Page last updated at 13:19 GMT, Monday, 19 January 2009

Germany's orderly 'social market'

By Steve Rosenberg
BBC News, Berlin

UK Prime Minister Gordon Brown and German Chancellor Angela Merkel have agreed to work closely to try to overcome the current downturn, but they still have very different ideas about how their economies should be run.

Ludwig Erhard
Ludwig Erhard was Chancellor of West Germany 1963 - 1966
The year was 1948, and Germany had already been carved up by the victors of World War II. All through the conquered country, the economy lay in ruins.

But in the "Bi-Zone" - the area under the control of British and American troops - the foundations were being laid for a brand new economic system. Something that would be able to help the future West German state rise from the ashes and transform itself into a prosperous, democratic country.

The idea they came up with was the "social market" and its architect was a future Chancellor, Ludwig Erhard.

The concept was very simple: West Germany would have capitalism with a market economy, but the government would provide a significant amount of regulation to ensure fair play; much more regulation than in Anglo-Saxon capitalism, the system which had developed in Britain.

Over the years, the social market has been modified, updated, and sometimes even questioned. But the system that fuelled Germany's post-war economic miracle has not only survived: with the global economy in collapse, many Germans are hailing it as the only show in town.

'Casino capitalism'

In recent weeks, an ideological row has erupted between supporters of the social market and proponents of Anglo-Saxon capitalism.

Germany is facing its worst recession since World War II and many Germans blame that on the under-regulated and over-risky financial systems of countries like Britain and the US.

They believe it was those economies which triggered the credit crunch that dragged the global economy down the tube.

There's definitely something in our history and philosophy that makes us Germans demand more regulation
Economist, Ralph Brugelmann

On 14 January, the head of the German trades' union federation Michael Sommer vented his fury. He raged against "brutal, casino capitalism".

"The Anglo-Saxon economic model," he declared, "had blown it and would disappear." It would be replaced, he predicted, "by Germany's socially regulated and socially responsible version of capitalism."

After hearing that, I rushed off to consult an expert. If the social market really was the new way forward for the planet, then I wanted to learn a little more about it.

'Closer eye'

When I arrived at the Institute for the Economy, I admit I was rather apprehensive.

I am from Britain, after all, and perhaps in the current atmosphere I would be suspected of being a "casino capitalist" and driven out of town.

But when I rang the bell they let me in and economist Ralph Brugelmann was more than happy to chat.

Mr Brugelmann told me that the origins of the social market predated 1948. They extended far back into the mists of German history.

Ralph spoke of German philosophers - such as Hegel and Kant - and of Prussian kings, whose subjects expected their rulers to shape their lives and take care of them.

Angela Merkel
Angela Merkel is reluctant to "spend" in order to overcome the recession
"There's definitely something in our history and philosophy," Mr Brugelmann concluded, "that makes us Germans demand more regulation."

That goes for western Germany, but it applies even more to eastern Germany which for 40 years existed as a separate communist state.

Many people there grew used to the authorities providing for them and controlling all aspects of their lives. It was the state that gave citizens a flat, a job and a free holiday by the sea.

Of course there is a big difference between the social market and socialism.

Few Germans today enjoy the luxury of free accommodation or guaranteed employment. But the German state does keep a closer eye on the whole economic system than perhaps we are used to in Britain.

Germany has been urging the rest of the world to do the same for some time.

The world stage

Two years ago, when Germany held the presidency of the G8, I can remember Angela Merkel tried hard to convince world leaders to sign up to greater transparency on the global money markets and in hedge funds.

Back then no-one was interested. But now - after the crash - what is the British government suddenly calling for? That's right, greater transparency for the world's financial markets.

Not surprisingly, the Germans believe this proves they were right all along. That their system may be more cautious, less sexy than laissez-faire capitalism, but that it is a better, safer, fairer way of organising a society.

Germany had no housing bubble waiting to burst, Germans were not seduced by credit to the extent that people in Britain, the US or Spain were.

You can see why Germany's finance minister has been so quick to defend Germany's way of doing things - and to criticise Britain.

Of course, no system is perfect. Germany's unemployment rate is higher than Britain's.

The German economy is forecast to suffer just as badly as Britain's.

The German car industry is taking a big hit. But few Germans are casting doubt on their system, on the social market.

As the German proverb declares: "Order is half of life."

From Our Own Correspondent was broadcast on Saturday, 17 January, 2009 at 1130 GMT on BBC Radio 4. Please check the programme schedules for World Service transmission times.

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