Germany’s Post- Wirtschaftswunder Struggle

For many years after World War II, Germany’s economic output grew very rapidly—a period commonly referred to as the “Wirtschaftswunder,” or economic miracle. It came to an end in the 1970s. This paper addresses three questions: Why did growth decline after the 1970s? Why did Germany take so long to embark on reforms? What is the economic outlook today? It argues that two factors were responsible for falling growth: the end of the post-World War II economic catch-up and a failure to reform the economy in response to shocks. Because of Germany’s political system, economic reforms require broad popular support. However, this support changes constantly due to frequent elections, which makes it difficult for governments to push through ambitious reforms that typically have payoffs stretching beyond electoral cycles. Nonetheless, the depth of the 2001-05 economic downturn and Germany’s comparatively poor economic growth performance in Europe have by now forged a general agreement on the need for change. The European Union, notably with its policies that combat state aid and that call for sound fiscal positions, has played an important role in forging this agreement. Accordingly, Germany’s economic outlook has by now improved noticeably, although significant challenges remain.