached and the FDP withdrew from the coalition. Erhard resigned in November 1966.
• Erhard was replaced by Kiesinger in 1966. In an attempt to resolve the economic problems, an SPD economics minister (Schiller) and CDU finance minister (Strauss) worked closely to implement policies. Schiller believed in more government intervention to counter the limitations of the free market. In December 1967 he introduced 5yr financial plans and attempted to co-ordinate the budgets of the different levels of government. He ideas can be summed up by 'as much competition as possible, as much intervention as necessary'.
• The coalition government acted decisively to reform the economy:

  • it introduced the Law for Promoting Stability and Growth in the Economy, also known as the Stabilisation Law. Passed in 1967, this formalised the process of co-operation in times of economic difficulties between federal government, employers and employees and increased federal government activity in the economy by altering taxes/raising loans to stimulate production.
  • Article 109 of the 1949 Basic Law was amended to allow increased government control of the tax and spending policies of different states.
• The coalition government acted decisively to reform the economy:

  • Moves were made to improve co-operation between the federal and state governments, with the aims of expanding higher education opportunities, improving health facilities and further developing the FRG'S infrastructure (motorways and rail networks).
  • Co-operation between workers, employees and the state was encouraged by improving economic planning through Concerted Action.
  • Public spending was reduced and taxes were raised, with VAT rising from 10% to 12%.
• Measures made to end the recession were successful and by 1968, unemployment was falling, industrial growth was at 6% per annum and in 1969 inflation had fallen to 1.5%.
• However, in 1969 the coalition collapsed over the issue of revaluation. Brandt took over government and one of the first economic actions was to revalue the DM by 9%, rising to 3.66 to $1. In January 1973, when the dollar was devalued by 10%, the DM grew more in value. While this made FRG exports expensive, their quality and continued reputation meant customers were prepared to pay extra. Many now felt the state could afford the expected social reforms of Brandt's new government.
• Inflation continued to rise and the problems was exacerbated by the OPEC crisis of November 1973. As a result of the oil crisis 1973, the FRG had to pay DM17 billion more for its imports and the balance of payments went from a surplus to an almost $700 million deficit within a year. GNP also fell from 5% in 1973 to 0.5% by 1974 and unemployment rose from 1% in early 1973 to 5% by 1975.
• Economic problems were caused by 3 problems:

  • rising public expenditure, due to rising unemployment
  • falling revenues from taxation as unemployment led to reduced tax-paying workforce
  • rising rates of taxation for those still in work
• The government introduced various publicity-catching measures to deal with the crisis:

  • car-free Sundays to save on fuel
  • a ban on the recruitment of migrant workers
• The FRG economy was more resilient compared to other Western countries. This was due to the maintained high level of exports sustained by high-quality marketing and advertising skills and decisive actions by the government.
• The government introduced:

  • a switch to nuclear energy, away from finite fossil fuels
  • the first steps in the process of creating a European monetary system - all the currencies of the EEC member states would be tied together
  • government support for private sector investments in the form of DM7-8 billion in grants and public works contracts to the tune of DM1.1 billion to help create jobs
  • abolition of the legislation that regulated mergers - during 1970s, firms grew in size, absorbing smaller enterprises - 1980s, biggest 50 firms controlled 50% of FRG industrial output
• Collectively, the measures introduced by the government worked to help the FRG recover from the oil crisis more effectively than its neighbours.