Why Germany is Europe's Superpower

How Germany Became the Richest Economy in Europe

By Arsalan HaroonPublished 6 months ago • 10 min read

Germany is the biggest economy in Europe and the fourth largest globally. Germany's economy is more influential than the UK and France, But just a few decades ago, countries like the UK, and France defeated Germany in World War 2.

Today, Germany is wealthier than the allied powers, such as the UK and France.

How did a country that lost two world wars and went through hyperinflation become the richest nation in Europe?

World War 1

After winning World War I, the Allied powers imposed heavy war reparation payments on Germany. The German army diminished to 100k personnel, and It was forbidden to draft soldiers.

Germany had to accept sole responsibility for causing the war and damage to the Allied forces.

During its worst depression in history, the Allied nations further demanded that Germany pay reparation payments, which was set by a series of conferences at 33 billion dollars (more than 500 billion in today's dollars)

“I believe that the campaign for securing the general costs of the war out of Germany was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible,” Economist John Maynard Keynes wrote in 1920.

Germany was already in severe financial trouble due to its former imperial regime's habit of printing a lot of currency and borrowing money to cover its military expenditures.

The new German government struggled with a massive debt and budget deficit. The German government defaulted on payment of gold-backed marks, which it was required to make.

France put pressure by occupying the Ruhr, an industrial region in West Germany. It deepened the German economic crises and contributed to the hyperinflation that made the nation's currency worthless in 1923.

The reparations and defeat of the German military were humiliating for many Germans primarily because the military and the press had lied to the German public about the war.

World War II

Anger over the humiliating defeat and economic crisis helped fuel the rise of populism and nationalism that led to the rise of Hitler, who violated the Treaty of Versailles by rearming Germany and invading Poland in 1939, which started World War II.

But in May 1945, Germany again surrendered to the Allied powers. Germany, under allied occupation, divided the country into West Germany controlled by Western powers like the US, UK, and France, and the East controlled by the Soviet Union.

Post-war Unemployment and poverty were rapidly increasing in the country because most of the industrial factories were destroyed by bombing.

As a result, Industrial output was down by a third, and 20% of overall housing was destroyed in Germany.

The Man Behind the German Economic Miracle

Ludwig Erhard was a researcher for an organization focused on the economics of the restaurant industry.

In 1944, when the Nazis were still in control of Germany, Ludwig Erhard bravely wrote an essay discussing Germany's financial condition. In it, he concluded that the Nazis would lose the war due to its disastrous economic policies.

Ludwig Erhard's work eventually reached the US intelligence forces, who soon found him out. When Germany surrendered, he was appointed as the finance minister of Bavaria, the largest state of Germany.

He worked his way up to become the economic minister of West Germany from 1949 to 1963. He later became the chancellor of West Germany from 1963 to 1966.

Ludwig Erhard's economic policies would change the course of Germany forever and make the war-devastating country the wealthiest in Europe.

Currency Reforms

Germany's old currency Reichsmark had become worthless because of the nazis' addiction to printing lots of currency into the economy, which drove the currency value to nearly zero.

On 21st June 1948, a new currency Deutschmark was introduced in Western Germany to restore confidence and trust in the economy.

The Deutschmark reduced the amount of currency available to the public by 93%.

Eliminating Price Controls

World War Two destruction was so severe in Germany, that by 1947, Agricultural output was only 51% of what it had been in 1938.

Furthermore, Germany had imposed price controls on goods and services, Which caused a constant shortage of goods.

Price controls were implemented during Hitler's regime, Making it easier for the government to purchase military goods and services at low fixed prices.

These price controls continued even after the war ended. It caused a massive shortage of essential goods in the market for the average consumer because suppliers wouldn't produce goods at a price lower than it takes to make that good.

The new leadership understood that Germany needed a market system. The elimination of price control imposed by Hitler's regime encouraged suppliers to start producing consumer goods.

Tax Reform

In post-war Germany, Tax reforms were implemented to encourage spending and investment and recover the economy to its pre-war level.

Corporate taxes ranged between 35% to 65%. But new tax reforms brought it to a flat 50%.

Allied powers applied a staggering 95% income tax to those earning more than 60k Reichsmark or 6k Deutschmark with the new currency.

After the tax reform, this 95% tax rate only applied to people earning more than 250k DM. It was less than 1% of the population.

In 1950, The median income among West German workers was 2,400 or 3000 DM, which had a marginal tax rate of more than 85% in the old tax system.

With new tax laws, The tax rate for average-income earners was reduced to only 18%.

The new tax reform allowed the middle class to increase spending on consumer goods and save more part of their income, raising their overall living standard. It also pushed high-income earners to pay more in taxes than average people.

These new economic reforms transformed the economy of Germany. Stores began to have plenty of goods to sell, and Germans trusted that a new currency had value.

At the time, Many countries criticized Ludwig Erhard for his economic policies.

He was called into the office of US General Lucius Clay, a commanding officer overseeing occupied West Germany.

Clay told Erhard his advisor informed him that Germany's new economic policies would be a terrible mistake. Erhard responded, “ Don't Listen to them, General, my advisor tells me the same thing”

In the long term, Ludwig Erhard proved them wrong and lifted the German economy to be the richest in Europe.

German Economic Miracle

With these new economic policies in place, West Germany started growing. Stores began to have a variety of goods to sell in the market, and as people started believing that the new currency had value, the bartering and the shadow market for goods also ended.

As new currency gained trust in the system, More people started to work and spend money on goods and services. It helped businesses hire more workers as consumers increased demand, providing Germans with many job opportunities to improve their living standards.

In May of 1948, Germans missed about 9.5 hours of the work week, which was spent looking for food and other necessities.

But in October, just a few weeks after the new currency was introduced, Price controls were lifted, and the number was down to 4.2 hours per week.

In June 1948, the nation's industrial production was about half its level in 1936.

By the end of 1948, industrial production in West Germany was 80% of its level in 1936.

The Marshall Plan

The European recovery program, famously known as the Marshall Plan, was crafted by US Secretary of State Geroge Marshall.

The United States gave more than 15 Billion dollars to European nations to recover their economies from the destruction caused by the war.

West Germany received about 1.4 billion dollars from the Marshall Plan through loans. But this monetary aid was overshadowed by the amount that Germany had to pay back as war reparation and the charges the allies made on Germans for the ongoing costs of the war, about 2.4 billion dollars per year.

In 1953, Germany would repay 1.1 billion of aid it had received. Germany made its last repayment in June 1971.

The aid from the Marshall Plan did help Germany to recover. Still, There were other reasons behind German economic success, the UK and France received far more aid than Germany. But it is still the wealthiest economy in Europe, ahead of the UK and France.

By 1958, West Germany's industrial production was four times higher than a decade earlier.

Small and medium-sized Enterprise

Small businesses played a significant role in making Germany the global export leader.

Small Businesses provide more than half of the jobs in the German economy. In 2022, Germany had approximately 2.6 million Small and Medium-Sized Enterprises (SMEs).

The Euro and European Union establishment provided tremendous opportunities for German small businesses to sell their quality product to European nations without any barrier and receive the payment in euros, thus reducing the exchange rate risk.

Germany is one of the largest exporters in the world. In 2022, Germany produced goods and services worth 4 Trillion dollars below the US, China, and Japan.

Germany is the fourth wealthiest country in the world. Its car companies have also played a crucial role in making Germany rich.

In 2016, Germany recorded the highest trade surplus in the world, worth 310 billion dollars. Meaning it exported far more than it imported from around the world.

European Union and Euro

Germany was one of the six founding nations of the European economic community. The EEC was established in 1957 known as the Treaty of Rome, which later evolved into the European Union. Germany was a strong advocate for European integration and cooperation,

It helped Germany build economic and political ties with European nations after World War Two.

Today, Germany is the largest economy in the European Union. It has the most influence on the European Union policies.

But at times of distress, as in the Greek debt crisis, the largest economy in the EU had to provide 22 billion euros in loans to Greece during its first Bailout.

Germany provided the biggest amount to Greece in the EU's 80 billion loan package. Being the largest economy in the EU bloc provided the most benefits, But it came with additional costs for Germany.

Conclusion

After losing two world wars, Germany's economy was nearing collapse.

Having educated and skilled workers who were willing to work long hours to produce goods and services of high quality, Such as German cars, helped fuel its economic growth.

In the German economy, Small and medium-sized businesses provide most employment compared to large corporations. They also play a vital role in making Germany one of the top exporters in the world.

The creation of the European Union and common currency among European nations helped Germany tremendously to make its exports more competitive among its European neighbors.

But being interdependent as European Union members are, At times, can make things worse when the economy is in recession, as it did in the European debt crises from 2009 to late 2010.

Germany’s economic miracle was achieved by many factors in its history, including the combination of innovation, effective policies, hard work, and some luck, which made it the wealthiest country in Europe.