Economic and Trade Development

The economic situation of Western Europe was faring extremely well in the first thirteen years of the 20th century following the Industrial Revolution. However, the growth of Nazism and Fascism followed by the World Wars and the Great Depression plunged most of the major European states particularly Germany and France into a seemingly irretrievable economic situation. What happened in Western Europe after the Second World War was an exceptional case of economic turnaround with a remarkable and swift pace of transformation to an industrialized society. This exceptional growth lasted only until 1973 but in this short span of time, it placed the Western Europe economy at par with other industrialized economies of the world despite the phenomenal destruction of men, materials and infrastructure during . (Grasping reality with both hands: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World); (Post-WWII Western European Exceptionalism: The Economic Dimension)

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The unparalleled success of the Western European economic policy can be attributed to the virtuous circle that it tapped into. Trade expansion resulted in growth, growth fuelled rise in real wage levels and expanded social insurance schemes which in turn led to social peace; social peace resulted in low inflation levels despite rapidly expanding production, rapidly expanding production resulted in high levels of investment which in turn fueled further growth and led to conditions favorable for international trade expansion. (Grasping reality with both hands: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World); (Post-WWII Western European Exceptionalism: The Economic Dimension)


One can identify three key periods in Germany post WWII which helped it to create new identities, institutions and interests. The first period which lasted from 1945 to 1949 was the Allied occupation. During this period Germany was temporarily divided into four zones with independent administration and without any form of central state apparatus. Germany’s position, both economically and politically was significantly weakened during this phase as compared to the U.S. And the U.S.S.R., the world’s new superpowers. The second period lasted from 1949 to 1990 when Germany was divided into two states — the FRG — Federal Republic of Germany, which was based on the western zones occupied by the French, British and American, and GDR — German Democratic Republic which was based on the eastern zone occupied by the Soviet Union. (Kopstein; Lichbach, 122)

During this period, the FRG changed, in economic terms, from being an average developer to become one of the world’s foremost developers. On the other hand, GDR which remained linked to the did not fare well economically and finally decayed with the collapse of the erstwhile USSR. The third period in German post WWII economic history started in 1989 with the collapse of Soviet-backed communism in Central Europe and the merging of East and West Germany into a single state in 1990. Together, reunited Germany has achieved the status of being one of the leading economies of Europe and the world. (Kopstein; Lichbach, 122)

Until early 1947, economic development was extremely slow. The condition was aggravated by the complete breakdown in the transportation system. The Allies contributed significantly to the transportation system and some of the vital industries like coal in order to boost the flagging economy. The turnaround came when the U.S. realized that it might need Germany’s support in order to stay ahead in the Cold War and thus established the “Economic Council” in the two zones that were under its control at that point of time. Subsequently, the Economic Council formed a vital part of the future FRG government. (Grunbacherv, 8)

Amongst the two German states, it was FRG that raced ahead in the post-WWII economic growth. The Marshall Plan for European Recovery initiated by the Americans contributed significantly to the economic and trade development of Germany but another equally significant factor was the domestic environment itself which promoted close cooperation between the state, organized labor unions and the leading businesses. The economic system that was fostered in Germany was a mixed economy, wherein both public as well as private sectors influenced resource allocation. The economic policies were also profoundly influenced by neo-liberal economists like A. von Hayek, A. Muller-Armack, and W. Eucken. From the beginning, there was complete agreement amongst the main political parties that the establishment of the new economic system would be a socially responsible market type economy. West German leaders had realized that another military conflict would prove to be fatal for the country and therefore actively supported the campaign for closer economic and political cooperation between European states. This would also help in expanding future intra-European trade. (Kopstein; Lichbach, 125); (The Postwar Economic System in Germany: Creation, Evolution, and Reappraisal)

The reconstruction and rebuilding activities from 1949 to the sixties led to a boom in the economy. Manufacturing of consumer goods in high volumes started and with the aid of steady technological progress and expansion into new markets, the industry’s focus shifted to machines, electrical equipment, cars, and furniture. (Unit 1: Post-war development and structure of the German economy) Throughout this period, Germany faced a major shortage of labor due to the fact that 8% of its population had perished during WWII. This meant importing labor from other countries in southern Europe and from Turkey. (Unit 1: Post-war development and structure of the German economy); (France, Germany and the Struggle for the of the Rhineland)

As part of its policy of fostering closer intra-European relations, Germany along with France decided to create the EMS or European Monetary System in 1978. (Kapstein; Mastanduno, 364) The unification of the two German states in 1990 upset the German economy for some time and initiated a large number of major adaptive processes and transformations. The huge demand in consumer goods in the hitherto deprived eastern Germany resulted in a short-lived economic boom in western Germany but the realities of setting up a competitive economy soon took over. Unemployment rates went up as many workers in previously state-owned firms were laid off. Despite the economic growth in western Germany, the eastern parts of reunited Germany still constitute some of the poorest regions of Europe. The miraculous growth rate experienced by Germany in the first and second phases of its economic history slowed down significantly after reunification. (Unit 1: Post-war development and structure of the German economy)

According to some experts, the swift rates of economic development witnessed in Germany and France after WWII can be attributed to their low starting point. In addition, the international agreements like GATT, EEC and Bretton Woods helped in setting up a remarkably favorable climate for expansion of international trade. This created an environment of open competition where diffusion and imitation of enhanced productive techniques were favored. (Graham; Seldon, 291)

The creation of the European Monetary Union has promoted increased competition and has stimulated the German economy which had weakened post-unification. The efforts of the EU and the Bundesbank have helped German investments towards an upswing. German shares in the world market have increased leading to higher wage demands which in turn have fueled German government investment and economic growth. Future economic growth rests on Germany’s ability to promote better relationships with international institutions and finding solutions to its domestic monetary problems. Another problem that the German economy faces is its rapidly aging population and the expansion of social security benefits which have adversely affected its economic performance and weakened the country’s economic foundations. The disparities between the eastern and western parts of Germany are also a matter of concern. This disparity can be reduced only through economic expansion which can be achieved through reduction of trade tariffs leading to more exports, enhanced cooperation with EU, China and the rest of the international community and increasing participation in the global economy. (German Economic History)

France suffered wide-scale devastation during WWII with 1.5% of its population perishing in concentration camps, during bombardments and on the battlefields. There was massive loss of infrastructure with the destruction of 37,000 km of railroads, one million buildings and 75% of its rolling stock. It was not just the German occupation and the War that had damaged the French economy but a decade of depression had also taken its toll. (France, Germany and the Struggle for the War-making Natural Resources of the Rhineland); (Graham; Seldon, 293)

The reconstructions programs carried out in Western Europe just after WWII brought profound changes in France as well. The was an infrastructural and industrial modernization plan that eventually helped France to stand up to Germany’s economic might. This plan not only resulted in the building of hydro-electric dams and electrified railways but also aided in establishing a more modern nation and enhanced its image in the world. The reconstruction efforts also helped to build an increased sense of national pride and unity. These economic reforms were complemented by widespread social reforms as well. The French social reforms of 1945 — 1946 helped to establish a social security system which was based on autonomously-managed funds for wage-earners. (Buchanan, 72)

The economic policy tools that were employed just after the war subsequently underwent some changes. From 1947 to 1950 direct controls on wages and distribution were eliminated followed by removal of trade controls in 1958. However, the government continued to maintain its hold over prices and credit distribution which made it different from many of its neighboring states in the postwar period. The French Ministry of Finance exerted greater control over the economy than the Bank of France. This led to a greater predilection to resort to devaluation when external equilibrium resulted due to the state failure to control incomes. In France, the period between 1945 and 1975 was known as the “thirty glorious years” because of the phenomenal economic performance. During this period, the average growth rate of GDP was around 6.8% which was quite remarkable considering that Britain’s average GDP growth rate was 2.4% and Germany’s was 4.8%. (Graham; Seldon, 295)

The National Champions Policy initiated by Charles de Gaulle in the late 1950s continued through the early 1980s and attempted to form conglomerates by concentrating the French industry. The main motive behind this policy was to enhance the industrial competitiveness of France and to elevate the nation to an autonomous industrial power without depending on other economies. The franc was devalued in order to attract foreign investment and to retain the money of French citizens in the country. Between 1957 and 1962, Foreign Direct Investment by U.S. alone grew by 17.3% every year. However, FDI slowed down after France laid off a large number of workers General Motors France and Remington Rand France as a part of economic restructuring. Tight governmental controls over FDI with the requirement of producing large amounts of information by companies willing to invest in France slowed down the growth of FDI in France. French investment in other countries was quite low until the mid eighties. Outward investment in France required permission from the Ministry of Finance and the condition that 75% of the outward investment had to be taken from foreign exchange. (Post-World War II French Industrial Policy: The Problems with Government Intervention, the Implications for World Politics)

The government’s lack of enthusiasm in outward investment and the from the Common market led to the decay of the protectionist policies and the nationalized industry of France. The French economy achieved a small degree of international success due to the economic policies followed by Giscard between 1974 and 1980 when subsidies for a small number of selective French companies in specific industries were increased threefold. Promoting the mergers of small manufacturing enterprises — SMEs led to a large-scale deskilling of workers and of large firms that manufactured standardized but low-cost products. (Post-World War II French Industrial Policy: The Problems with Government Intervention, the Implications for World Politics)

When the socialists came to power in 1981, they started a massive drive for nationalization of industries supported by huge amounts of government aid. The economic policies followed by the Socialist governments led to massive losses in the public sector, a large budget deficit and increased inflation levels. After the Socialist regime ended, France started concentrating on privatization of its industries and promoting outward as well as inward investments by relaxing the laws that controlled it. As a result, its average FDI outflow increased from $3.25 billion from 1984-86 to $19.53 billion from 1987-90. France lifted all trade restrictions and investment restrictions and completed its liberalization process by 1996. (Post-World War II French Industrial Policy: The Problems with Government Intervention, the Implications for World Politics)

From 1999 onwards, the French economy has witnessed strong growth. It has been in the forefront of the integration of the European nations into a European union and had pioneered the drive towards a common European currency. A nuclear power and a permanent member of the Security Council, France has risen from a ravaged nation to a position of strength. The monetary union has created favorable conditions for France and has helped it in maintaining economic competitiveness and a lucrative business destination. (The economic situation in France and the euro area); (France’s political and economic situation) The recent worldwide financial crisis has taken its toll on France as well with economic growth likely to fall below 1%. This negative growth is expected to continue in 2009. However, according to experts, economic activity is expected to pick up by mid-2010. (France: A widening budget deficit)


The economic and trade developments in Germany and France provide excellent case studies on how countries can not just rebound back into the forefront of international trade even after being ravaged by war and economic depression, but also demonstrate the flexibility, commitment and resilience needed to overcome every weakness with a matching strength. France and Germany, traditional foes till the end of WWII, have come together to integrate Europe into a union based on mutual cooperation that will foster increased growth in the region. The monetary union resulting in a common currency had France and Germany as the main driving forces behind it and the move has paid rich dividends for both the nations. The worldwide recession has blunted the economic growth of both the countries but there is no doubt that their economic policies will show enough flexibility to overcome that hurdle as well.


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Figure 7: Current and projected economic situation of Germany

Figure 8: Current and projected economic situation of France