Government Subsidies

Germany Table of Contents

The Länder are not alone in subsidizing or supporting certain industries: the federal government does it to a massive and increasingly significant degree. Despite Germany's commitment to a social market economy, exceptions to market principles existed in West Germany and are proliferating in united Germany. German economic institutes and experts have repeatedly warned that authorities at various levels have supported many economic activities that should long ago have been discontinued or compelled to become competitive. Federal and Land authorities have ignored the complaints of the economists but have usually promised to reduce or eliminate subsidies as soon as feasible.

Before unification, the West German government and various Länder supported a number of industries and services, such as coal, steel, aerospace, shipbuilding, and agriculture, with the federal government supporting activities across the board and the Länder supporting locally important and influential industries. Between 1970 and 1989, the total volume of subsidies, including those paid through the European Community (EC--see Glossary), rose from DM12 billion to over DM45 billion. The level of subsidies rose almost uninterruptedly, even after Kohl assumed office and his government had committed itself to reducing them. Although some categories of subsidies--for example, those for agriculture--were not fully under West German but rather under EC control, even the portion specifically designated for German farmers also rose by 250 percent during the 1980s. Overall, the federal government provided about one-third of total West German subsidies. The other two-thirds came from the Länder and the localities. During the late 1980s and early 1990s, the total has generally averaged around 6 percent of West German GDP, although it has risen because of unification.

Despite the concern expressed about West German subsidies, a 1990 Organisation for Economic Co-operation and Development (OECD--see Glossary) survey of Germany concluded that German subsidies were not unusually high by the standards of the EC. The OECD described them as being around the average for OECD countries. Separate International Monetary Fund (IMF--see Glossary) and Ministry of Finance studies reached a similar conclusion, indicating that West Germany was actually somewhat below the average among EC members in the level of subsidies.

Although such conclusions might have offered some comfort as a matter of general policy, it remains true that some German industries--especially in the traditional coal and steel complex--are dependent on subsidies to such an extent that they would have to be closed if they no longer benefited from government support of one kind or another. But subsidies are also often paid even to some of the largest and most profitable German concerns, such as Daimler-Benz, Siemens, Bayer, and Volkswagen, for special production or research lines. Those companies have usually stated that the subsidies cover only a minute part of their expenditures.

After unification, the combined subsidies of western and eastern budgets rose even higher, and the new all-German government has found itself compelled to provide even more subsidies in order not to permit an excessive level of structural unemployment in the former East Germany. Official East German statistics suggested that the level of subsidies in the GDR budget was 30 percent, but in reality the level may have been much higher because of the generally low level of productivity in the GDR. Although no total figures for German subsidies have been available in the confusion and diversity of programs since unification, the government has already promised to keep a number of unprofitable East German ventures (such as the steel complex around Eisenhüttenstadt and the shipbuilding docks around Rostock) in production until they become competitive--which will not be for decades, if at all.

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Source: U.S. Library of Congress