The German Economy: Europe's faltering giant.

• Author: Mueller, Antony P.
• Position: REVIEW ESSAY

In The German Economy beyond the Social Market (Princeton, N.J.: Princeton University Press, 2005), Horst Siebert provides a profound and detailed analysis of the current state of the German economy. Siebert is in a unique position to carry out such a task, having served as president of the Kiel Institute for World Economics and as a member of the German government's council of economic advisors. He has also held a series of university positions in Germany and other countries.

Siebert characterizes the German economy succinctly as an open economy--exports amount to one-third of its gross domestic product (GDP)--with a strong industrial base, embedded in a tightly knit social-security system and accompanied by a government sector that absorbs half of the GDP when social security is included.

The starting point of Siebert's analysis is Germany's slow economic growth since the mid-1990s. After a rapid and relatively stable growth in the 1950s and 1960s, Germany's economic performance began to falter in the late 1970s. In the second half of the 1990s, growth rates declined further, and since the year 2000 growth of GDP per capita has almost come to a standstill: from 2000 to 2003, the annual rate of growth was only 0.2 percent. Productivity grew rapidly from the 1950s to the end of the 1970s, but began to decline after 1980 and slowed even more in recent years. The annual rate of growth of productivity declined from 2.1 percent in 1991-2000 to 1.2 percent in 2000-2003 (p. 3).

Siebert traces the German economy's weak performance to the growth of the welfare state, which has created a governmental presence and intervention that go beyond social security to encompasses the labor market and the regulation of various product markets and sectors of the economy. The labor market's inflexibility, high reservation wages, and a labor factor burdened with large social contributions produce persistently high unemployment rates in the neighborhood of 10 percent.

The German economy has two sides. On the one hand, it is highly regulated, particularly with respect to social and labor issues. On the other hand, the German enterprise sector is efficient and internationally competitive. Germany's industrial sector consists to a large extent of small and medium-size firms, the so-called Mittelstand. As Siebert explains, the important companies in this group are built around a technological idea and are technological specialists in their fields (p. 9). Private ownership by the entrepreneur typically plays an important role in these firms, and thus the "owner-entrepreneur is the driving force of the enterprise" (p. 9).

When national reunification occurred in 1990, the West German...