Sovereignty Regained, Economic Order Uncertain: Germany’s Social Market Economy at 70

Peter S. Rashish

Vice President; Director, Geoeconomics Program

Peter S. Rashish, who counts over 30 years of experience counseling corporations, think tanks, foundations, and international organizations on transatlantic trade and economic strategy, is Vice President and Director of the Geoeconomics Program at AICGS. He also writes The Wider Atlantic blog.

Mr. Rashish has served as Vice President for Europe and Eurasia at the U.S. Chamber of Commerce, where he spearheaded the Chamber’s advocacy ahead of the launch of the Transatlantic Trade and Investment Partnership. Previously, Mr. Rashish was a Senior Advisor for Europe at McLarty Associates, Executive Vice President of the European Institute, and a staff member and consultant at the International Energy Agency, the World Bank, UNCTAD, the Atlantic Council, the Bertelsmann Foundation, and the German Marshall Fund.

Mr. Rashish has testified before the House Financial Services Subcommittee on International Monetary Policy and Trade and the House Foreign Affairs Subcommittee on Europe and Eurasia and has advised three U.S. presidential campaigns. He has been a featured speaker at the Munich Security Conference, the Aspen Ideas Festival, and the Salzburg Global Seminar and is a member of the Board of Directors of the Jean Monnet Institute in Paris and a Senior Advisor to the European Policy Centre in Brussels. His commentaries have been published in The New York Times, the Financial Times, The Wall Street Journal, Foreign Policy, and The National Interest, and he has appeared on PBS, CNBC, CNN, and NPR.

He earned a BA from Harvard College and an MPhil in international relations from Oxford University. He speaks French, German, Italian, and Spanish.

The Federal Republic of Germany gained de jure sovereignty as a nation-state on May 23, 1949, but its road to de facto sovereignty—actual power to advance its interests in the world—was somewhat long and winding.

As a middle-sized country that had suffered recent defeat in World War II, Germany could not pretend to reassert its identity as an independent power the way that France and the United Kingdom did in the immediate postwar years. From the start, Germany needed to find another way to craft a role for itself among the group of democratic, market-economy countries dominated by the United States. That avenue would be participation in regional and multilateral institutions.

While Germany didn’t join NATO until May 1955, it gained membership in a number of European and international economic organizations several years earlier. First came the European Coal and Steel Community (ECSC) signed on April 18, 1951, which besides Germany included France, Italy, Belgium, the Netherlands, and Luxembourg. The key idea and innovation of the ECSC was to pool the main raw materials of war in order to ground efforts at peaceful reconciliation in Europe in the real economy.

Next, Germany joined the three Bretton Woods institutions that were established as the war was coming to an end with the goal of anchoring international trade and finance in a multilateral order inspired by liberal principles such as the rule of law, economic openness, and fair competition. Germany joined the General Agreement on Tariffs and Trade (GATT), the predecessor of the World Trade Organization (WTO) on October 1, 1951, and the International Monetary Fund (IMF) and World Bank on August 14, 1952.

Because of Germany’s emerging economic model, the country was a particularly good fit for the international economic system that was taking shape under the guidance of the GATT, IMF, and World Bank.

Because of Germany’s emerging economic model, the country was a particularly good fit for the international economic system that was taking shape under the guidance of the GATT, IMF, and World Bank. Until the 1970s, when the Bretton Woods consensus began to break down, the implicit assumption behind the postwar economic order was “embedded liberalism,” the idea that greater international economic openness needed to be balanced by an active state ensuring both a pro-competitive regulatory framework and a strong social safety net at home.

This notion was close to the Sozialmarktwirtschaft, or social market economy, championed by Ludwig Erhard, Germany’s first postwar economics minister and later Chancellor of the Federal Republic. Erhard represented the Christian Democratic Union (CDU) that dominated German politics until the late 1960s, but the opposition Social Democrats also came to embrace the idea of a social market economy with their 1959 Bad Godesberg reform program.

Germany joined the Common Market that evolved from an expanded the ECSC (and that is the forerunner to today’s European Union) as a founding member in 1957. The country’s new membership in European and international organizations coincided with the Wirtschaftswunder, or economic miracle, of the 1950s, when GDP growth averaged 8 percent per year. While Germany’s impressive economic performance had more to do with domestic than international factors, this very success eventually helped to build up its political capital and influence within the regional and multilateral institutions of which it was a member.

While Germany’s regaining of de facto sovereignty through multilateral cooperation was an evolutionary phenomenon, one important milestone in this process was the creation of the Group of Seven, or G7, in 1975. The G7 was formed by the six and then seven leading economic powers (the U.S., Germany, France, the UK, Italy, Canada, and later Japan) after two major shocks to the international economic system. The first of these disruptions was the 1971 decision by U.S. president Richard Nixon to end convertibility between gold and the dollar as a way to right the country’s growing current account imbalances, effectively putting an end to the Bretton Woods system of managed exchanged rates. The second was the 1973 oil crisis when a number of Middle East producers embargoed exports in the aftermath of the Arab-Israeli war of that year.

At the time of the G7’s creation Germany was led by Social Democrat Helmut Schmidt, who before becoming chancellor in 1974 had served as finance minister. Schmidt formed a strong partnership with France’s pro-European, center-right president Valéry Giscard d’Estaing (who had also served as finance minister in his country). Schmidt established a leading role for Germany in the G7, which continued under his Christian Democratic successor Helmut Kohl and the 1985 Plaza and 1987 Louvre accords to devalue and then stabilize the dollar.

With nearly forty years of increasing contributions to the steering of European and international economic diplomacy, as well as a strong economic performance during this period, by the time of the 1989 end of the Cold War the dynamics surrounding Germany’s exercise of sovereignty had shifted. With the reunification of Germany in 1990—first in economic and financial terms in May and then fully political and constitutional in October—the country of 80 million became a European regional economic superpower.

As during the 1970s, a close Franco-German link in the 1990s helped to stabilize the European and broader global ramifications of major shifts in the established order. Not only was Germany now on a different level economically from its closest peers like France, the UK, or Italy; with the end of communism the countries of Central and Eastern Europe were natural candidates to join European and transatlantic institutions. Along with the far-sighted strategy of the U.S. administration of President George H.W. Bush, which played a crucial in promoting peace and stability across Europe, Chancellor Kohl and France’s Socialist president François Mitterrand forged a partnership to advance the 1991 treaty creating the European Union and with it the euro, the European Central Bank, and the Economic and Monetary Union. Germany gave up its currency, the Deutsche Mark, but in return acquired stronger institutions for promoting German and European interests.

Over the last thirty years the European Union has grown to twenty-eight countries, the GATT became the World Trade Organization, and the liberal economic order that Germany has participated in as a full member since the early 1950s has become global. But that order is under strain. Whether that is because of a straying from its founding principle of embedded liberalism, left and right-wing populist reactions to the failure of international cooperation to prevent or sufficiently contain the 2008-2009 financial crisis, the rise of China and its state-capitalist model, or the fact that technological change moves faster than governments’ ability to ensure its benefits are equitably shared remains a matter of debate.

While the European Union, one of Germany’s two avenues for regaining de facto sovereignty over the years, has been buffeted by Brexit and populist politics, it remains popular with its citizens and is likely to survive more or less in its current role and form. Whether the same can be said about multilateralism—Germany’s second avenue for developing into a leading economic power—is less certain. The WTO is growing weaker as a forum for both trade reform and dispute settlement.

Germany can play a leading role in thinking about alternative or supplemental arrangements that may be needed to ensure that open, high-standard economies continue to set the terms of international economic engagement.

In addition to shoring up the WTO and multilateralism where possible, Germany can play a leading role in thinking about alternative or supplemental arrangements that may be needed to ensure that open, high-standard economies continue to set the terms of international economic engagement. Does the world face a future of three competing orders, one dominated by the U.S., one by the EU, and one by China? Or would more nuanced arrangements, where transatlantic cooperation can play a greater role, be more favorable to the interests of advanced market economies? Chances are that Germany will need to move beyond its European and multilateral comfort zones if it is to thrive in the economic order(s) that will frame its next seventy years.

Read more on the 70th anniversary of the Federal Republic of Germany

Seventy Years as a Country of Immigrants: What’s Next for Germany? by Susanne Dieper
From Fear to Friendship: Franco-German Relations in 1949 and 2019 by Lily Gardner Feldman
From Bonn to Berlin: Seventy Years of the FRG by Jackson Janes
The Past Shapes the Future: The German Constitution at 70 by Stephen F. Szabo