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Social Market Economy

History, Principles and

Implementation –
From A to Z
Social Market Economy
History, Principles and
Implementation –
From A to Z

Edited by
Rolf H. Hasse, Hermann Schneider & Klaus Weigelt

English edition
© 2008 Ferdinand Schöningh, Paderborn, Germany

All rights reserved

While copyright in this publication as a whole is vested in Verlag Ferdinand Schöningh GmbH,
Paderborn, Germany, copyright in the text rests with the individual contributors, and no section
may be reproduced in whole or part without the express permission, in writing, of both the con-
tributors and the publisher. It should be noted that any opinions expressed are the responsibility
of the individual contributors and that Ferdinand Schöningh does not necessarily subscribe to the
opinions of contributors.

ISBN: 978-0-9802543-7-2

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First published in German: Lexikon Soziale Marktwirtschaft – Wirtschaftspolitik von A bis Z

ISBN 3-506-97018-6
© 2002 Verlag Ferdinand Schöningh GmbH, Paderborn, Germany
Second updated and extended edition, 2005
The editors

Prof. Dr Rolf H. Hasse was born in Berlin in 1940. He completed his undergrad-
uate studies in economics in Münster, Westphalia and Cologne. Hasse graduated in
1967 and completed his doctorate (1973) and post-doctoral qualification (1981) in
Cologne. From 1981 to 1998 he was Professor of Economics, in particular econom-
ic policy, at the University of the Federal Armed Forces in Hamburg. Hasse was at
the University of Leipzig from September 1998 to March 2006. Since March 2006
he has been acting manager of Fraunhofer-Zentrum für Mittel- und Osteuropa
(MOEZ), Leipzig. His main focus of research and publications include economic
policy, international business relations and European integration.

Dr Hermann Schneider was born in Niederwalgern (near Frankfurt) in 1940. He

completed his undergraduate studies in economics in Frankfurt and Marburg. After
graduation he became a research assistant in Marburg, concentrating on economic
policy. Schneider’s doctorate focused on development policy. He became a research
assistant for the Konrad-Adenauer-Stiftung (KAS) both in Germany and abroad.
Schneider was the KAS national representative in Colombia (1977–1982), and
director of the Science Project for Latin America (Buenos Aires) (1988–1994),
where he was able to focus on socio-economic institutional order policy issues.
Schneider was the KAS national representative in Chile from 1994 to 1996.

Dip Vw (Master in Economics) Klaus Weigelt was born in Königsberg, Prussia,

in 1941. He is an economist (Freiburg), and since 1971 he has been a KAS research
associate both in Germany and abroad. Weigelt was director of the KAS Academy for
11 years (1981–1992), KAS national representative in Caracas, Venezuela
(1975–1981), director of the KAS European Office in Brussels (1992–1998), and
director of the KAS foreign branch in Budapest, Hungary (2002–2007). The main
focus of his publications is institutional order policy and economic ethics in the
social market economy.


fter half a century of economic policy under the banner of the social market

A economy, the vast majority of Germans have accepted this as their country’s
economic order. This is particularly due to the consistent implementation of
the institutional order (Ordnungs) concept and the resulting rapid economic and
social successes in the initial phases of the Federal Republic. However, insight into
the context and functioning of the social market economy has declined considerably
over the years, while its interpretation has become highly arbitrary. Vital institu-
tional order policy principles of the social market economy have thus been diluted
beyond recognition. In public debate the social market economy has become almost
an empty formula that is used by all and sundry. In this way, the model of the social
market economy has become an example of the continuation of an idea, even
though its fundamental principles are often flawed in their implementation and its
core is under threat.
Economic policy in Germany is faced with enormous problems. At present,
neither its economic aims nor its social aims are being satisfactorily achieved.
Unresolved problems range from long-term unemployment to increasing demands
on the welfare system, the dangers of renewed inflation and the unanswered ques-
tions relating to an economic policy in a European context, as well as the worldwide
challenges of globalisation, environmental problems and poverty. The social market
economy in its conceptual form can offer answers to these questions and problems;
however, these answers have become obscured, with the result that they are no
longer clearly visible and are therefore not sufficiently used. The German and
European economic policies are looking for direction and are currently going
through an institutional order policy crisis.
The aim of this volume is to clarify the concept of the social market economy in
terms of economic and social policy and its political implementation. On the one
hand, it is an attempt to retrace the origins and basic principles of the social market
economy. On the other, it presents the different forms of social market economy, the
need for adaptation in the light of recent challenges, the objections to social market
economy and its prospects as a future economic and social system.
The book is aimed at the younger generation, which has the impartiality, openness
and critical attitude necessary for implementing reforms, as well as an openness to
conceptual orientation.
The editors and contributors have tried to summarise the essential aspects in short
articles and to formulate the sometimes difficult factual issues in comprehensible
8 Preface

language. Cross-referencing makes the book more user-friendly, while a glossary is

included for the explanation of specialised terms and their relevance.
In terms of work on the original German version, the editors are particularly
grateful to Prof. Dr Hans Willgerodt for his suggestions regarding the conceptual
unity of this work, to Marina Ignatjuk for her diligent work in coordinating and
editing the contributions, and to Wolfgang Reeder for selecting the illustrations and
The editors would like to thank all the contributors for their punctual and diligent
work. Particular thanks go to Joachim Hummel who managed and coordinated the
complicated task of editing the original German second edition. Furthermore, we
would like to thank the staff of the Institute for Economic Policy at the University
of Leipzig and the Konrad-Adenauer-Stiftung (KAS) in St. Augustin, which have
both contributed to the book’s success in many ways.
This english version is based on the second edition (2005) of the original German
work, with updates where relevant. At a time of international upheaval of institu-
tions and structures, its content responds to the lively interest in this subject as well
as providing invaluable information on institutional order policy (Ordnungspolitik).
Regarding this English version, we must acknowledge the translator Dr Vera
Leckie and the English language editors Tracy Seider and Richard Proctor-Sims for
their diligence and commitment to this challenging task.
The editors would also like to thank the KAS Johannesburg office staff for their
constructive collaboration in producing the English version of this book. KAS head
office deserves thanks for its immediate and positive response to the idea, for its
encouragement and support while the work was in progress, as well as for provid-
ing the necessary funds.

Rolf Hasse Hermann Schneider Klaus Weigelt

Leipzig Bonn Budapest


Alphabetical list of biographies and themes 11

Biographies 27

Themes 79

Glossary 477

Sub-division of themes 495

Abbreviations 503

List of tables, figures and other illustrations 505

List of contributors 507


Biographies and other personalities 515

Themes 517


Selected German economic research and advisory institutions 530


Alphabetical list of biographies and themes


Beckerath, Erwin von 27

Norbert Kloten

Böhm, Franz 29
Ulrich Immenga

Briefs, Goetz A. 30
Anton Rauscher

Dietze, Constantin von 31

Nils Goldschmidt

Einaudi, Luigi 32
Hans Willgerodt

Engels, Wolfram 33
Rolf H. Hasse

Erhard, Ludwig Wilhem 34

Rainer Klump

Eucken, Walter Kurt Heinrich 36

Lüder Gerken

Frickhöffer, Wolfgang 39
Joachim Starbatty

Hayek, Friedrich August von 40

Gerd Habermann

Hensel, K. Paul 42
Gernot Gutmann

Höffner, Joseph Kardinal 43

André Habisch
12 Alphabetical list of biographies

Kamitz, Reinhard 45
Wolfgang Schmitz

Karrenberg, Friedrich 47
Martin Honecker

Lutz, Friedrich August 47

Verena Veit-Bachmann

Meyer, Fritz W. 49
Helmut Gröner

Miksch, Leonhard 50
Heinz-Dieter Smeets, Michael Sket

Müller-Armack, Alfred 52
Friedrun Quaas

Nell-Breuning, Oswald von 53

Lothar Roos

Nipperdey, Hans Carl 57

Hans-Jürgen Papier

Röpke, Wilhelm 58
Hans-Günter Krüsselberg

Rueff, Jacques 60
Josef Molsberger

Rüstow, Alexander 63
Jan Hegner

Schiller, Karl 65
Egon Tuchtfeldt

Schleyer, Hanns-Martin 67
Franz Schoser

Schmölders, Günter 67
Horst Zimmermann

Schreiber, Wilfrid 68
Heinz Lampert
Alphabetical list of biographies 13

Stoltenberg, Gerhard 70
Peter Wichert

Stützel, Wolfgang 72
Peter Bofinger

Thielicke, Helmut 74
Rolf Kramer

Veit, Otto 75
Hans Jörg Thieme

Welter, Erich 77
Walter Hamm
14 Alphabetical list of themes


Accident insurance 79
Albrecht Bossert

Achievement principle 80
Hans Willgerodt

Act Against Restraints of Competition 81

Kurt Stockmann

Agricultural policy 83
Stefan Tangermann

Balance of payments equilibrium 85

Marcus Cieleback

Banking system, structure and supervision 86

Stephan Paul, Peter T. Baltes

Basic rights, the Basic Law and social market economy 89

Hans Willgerodt

Basic social security 91

Jörg Althammer

Business accountancy: Basic concepts 93

Marc Richard

Business cycles 95
Adolf Wagner, Sabine Klinger

Business cycle policy 96

Adolf Wagner, Sabine Klinger

Capital markets 98
Stephan Paul

Catholic social doctrines 100

Lothar Roos

Chamber system 103

Hans Werner Hinz
Alphabetical list of themes 15

Chambers of commerce and industry 104

Dagmar Boving

Circular flow of incomes, national income and 106

national product
Adolf Wagner, Sabine Klinger

Co-determination 107
Gernot Fritz

Collective agreements 109

Gernot Fritz

Competition 111
Hans Peter Seitel

Concentration 114
Kurt Stockmann

Concerted Action and Alliance for Employment 116

(Konzertierte Aktion/Bündnis für Arbeit)
Walter Hamm

Conflicting aims in economic policy 118

Thomas Apolte

Conservatism 120
Klaus Weigelt

Constructivism 122
Christian Watrin

Consumer policy 126

Wolfgang Reeder

Council of Experts 128

Martin Wolburg

Currency system and exchange rate regimes 129

Wolf Schäfer

Demographic development 131

Thomas Straubhaar
16 Alphabetical list of themes

Deregulation 135
Juergen B. Donges

Development aid, development policy 137

Hans-Rimbert Hemmer

Distribution 139
Jürgen Siebke

Economic ethics 141

Ingo Pies, Alexandra von Winning

Economic orders: Theory and implementation 143

Helmut Leipold

Education and research policy 146

Ulrich van Lith

Education funding 148

Ulrich van Lith

Employment 153
Ansgar Belke, Frank Baumgärtner

Employment policy 157

Ansgar Belke

Enterprise, plant 159

Kurt J. Lauk, Rainer Gerding

Entrepreneur, manager 161

Kurt J. Lauk, Rainer Gerding

Environmental impact 163

Paul Klemmer

Environmental policy: Actors 165

Bernd Hansjürgens

Environmental policy: Conflicting aims 167

Eberhard Feess

Environmental policy: Instruments 167

Alfred Endres
Alphabetical list of themes 17

Environmental protection objectives 169

Fritz Söllner

Environment-oriented management 171

Ulrich Steger

European Central Bank, German Federal Bank 172

Reiner König

European Economic and Monetary Union 174

Rolf H. Hasse

European monetary policy: Actors 178

Diemo Dietrich

European monetary policy: Aims and duties 179

Diemo Dietrich

European monetary policy: Instruments 180

Diemo Dietrich

European monetary policy: Strategies 182

Diemo Dietrich

EU: Agricultural policy and enlargement east 183

Stefan Tangermann

EU: Budgeting 186

Alexander Schumann

EU: Competition policy 190

Peter Behrens

EU: Education and research policy 192

Ulrich van Lith

EU: Employment policy 194

Ansgar Belke

EU: Enlargement 197

Wolfgang Wessels, Jürgen Mittag

EU: Environmental policy 200

Helmut Karl
18 Alphabetical list of themes

EU: History 202

Melanie Piepenschneider

EU: Industrial, research and technology policy 203

Joachim Starbatty, Andreas Schumm

EU: Maxims for action 206

Hans-Eckkart Scharrer

EU: Organs and institutions 208

Wolfgang Wessels, Jürgen Mittag

EU: Reforms and consolidation – economic aspects 211

Daniel Piazolo

EU: Reforms and consolidation – political aspects 214

Wolfgang Wessels, Jürgen Mittag

EU: Regional and structural policy 217

Reiner Martin

EU: Social policy 220

Hans Jürgen Rösner

EU: Trade policy 222

Detlef Böhle

EU: Transport policy 224

Karl-Hans Hartwig

Family policy 226

Hans Jürgen Rösner

Federal Cartel Office 227

Kurt Stockmann

Federal Employment Agency 229

Gerhard D. Kleinhenz

Federal Republic (Bund), federal states (Länder) and municipalities 232

Klaus Dieter Diller

Financial constitution 233

Dietrich Dickertmann, Peter T. Baltes
Alphabetical list of themes 19

Fiscal federalism 235

Dietrich Dickertmann, Peter T. Baltes

Foreign trade 238

Markus Neimke

Globalisation 241
Heinz Gert Preuße

Growth 245
Günter Gabisch

Health insurance 247

Albrecht Bossert

Housing policy: New federal states (Länder) 249

Katrin Leonhardt

Housing policy: Old federal states (Länder) 251

Winfried Michels

Income 254
Jörg Winterberg

Indebtedness of developing countries 257

Ronald Clapham

Individual responsibility 260

Lüder Gerken

Industrial action 261

Hans Jürgen Rösner

Industrial policy 263

Peter Oberender, Stephan Ruckdäschel, Thomas Rudolf

Industrial relations constitution 266

Gernot Fritz

Institutional economics 267

Martin Leschke

Institutional order policy (Ordnungspolitik) and process policy 270

Hans Jörg Thieme
20 Alphabetical list of themes

Institutional order policy (Ordnungspolitik): 271

Exemptions from competition rules
Norbert Eickhof

Integration 274
Karl Wolfgang Menck

Interest groups, lobbies 276

Werner Lachmann

International currency system 278

Carsten Eppendorfer

International Labour Organization 280

Peter Clever

International migrations 283

Thomas Straubhaar

International organisations 287

Marina Ignatjuk

Interventionism 290
Alfred Schüller, Thomas Welsch

Keynesianism 293
Adolf Wagner, Sabine Klinger

Labour law 295

Gernot Fritz

Labour market order 297

Gerhard D. Kleinhenz

Labour market policy 300

Rüdiger Soltwedel

Liberalism 303
Ralph G. Anderegg

Managing and planning 305

Gernot Gutmann
Alphabetical list of themes 21

Market economy 307

Joachim Starbatty

Market economy and public institutions 308

Hans Willgerodt

Market mechanism 310

Hermann Schneider

Markets and prices 312

Hans Peter Seitel

Media policy 313

Norbert Eickhof, Henning Never

Middle class policy 316

Eberhard Hamer

Monetarism 317
Roland Vaubel

Monetary order 318

Wim Kösters

New economy 320

Wolf Schäfer

Nursing care insurance 321

Albrecht Bossert

Occupational health and safety 323

Werner Schönig

Old-age pensions 325

Thomas Apolte

Open markets: Market entry, market exit 327

Dieter Fritz-Aßmus

Parastatals 329
Dietrich Dickertmann, Viktor Wilpert Piel

Patent system 331

Dieter Fritz-Aßmus
22 Alphabetical list of themes

Pension insurance (additional services) 333

Werner Schönig

Policy consulting 334

Stefan Okruch

Political parties 337

Horst-Dieter Westerhoff

Poverty 340
Horst-Dieter Westerhoff

Price level stability 343

Heinz-Dieter Smeets

Privatisation 347
Dietrich Dickertmann, Peter T. Baltes

Production and supply 349

Hans Peter Seitel

Profit 350
Marc Richard

Property 354
Heinrich Höfer

Protection of freedoms 356

Helmut Leipold

Protestant social ethics 358

Martin Honecker

Public debt 361

Dietrich Dickertmann, Annemarie Leiendecker

Public enterprises 363

Dietrich Dickertmann, Viktor Wilpert Piel

Public expenditure 365

Dietrich Dickertmann, Annemarie Leiendecker

Public revenue 367

Dietrich Dickertmann, Viktor Wilpert Piel
Alphabetical list of themes 23

Public-private partnerships 371

Peter Oberender, Thomas Rudolf

Reconstruction East 373

Ullrich Heilemann, Hermann Rappen

Redemption Fund for Inherited Liabilities 375

Ullrich Heilemann, Hermann Rappen

Resource protection 377

Klaus W. Zimmermann

Reunification: Monetary, economic and social union 380

Rolf H. Hasse

Reunification: Monetary union through currency conversion 383

Peter Bofinger

Shadow economy 385

Wolf Schäfer

Social budget 386

Jörg Althammer

Social capital 389

Stefan Okruch

Social justice (social balancing) 390

Friedrun Quaas

Social market economy: An introduction 393

Friedrun Quaas

Social market economy: Concept of man 395

Klaus Weigelt

Social market economy: In the EU 398

Karl von Wogau

Social market economy: Political implementation 401

Christian Otto Schlecht

Social market economy: Principles and functioning 407

Dietrich Dickertmann, Viktor Wilpert Piel
24 Alphabetical list of themes

Social market economy: Social irenics 416

Friedrun Quaas

Social partners 418

Hans Jürgen Rösner

Social partnership 419

Hans Jürgen Rösner

Social policy 420

Heinz Lampert

Social policy: International 423

Hans Jürgen Rösner

Social state and welfare state 424

Heinz Lampert

Social system 426

Heinz Lampert

Socialism/planned economy 429

Alfred Schüller, Thomas Welsch

Societal foundation of economic orders 431

Friedrun Quaas

Solidarity surtax 433

Ullrich Heilemann, Hermann Rappen

Speculation 435
Franz-Josef Leven

Statistics 436
Horst-Dieter Westerhoff

Structural policy 439

Walter Hamm

Subsidies, government assistance 441

Dietrich Dickertmann, Annemarie Leiendecker

Supervisory offices 443

Dieter Fritz-Aßmus
Alphabetical list of themes 25

Supply and demand 445

Hans Peter Seitel

Sustainability 448
Rolf H. Hasse

System(s) competition 449

Ronald Clapham

Tax policy 451

Wolfgang Reeder

Third ways: Mixed economy 454

Alfred Schüller, Thomas Welsch

Transport policy 456

Karl-Hans Hartwig

Treuhand Privatisation Agency (Treuhandanstalt) 458

Uwe Siegmund

Types of market economy 460

Joachim Starbatty

Unemployment: Causes and effects 463

Hans-Günter Krüsselberg

Unemployment: Social security 467

Hans-Günter Krüsselberg

Vocational training and further education 471

Ulrich van Lith

Wealth accumulation policy 473

Eckhard Knappe

World trade order 474

Dieter Bender
Erwin Emil von Beckerath 27

The First World War marked the

Biographies collapse of the old European political
order that had been established in 1815
by the Congress of Vienna, with its
world economic order of free trade and
Beckerath, Erwin Emil von the gold standard. Like many others,
Born 31 July 1889 von Beckerath asked himself how a new
Died 23 November 1964 order could be created from the chaos.
He studied the great political thinkers
Three historical periods influenced von from Machiavelli to Tocqueville, from
Beckerath’s life and career: the last decades Marx to Max Weber, but also Bergson,
before the First World War; the inter-war Lenin, Sorel, Mosca and Robert
years; and the emergence of the new political Michels. But most of all von Beckerath
and social order and the →social market studied Vilfredo Pareto and his teach-
economy in (Western) post-war Germany. ings about logical and illogical actions
Having grown up in one of Krefeld’s great and the ‘cycles of the elites’.
Mennonite merchant families, von Beckerath Von Beckerath examined fascism in
began to develop his interest in history, politics, Italy, which with the Stato Corporativo
economics and the social sciences under his might have qualified as a potential, albeit
academic supervisor, Dr Gustav von Schmo- dictatorial, system for economy and
ller. Even before the end of the war – and society. However, for reasons inherent in
influenced by the academic writings of the the system and influenced by Mus-
finance and transport expert Emil Sax – von solini’s fateful pact with Hitler in the
Beckerath turned his attention to the logic and 1930s, this system degenerated into one
clarity of the Vienna School of Marginal of the totalitarian systems of 20th centu-
Utility (doctrine of subjective value). It was ry Europe.
then that he started to teach this subject in his The Erwin von Beckerath Associa-
inimitable style, deepened by references to the tion thought hard about both the present
great economic thinkers of every school of and the future of a National Socialist
thought. Throughout his many years as chair- Germany caught up in a world war. The
person of the Scientific Advisory Council association had been started on a quasi-
(1948–1964), von Beckerath played a con- private basis in March 1943, after Class
siderable role in the implementation of the XI of the German Law Academy had
concept of the social market economy. been closed down by a government that
was growing increasingly suspicious.
After 1945, von Beckerath embarked on After the dissolution of the Associa-
a detailed analysis of the macro- tion for Social Policy (1936), Jens
economic ideas that John Maynard Jessen, executed in 1944 after the
Keynes had developed during the 1930s, attempt on Hitler’s life, had been trying
whose importance he recognised for to give to the economists who had lost
economic policy (→Keynesianism). In their home base a new forum in the
the decades prior to that, he had articu- ‘Economics Study Group’, chaired by
lated very clear ideas about the structure von Beckerath. In the association,
of a free post-war system. Erwin von Beckerath undertook to
28 Erwin Emil von Beckerath

work out ‘the principles of an econom- Among his historical writings on doc-
ic system for the transition period from trine and methodology, the biographical
war to peace, and the shape of the new contributions are seen as models of
economic system after the demise of appreciation for a scientist. Von Beck-
the regime’. The preliminary work of erath’s discourses on the theory of eco-
the association – today considered as nomic policy and his essays on political
one of the Freiburg resistance groups – policy are today still greatly valued.
which was already well advanced by
then, came to an abrupt end with the ACADEMIC AND PROFESSIONAL CAREER :

assassination attempt on Hitler in 1944. Undergraduate degree in History at

After the war, there were plans to Freiburg, followed by an Economics degree
in Berlin. On 18 March 1912 he received his
resuscitate the association when on 24
doctorate from the Friedrich-Wilhelm
January 1948, on the initiative of Ludwig
University in Berlin. From July 1913 until
→Erhard, the Economic Administration February 1915 he was assistant lecturer in
for the United Economic Zone (the eco- the Department of Economics at the Uni-
nomic administration for two zones) versity of Leipzig. From February 1915 until
established a scientific advisory body. Its January 1916, military service; subsequently
founder members →Eucken, →Böhm, made tutor to the Princes of Saxony as a
Lampe, Preiser, Wessels and von commissioned officer. From January 1916
Beckerath – who was quickly elected until March 1917, assistant staff member at
chairman – had already been part of the the Ministry for Public Works in Bremen; in
Erwin von Beckerath Association which March 1917, assistant lecturer in the Stieda
was then adequately replaced by the chair at the University of Leipzig. On 4 May
1918 post-doctoral lecturing qualification at
advisory body. The advisory body, which
the University of Leipzig under Karl
after the establishment of the Federal
Bücher; in January 1920, associate professor
Republic became affiliated with the of Economics at the University of Rostock;
Federal Ministry for Economic Affairs, in 1920, professorship in Economics at the
remained the undisputed model for University of Kiel; in 1924 at the University
independent political advisory organisa- of Cologne; from 1937 professor of
tions in the new Germany. It sustained Economics and Political Sciences at the
and inspired the birth of the social mar- University of Bonn until his retirement
ket economy with its reports, and von from academic service in 1957. From 1931 to
Beckerath remained its chairman until 1939, he was German director of the
his death in November 1964. German–Italian Cultural Institute (Petrarca-
Haus) in Cologne.
After he was made professor emeri-
tus in Bonn, von Beckerath lectured in
Basel at the request of Edgar Salin, to BECKERATH, E. v. (1927), Wesen und
whom he had been close since the Werden des faschistischen Staates, Berlin; —
foundation of the List Society in 1924. (1962), Lynkeus. Gestalten und Probleme aus
He was as involved in its re-establish- Wirtschaft und Politik, Tübingen; KLOTEN,
ment after the war (June 1955) as he N. (1966), Erwin von Beckerath, in:
was in the re-establishment of the Asso- Finanzarchiv, N. F. 25, pp. 193ff.
ciation for Social Policy (Verein für
Socialpolitik) (16 September 1948). Norbert Kloten
Franz Böhm 29

Böhm, Franz ist economy. However, and in large

Born 16 February 1895 measure due to Böhm, even politicians
Died 26 November 1977 had to concede that competition left to
its own devices eventually self-destructs,
unless restraints on competition are
made illegal.
In Germany, this led to the interna-
tionally recognised, highly advanced
→Act Against Restraints of Competition,
which even left its mark on the contin-
ued development of the Competition
Laws of the European Community. It
forms the basis for action by the
→Federal Cartel Office and the European
Commission against agreements and
mergers which restrict trade. Anyone
who feels they have a case can defend
themselves against improper use of eco-
nomic power by appealing to the courts.
Today, the Act Against Restraints of
Competition – often simply referred to
as the antitrust law – has become a fully
integrated part of the economic and
Böhm’s influence on the development of anti- social order.
trust law and competitive policy in the Federal Franz Böhm initiated this process
Republic as well as in today’s European with his most important work,
Union was considerable. With his academic Competition and the Battle against
work, he paved the way for the introduction of Monopolies, which was published in
a law against trade restrictions; a law that 1933. The Freiburg School where
makes it possible to take action against price Böhm and Walter →Eucken had a guid-
cartels, predatory competition or the creation of ing influence, started at around the
monopolies through company mergers. same time. It represents one specific
branch of the School of Ordo–→liberal-
During the 1920s and through tangible ism, a legal system of liberties which,
successes after the Second World War, too, imposes boundaries on state inter-
Böhm made his conclusion public that ventions. As a Member of Parliament,
economic →competition as a fundamental Böhm was involved in the creation of
element of a →market economy requires a the antitrust law that came into force in
legal framework. His conclusion was 1958.
frankly opposed to the currently prevail-
ing views on which aspects of an econo- ACADEMIC AND PROFESSIONAL CAREER :
my needed to be organised. Cartels and Professor Dr. jur. doctorate and post-doc-
business conglomerates were seen as an toral lecturing qualification in Law; senior
inevitable phenomenon of a late capital- university lecturer at Freiburg in 1933, lec-
30 Goetz A. Briefs

turer at the University of Jena until the worker in a liberal-capitalist age, Briefs
withdrawal of his lecturer’s licence on polit- saw the transition from the ‘classical’ to
ical grounds in 1938. 1946–1962: incum- the ‘consolidated’ trade unions as a
bent of the chair for Civil, Commercial and
problem in that they were trying to gain
Economic Law in Frankfurt. 1952–1964:
and exercise control over companies
served a member of parliament for the
Christian Democratic Union and led the
and the workforce.
German Delegation which negotiated repa- Briefs was a proponent of the social
ration agreements with the state of Israel market economy, which he saw as being
and the Jewish international associations. under threat by the demands for ‘parity
in →co-determination’ and the ‘democra-
REFERENCES: tisation’ of the economy and all other
BÖHM, F. (1933), Wettbewerb und aspects of society.
Monopolkampf, Berlin (Reprint 1964,
Cologne); — (1937), Die Ordnung der ACADEMIC AND PROFESSIONAL CAREER :
Wirtschaft als geschichtliche Aufgabe und rechtss- Briefs initially embarked on undergraduate
chöpferische Leistung, Stuttgart, Berlin; — studies of Philosophy and History in
(1960), Über die Ordnung einer freien Munich, but then changed to Economics in
Gesellschaft, einer freien Wirtschaft und Freiburg, where he submitted his doctoral
über die Wiedergutmachung, in: Mest- thesis on the spirits monopoly. After a brief
mäcker, E.-J. (ed), Reden und Schriften, stay in England, Briefs gained his qualifica-
Karlsruhe. tion as a university lecturer in 1913 with a
dissertation on the profit rate in Classical
Ulrich Immenga Economics. In 1919, Briefs took up a lectur-
ing position at the University of Freiburg.
There, the witty humanist and devout
Christian wrote a critical appraisal of
Briefs, Goetz A.
Oswald Spengler’s book The Decline of the
Born 1 January 1889 Western World. This is where he developed
Died 16 May 1974 the category of the ‘moral limit’, arguing
that under competitive pressure unscrupu-
Thanks to his unusual academic and analy- lous outsiders may sacrifice the ethical min-
tical ability, Briefs became known for his imum and that this might be copied by all
ruthless pronouncements on the structural the economic players. In 1921 he accepted
weaknesses of the industrialised nations. He an academic position in Würzburg, only to
was not just an economist but also had a pro- return to Freiburg in 1923 where he com-
found understanding of economic history. posed his first long essay on labour issues,
Moreover, Briefs was firmly anchored in a ‘The Industrial Proletariat’. Having been
one of the creators of the Regulations for
Christian view of ‘Man and Society’.
Works Councils in 1920, Briefs was called to
Berlin in 1926 where he set up the Institute
While initially Briefs stressed the posi- for Business Sociology and Social Business
tive role of the trade unions in terms of Studies. He produced numerous publica-
their social subjugation of capitalism, tions on trade union issues and business
after the Second World War he became sociology, critiques of the capitalist class sys-
increasingly critical of them. Consid- tem as well as essays on social ethics. In 1930
ering the fact that they had been set up Briefs became a member of the Königs-
as protective organisations for the winter Circle, which laid the groundwork
Constantin von Dietze 31

for the encyclical Quadragesimo Anno (1931). of post-war Germany, primarily through his
In 1934, Briefs managed to flee to the public work and commitment to a social and
United States where he became familiar economic life on the basis of his Christian
with American developments, including the
Protestant faith.
teachings of Keynes and the work of J. A.
Schumpeter. Following his stay as a visiting
professor at the Catholic University of
Due to his staunch character, von
America, Briefs accepted a position at Dietze was opposed to Hitler’s regime
Georgetown University. In 1960, he early on. As chairman of the Association
received an honorary doctorate for political for Social Policy – the most important
science from the University of Munich. For association of economists in Germany –
his 80th birthday, Briefs’s pupils, friends and von Dietze saved the association from
colleagues presented him with a commem- national socialist interference by dis-
orative publication. solving it in 1936.
He was briefly arrested for the first
time in 1937 while standing in for an
BRIEFS, G. (1926), Das industrielle Proletariat,
imprisoned pastor in a church service.
Tübingen; — (1927), Gewerkschaftswesen
After this incident von Dietze had to
und Gewerkschaftspolitik, in: HdSt. Vol. 4,
pp. 1108 ff.; — (1952), Zwischen Kapitalismus leave the University of Berlin. He took
und Syndikalismus. Die Gewerkschaften am a position at the Faculty of Law and
Scheideweg, Bern, Munich; — (1955), Das Political Science in Freiburg. There he
Gewerkschaftsproblem gestern und heute, exchanged ideas with the ‘founding
Frankfurt/M. (1968 under the title.: Gewerk- fathers’ of the Freiburg School and the
schaftsprobleme in unserer Zeit. Beiträge zur ordo-liberalism of Walter →Eucken.
Standortbestimmung); AMSTAD, A. (1985), The dissident Bonhoeffer Circle in
Das Werk von Goetz Briefs als Beitrag zu Freiburg, of which he was a co-founder,
Sozialwissenschaft und Gesellschaftskritik aus der had been asked by the provisional lead-
Sicht christlicher Sozialphilosophie, Berlin (with
ers of the Confessional Church to write
a memorandum on post-war Germany.
Anton Rauscher
Together with Walter Eucken and Adolf
Lampe, von Dietze compiled The
Economic and Social Order, which con-
tains passages that resemble an early
Dietze, Constantin von manifesto of the →social market economy.
Born 9 August 1891 After the attempt to assassinate Hitler
Died 18 March 1973 on 20 July 1944, some parts of the
memorandum fell into the hands of the
A full appreciation of the significance of Gestapo and von Dietze was arrested
Constantin von Dietze for the emergence and again. He escaped a certain death sen-
development of the social market economy is tence thanks to the collapse of the
impossible if only his (however important) Third Reich.
theoretical articles on economics and particu- After the war, von Dietze, together
larly on modern agricultural economics are with other members of the Freiburg
taken into account. Von Dietze had a much Circle, was behind the foundation of
more lasting influence on the economic order the inter-denominational and decidedly
32 Luigi Einaudi

market-orientated Christian Social Einaudi, Luigi

People’s Party of Baden, which was Born 24 March 1874
subsequently incorporated into the Died 30 October 1961
Christian Democratic Union.
Beyond that, von Dietze was a ded- Luigi Einaudi started publishing the maga-
icated academic and rector at the zine Riforma Sociale in 1908. After it was
University of Freiburg (1946–1949). banned in 1935, he replaced it with the
He was also a leading member of the Rivista di storia economica, without com-
Protestant Church and was involved in promising on the content but including more
the establishment of the Federal material on the integration of economic theory
Republic of Germany, always aware that and history. It was there that Einaudi pub-
‘every economic order must be based lished his sensational endorsement of the book
on specific political and moral princi- by Wilhelm →Röpke, The Social Crisis
ples’. of the Present Day, which was subsequent-
ly banned in Germany. Like Röpke,
ACADEMIC CAREER: 1909–1912 undergradu- Einaudi was an outspoken and thoughtful
ate studies in Law and Political Sciences at proponent of a competitive →market econ-
Cambridge, Tübingen and Halle. omy that favours neither private monopolies
1913–1918 active service and captivity. 1919 nor state control, and where political cronyism
Doctorate at the University of Breslau. 1922
has no place. Einaudi advocated the accumu-
Post-doctoral lecturing qualification at the
lation of assets through savings and considered
University of Berlin. 1925–1961 professor-
ships at the universities of Rostock
the taxation of saved income as well as the
(1925–1927), Jena (1927–1933), Berlin resulting proceeds as double taxation. His
(1933–1937) and Freiburg (1937–1961). concept of consumer taxation had a modern
1955–1961 presiding member of the Synod ring to it. In terms of social policy, Einaudi
of the Protestant Church in Germany. supported individual responsibility and equal
opportunities, and was in favour of private
REFERENCES: property for large sectors of society. He also
DIETZE, C. v./EUCKEN, W./ LAMPE, A. wanted to preserve the peasant class in its tra-
(1942/1979), Wirtschafts- und Sozial- ditional form as a counterbalance to the trend
ordnung, in: In der Stunde Null. Die towards proletarianisation, for example, in
Denkschrift des Freiburger ‘Bonhoeffer-Kreises’:
anonymous tenement housing. As a liberal
Politische Gemeinschaftsordnung. Ein Versuch des
thinker with a broadly conceptual approach,
christlichen Gewissens in den politischen Nöten
unserer Zeit, Tübingen, pp. 128-145; DIET- Einaudi convincingly defended his view – in
ZE, C. v. (1962), Gedanken und Bekenntnisse opposition to the philosopher Benedetto Croce
eines Agrarpolitikers, Göttingen; — (1967), – that intellectual, moral and political freedom
Grundzüge der Agrarpolitik, Hamburg, Berlin. without economic freedom is impossible.

Nils Goldschmidt In 1928, Einaudi and others voted

against the fascist government in Italy’s
Senate, and in 1935 he opposed the
unconditional approval of the war with
Ethiopia. Einaudi wanted to see Europe
politically united in a defence alliance.
Wolfram Engels 33

He contested the financing of budget ica sociale, Torino; BENEDETTO, C./EIN-

deficits and bread subsidies by the cen- AUDI, L. (1957), Liberismo e Liberalismo,
tral bank and succeeded in putting the Milano, Napoli.
national budget back on an even keel.
Hans Willgerodt
Einaudi also achieved the stabilisation
of the lira at the current level of infla-
tion without monetary reform.
Similarly to Jacques →Rueff, Ludwig Engels, Wolfram
→Erhard and Reinhard →Kamitz, Born 15 August 1933
Einaudi was able, as a neo-liberal pro- Died 30 April 1995
fessor, to put his theories into practice
with great success. Together with Engels was one of a number of economists
Konrad Adenauer and Shigeru Yoshida, who always advocated and defended the social
Einaudi was one of the great old men market economy and its principles in their
who, with determination and calm, ini- research, teaching and publications. He was
tiated the reconstruction of their ruined also one of the few economists who knew that
countries after the Second World War. economics and business management are so
closely linked as to be virtually one entity, and
ACADEMIC AND PROFESSIONAL CAREER: After who continually demonstrated this through
his doctorate (1895), initially economics his extensive knowledge. This gave Engels
editor at the daily paper Stampa. 1902–1948 added credibility when he had the courage to
professor of Finance at the University of stand up for his beliefs during the 1968 stu-
Turin and professor of Political Economics
dent uprisings at the University of Frankfurt,
at the Technical College. In 1920, additional
opposing the Marxist spokesman with his
professorship at the Bacconi University in
Milan. From 1925, forced to restrict his
sober arguments and upholding the principle
teaching activities to the University of of individual freedom and the advantages of
Turin. Became a Senator of the Kingdom of the market economy over all the many per-
Italy in 1919, and was appointed rector of mutations of collective or state-controlled
the University of Turin in 1943 by a govern- economies.
ment that was no longer fascist. Managed to
escape fascist persecution by fleeing across This phase was instrumental in turning
the Alps to Switzerland. 1945–1948 Gover- Engels into a political economist in the
nor of the Banca d’Italia, member of the spirit of →liberalism. He took it upon
Constituent Assembly, and from May 1947 himself to support the development of
Minister of Finance and Deputy Prime
the →social market economy and to protect
Minister. 1948–1955 Italian President.
it against genuine enemies and false
Involvement in the newspaper Corriere della
Sera from 1900 followed by his withdrawal friends. Studies like On Civic Taxation
in 1925 as an act of protest against fascist (1973, with J. Mietschke), on the inte-
control. 1908–1946 correspondent for The gration of individual taxes with personal
Economist. social transfers, his writings on wealth
creation (1974), on the labour market
REFERENCES: and co-determination (1974 and 1978)
EINAUDI, L. (1958), Saggi sul risparmio e as well as his essays concerning the
l`imposta, Torino; — (1964), Lezioni di polit- social market economy (including More
34 Ludwig Wilhelm Erhard

Market: Social Market Economy as Political Erhard, Ludwig Wilhelm

Economy, 1976; Thirty Years of Social Born 4 February 1897
Market Economy Experienced But Not Died 5 May 1977
Understood, 1979) and his writings on
economic and social policy (A
Constructive Critique of the Welfare State,
1979; Die Wende: Taking Stock of German
Economic Policy, 1984) are testimony to
this self-imposed task.
But this did not mean that Engels
was neglecting his other major academ-
ic interest: banking and the monetary
and financial markets. Having analysed
them creatively and critically, he provid-
ed suggestions on how to stimulate the
markets and →competition. In his capaci-
ty as editor of the weekly Wirtschafts-
woche, Engels was able to give a wide
audience access to his articulate and
innovative ideas on institutional order

ACADEMIC AND PROFESSIONAL CAREER : Erhard made a significant contribution to the

1953–1955 management apprenticeship in restructuring of the German economic system
Bremen; 1955–1961 undergraduate studies; and to the birth of the ‘economic miracle’. It
1961–1964 sales manager in the textile was he who popularised the term →social
industry; doctorate in 1962; 1964–1968
market economy in Germany. His aim
assistant lecturer; 1968 postdoctoral lectur-
was ‘prosperity for all’ in a free society. As
ing qualification with W. →Stützel;
1968–1995 professor at the Johann
Federal Chancellor, Erhard tried to encourage
Wolfgang Goethe University, Frankfurt; the socio-political acceptance of the social mar-
1984–1987 editor of the Wirtschaftswoche; ket economy. It was his hope that more under-
Awards: The Ludwig Erhard prize and oth- standing of and information on economic
ers. issues would be able to prevent institutional
order policy aberrations. This is why he estab-
REFERENCES: lished a →Council of Experts who were
ENGELS, W. (1970), Soziale Marktwirtschaft appointed to monitor overall economic
als Politische Ökonomie, Stuttgart; — (1996), progress. His concept of a ‘formed society’ –
Der Kapitalismus und seine Krisen. Über where particular group interests are overcome
Papiergeld und das Elend der Finanzmärkte,
through cooperation and competitive pressure
– remained utopian.
Rolf H. Hasse
Even before the end of the war, Erhard
had composed a memorandum that
emphasised the need for currency
Ludwig Wilhelm Erhard 35

reform. In 1947, he was made director principles of the market economy were
of the Homburg Special Bureau for taken into account in the process of
Monetary and Currency Matters. Based European economic integration.
on different reform drafts by German On the occasion of the currency
experts, the bureau submitted the reform Erhard had already suggested
Homburg Plan for German currency the urgency of an effective German
reform. Elements of this plan were antitrust law being put in place. For
adopted by the Allies in the currency him, anti-competitive company agree-
reform that took place in the three ments and inflation remained the two
Western zones on 20 June 1948. greatest threats to a successful social
From March 1948, Erhard, who was market economy. When the →Act
economic director of the bizone, was Against Restraints of Competition was final-
faced with the task of complementing ly passed in 1957, Erhard had only part-
the currency reform with an appropriate ly succeeded. While it is true that the
economic reform. Germany was at that Act imposed a general ban on cartels, a
time subject to an all-encompassing sys- long list of areas and issues were
tem of government price controls and exempt from the rules.
regulations on economic management. In the same year, the Federal
Concurrently, with the replacement Banking Act declared the independence
of the Reichsmark by the Deutschmark, of the central bank (→European Central
Erhard decided to initiate the complete Bank, German Federal Bank) and its
removal of state control and to rely on commitment to →price level stability.
the effectiveness of the free markets. Erhard had been a keen supporter of
However, Erhard was aware of the both these key elements of the financial
fact that without a stable new currency it system.
would not be possible to revert to a free
market economy. Only an efficient mar- ACADEMIC AND PROFESSIONAL CAREER :

ket economy would be able to demon- 1919–1922 studies at the College of

strate its extraordinary capacity to satisfy Commerce in Nuremberg; 1925 doctorate
material needs to the full, win lasting in Frankfurt; 1928–1942 economic research
at an institute in Nürnberg; 1945–1946
acceptance by the people and become a
Bavarian Minister of Economic Affairs;
genuine social market economy.
1947 honorary professorship at the
The sharp productivity increase and University of Munich; 1947–1948 director
the visible reduction of goods shortages of the Special Bureau for Monetary and
after the currency reform endorsed Currency Matters in Bad Homburg;
Erhard’s market-orientated economic 1948–1949 administrative director of
policy, which he continued to pursue as Economic Affairs in the British-American
Federal Minister of Economic Affairs. bizone; 1949–1977 Member of the German
From very early on, Erhard Parliament; 1949–1963 Federal Minister of
favoured a far-reaching liberalisation of Economic Affairs; 1963–1966 Federal
foreign trade in order to see Germany Chancellor; 1966–1967 Chief Whip of the
becoming more deeply rooted in the Christian Democratic Union.
world economy (→foreign trade). It is
thanks to his sustained efforts that the
36 Walter Kurt Heinrich Eucken

REFERENCES: Eucken saw power – of a private as well as a

ERHARD, L. (1977), Kriegsfinanzierung und public nature – as a central problem in mod-
Schuldenkonsolidierung, fax print out of the ern economic systems and demanded that, in
commemorative publication from 1943/44,
order to restrain it, the state should adopt insti-
Frankfurt, Berlin, Vienna; — (1953), Deutsch-
tutional order policies which adhere to the
lands Rückkehr zum Weltmarkt, Düsseldorf; —
(1957), Wohlstand für alle, Düsseldorf; —
principle of competition, and that there must
(1962) Deutsche Wirtschaftspolitik. Der Weg der be no interference with the economic process.
Sozialen Marktwirtschaft, Düsseldorf, Vienna,
Frankfurt. Eucken’s insights were strongly influ-
enced by personal observations dating
Rainer Klump back to the time before and after the
First World War.
Before 1914, governments used to
Eucken, Walter Kurt Heinrich follow the classical liberal principle of
Born 17 January 1891 laissez-faire: the state simply provides a
Died 20 March 1950 legal framework and otherwise leaves
the economy to its own devices. This
policy was based on the individual’s
right to freedom. The consequence,
however, was that monopolies and car-
tels started to dominate many sectors of
the economy because economic actors
considered competition to be a nui-
sance and a threat to their attempt to
monopolise. This is how private power
blocs come about. Eucken saw this as a
serious obstacle to the right to freedom
of others. During the era of laissez-
faire, the abundance of freedom turned
into a threat to freedom itself, because it
allowed private power build-ups.
After the First World War, economic
policy changed fundamentally and
became the opposite of what it had
been. The state started to intervene in
the economy more and more and tried
‘How can the modern industrialised economy to exercise control through policies
be integrated into a system which is both effec- aimed at preventing →business cycles,
tive and humane?’ Walter Eucken asked him- →... monetary policy, →subsidies, etc. de-
self this question, which animates his life’s pending on the specific situation.This
work. His answer was the development of the meant that now the state had a great
concepts which Ludwig →Erhard imple- deal of power at its disposal.
mented, and which led to the German eco- In this, Eucken recognised the hall-
nomic miracle after the Second World War. mark of centrally controlled economies
Walter Kurt Heinrich Eucken 37

(→socialism, →constructivism, →third should an economic policy look like? In

ways). The problem of power as a other words, how can the modern
restriction to freedom had therefore not industrialised economy be integrated
been solved, but only displaced. into a system which is both functional
Beyond that, there is another conse- and humane? In answer to this ques-
quence of interventionist economic pol- tion, Eucken developed his famous
icy. An economic policy which deals concept of →institutional order policy
with individual cases on their own merit (Ordnungspolitik).
will always affect everybody differently. Institutional order policy is the kind
Certain groups will benefit while others of economic policy which forms the
will be disadvantaged. This is the moti- content of an economic system.
vation for the formation of private Opposed to institutional order policy is
→interest groups whose purpose is to fight →process policy. The latter concerns
for economic policies which benefit those economic policy measures which
their members. The members then politicians use to intervene in the actu-
exploit the privileges granted by the al economic process, and which affect
state to secure more privileges for them- the way it runs either directly or indi-
selves. This is how the state is put under rectly.
pressure by these groups and eventually The fundamentally disparate nature
becomes dependent on them (→inter- of these two categories of economic
ventionism). policy showed Eucken the dividing line
Thus interventionist economic poli- between legitimate and necessary eco-
cies lead to a dual power problem: while nomic policy on the one hand, and ille-
expanding its power through various gitimate economic policy on the other.
interventions into routine economic Economic policy should give content to
processes, the state comes increasingly the economic order without influenc-
under the influence of powerful eco- ing the economic process.
nomic groups. A great many different economic
In the modern economy, therefore, systems are, in theory, possible. Eucken
personal freedom is equally under identified three basic types: the central-
threat from public and private power. It ly controlled economy; an economic
is widely believed that the problem of system based on monopolies; and a
private economic power can be solved competitive system. He devoted much
only if the state seizes it. However, this time to studying the centrally con-
cannot be the solution as far as individ- trolled economy and subjected it to a
ual freedom is concerned. According to thorough critical analysis. There is no
Eucken, the problem of economic need for further elaboration on this
power can never be solved through fur- point because the matter of the central-
ther concentration of power. The fact is ly administered economy was famously
that, on the contrary, the freedom of the settled after the events of 1989.
individual must be safeguarded with Economic structures based on
respect to the other citizens and to the monopolies are characterised by the fact
state. that the individual goods and job mar-
In the light of this dilemma, what kets are dominated by monopolies or
38 Walter Kurt Heinrich Eucken

similar structures such as cartels. It, too, • freedom of market entry (→open mar-
was rejected by Eucken for the afore- kets), which involves the removal of
mentioned reasons. both public and private economic
What remained was the competitive barriers to market entry;
order. For Eucken, this was the eco-
nomic structure that allowed for the • →private property;
highest degree of personal freedom as it
restricts the powers of the state (unlike • freedom to enter into contracts;
the centrally controlled economy) and
(unlike the monopolistic economy) also • →individual responsibility and the liabil-
curbs private power. ity of each economic participant for
→Competition – where suppliers his/her own economic actions; and
compete for the favour of buyers, while
buyers compete for the favour of sup- • a consistent, steady economic policy
pliers – is the one process that does not in order to avoid uncertainty.
allow power reservoirs that are prone to
abuse to build-up. This is because in a Eucken was also deeply concerned
competitive system the actors in the with social issues, which helped him
markets can always choose from several form his conclusions. He made it
business partners. unmistakably clear that no economic
As the laissez-faire model before the order would survive for long unless
First World War showed, a competitive these social aspects were taken into
economic order does not emerge by consideration. He believed, for exam-
itself. So what should the state do to ple, that a social conscience cannot tol-
establish and maintain it? In other erate mass unemployment – and nor
words: which institutional order policy can the state.
should be adopted? Eucken identified However, Eucken was very critical
seven conditions which have to be ful- of the traditional →social policy because
filled for the creation of a resilient com- it interferes with the right to personal
petitive order. freedom by forcing everybody into state
The first and most important condi- insurance schemes. In Eucken’s view,
tion is a market structure based on a this incapacitates the individual by
sound pricing system, which must be a making the citizen increasingly depen-
realistic reflection of relative scarcity dent on the state. Eucken saw this as
combined with a high degree of com- almost a sort of enslavement by the
petitive pressure. The competitive pres- state and, as a consequence of the denial
sure increases with the number of sup- of basic human rights, the destruction
pliers and buyers who are active in the of what makes us human.
market. This makes a general ban on This is why, according to Eucken, if
cartels and monopolies the necessary social policy is to be successful there has
consequence. The other six conditions to be an institutional order policy at the
can only be listed here: same time. And the problem of mass
unemployment can be solved only if
• a stable currency; the principles of competition also find
Wolfgang Frickhöffer 39

application in the labour market. Trade to be its fervent supporters but thought noth-
unions and employers’ associations ing of betraying their conviction when things
would then not be able to behave like became difficult. For Frickhöffer, the social
monopolies and negotiate binding wage market economy was no fair weather system,
agreements, but wage levels would be but a concept for all seasons.
decided freely by the market.
Regarding social security, Eucken Frickhöffer had to contend with all the
wanted to lean much more on the pri- vicissitudes of the war and the post-war
vate initiative of the individual: the period. Immediately after graduating
political system was giving the citizens from the Berlin-Steglitz Gymnasium
every opportunity to secure themselves. with a classical education, he was called
In Eucken’s view, a public welfare sys- up for compulsory labour and military
tem was only justified when self-help service and ended up in captivity. After
and insurance did not suffice; but, the war, he supported himself with var-
whenever possible, the free initiative of ious jobs: he was a part-time journalist
the individual had preference. (1949–1952); became a certified inter-
preter (1951–1954); and studied eco-
ACADEMIC AND PROFESSIONAL CAREER : nomics at the University of Heidelberg.
1909–1913 undergraduate studies in Kiel, Alexander →Rüstow, who, after his
Bonn and Jena, 1913 doctorate in Bonn; return from Turkey had succeeded to
1913–1918 military service; 1919–1925
Alfred Weber’s chair at the University of
University of Berlin, 1921 post-doctoral
Heidelberg, was his most influential
lecturing qualification, then assistant profes-
sor; 1925–1927 professorship in Tübingen;
1927–1950 professorship in Freiburg. In January 1954, Frickhöffer accept-
ed the position that would become the
REFERENCES: core of his life’s work: he became secre-
EUCKEN, W. (1961), Nationalökonomie tary of the Social Market Economy
wozu?, 4th edition, Düsseldorf; — (1989), Action Group (Aktionsgemeinschaft
Die Grundlagen der Nationalökonomie, 9th edi- Soziale Marktwirtschaft – ASM). After the
tion, Berlin; — (1990), Grundsätze der death of Alexander Rüstow, Frick-
Wirtschaftspolitik, 6th edition., Tübingen. höffer’s academic mentor and previous
chairman of the ASM, Frickhöffer
Lüder Gerken
became his successor in 1962.
The ASM provided Ludwig
→Erhard with staunchly supportive
Frickhöffer, Wolfgang publicity for his reconstruction and
Born 26 May 1921 reform policies. It was here that the
Died 31 October 1991 guardians of the doctrine of the social
market economy found a platform for
Frickhöffer was generally known as the their ideas and concepts and took on
‘watchdog of the social market economy’ and the role of political opinion-makers.
was a man who was equally merciless The →Act Against Restraints of
towards the declared enemies of the →social Competition, the autonomy of the
market economy and those who pretended →German Federal Bank and the organi-
40 Friedrich August von Hayek

sation of the European Community cians and his nagging is not always
were topics under intense discussion at comfortable, but he is fighting a just
these meetings, while repeated, fervent fight.’
debates about currency revaluations
and the floating of the exchange rate REFERENCES:

were also on the agenda. RÜSTOW, A. (1963), Rede und Antwort,

Karl →Schiller, the Minister of Ludwigsburg; FRICKHÖFFER, W. (1964),
Economic Affairs, delivered lectures on Deutsche Politik als marktwirtschaftliches
Beispiel, in: Aktion Soziale Marktwirtschaft,
social symmetry and the recovery
Ehrliche Weltoffenheit als deutscher EWG-
process after an economic slump. In
Beitrag, Tagungsprotokoll, 22, Ludwigsburg;
short, the ASM was, and still is, a place — (1969), Gesellschaftspolitische
where the future course of the market Folgerungen in einer freiheitlichen
economy is considered and where clear Ordnung – von sozialen Fiktionen zu realis-
pointers are put in place. tischer Politik, in: Aktionsgemeinschaft Soziale
Although Frickhöffer always Marktwirtschaft, Freiheitliche Politik für eine freie
ensured that this remained the case, he Welt, Tagungsprotokoll, 32, Ludwigsburg.
did not simply offer to the architects of
the social market economy a highly Joachim Starbatty
respected platform; instead, he actually
initiated and encouraged national and
international debate – not least through Hayek, Friedrich August von
the Mont Pèlerin Society. Born 8 May 1899
At the same time he was not afraid Died 23 March 1992
to make public and private statements
on the current political situation from
the perspective of the market economy.
He could be very blunt when he sus-
pected or was able to prove bungling,
disimprovements or institutional order
policy breaches.
The former Federal Minister of
Economic Affairs, Otto Count
Lambsdorff, paid tribute to Frickhöffer
for playing the role of the admonishing
voice and for his commitment to the
cause of the res publica by saying: ‘It is
Wolfgang Frickhöffer’s great contribu- Hayek is seen as one of the most important
tion to have been able, with penetrating representatives of ‘neo-liberalism’ of the war
knowledge and without having to make generation. In 1974 he was awarded the
allowances for the political conventions Nobel Prize for his comprehensive work on
of the day, to lay his finger on the economics and social philosophy. As a liberal
wounds which keep being inflicted on of the classical tradition he was one of the fore-
the market economy. His advice and his most critics of socialism and the welfare state,
comments are a wake-up call for politi- while also being a fearless supporter of a free
Friedrich August von Hayek 41

society. Hayek was intellectually close to the leading to the discovery of facts which
‘founding fathers’ of the social market econo- would otherwise either remain
my, especially Wilhelm →Röpke, Walter unknown or would at least not be
→Eucken and Ludwig →Erhard. It is true utilised’.
that he strongly criticised the term ‘social’ for Although Hayek was one of the
being too vague. harshest critics of the →welfare state and
had even laid out propositions for the
Hayek’s comprehensive body of work ‘denationalisation of currencies’, he
grew out of a critical analysis of the cannot be seen as a typical representa-
‘constructivist’, planned or centrally tive of the ‘laissez-faire tradition’.
controlled economy typical of the total- Rather he was an excellent analyst of
itarian systems. He proved that social- the institutional framework (albeit not
ism is not only doomed to failure predominantly of the state), which
because enterprises cannot make eco- requires a spontaneous order.
nomic calculations without scarcity- Furthermore – to the annoyance of
related prices, as his teacher Ludwig some of his friends – Hayek supported
von Mieses had discovered, but also for the concept of basic social security, but
reasons concerned with information not through a monopolistic state insur-
theory. He called it a ‘presumption of ance scheme. Nonetheless he was one
knowledge’ to want to centrally store all of the most outspoken champions of a
the knowledge, which is so dispersed free society.
among people and places, which is During his later years, Hayek drew
ever-changing, and which has accumu- up a political reform plan for democra-
lated throughout history and endless tic systems, which has hitherto not
experience. aroused much interest. His primary
Hayek’s detailed theory of ‘sponta- concern here was to reinstate the sepa-
neous order’ draws especially freely on ration of powers through a bicameral
the ideas of the 18th century Scottish system where one chamber, made up of
order theorists (Ferguson, Smith, economically independent representa-
Hume). He showed convincingly that a tives of different age groups, has the
spontaneous, complex economic sys- task of ensuring that the executive
tem is the result of human action but observes the general, abstract rules
not of rational design. The market, without giving specific pressure groups
morality, the law or language were not an unfair advantage.
‘invented’ by anyone in particular; Hayek’s influence has been growing
rather, these institutions developed in a steadily since the 1970s. His impact on
historical process of trial and error Ronald Regan’s reforms in the United
where only those groups succeeded States and on Margaret Thatcher in the
who ‘discovered’, above all, private United Kingdom was considerable.
→property and the appropriate moral The Friedrich August von Hayek
rules. Society in Berlin, founded in 1998, is
Hayek became particularly famous currently involved in the publication of
for his contribution to the theory of his German works and the organisation
competition: →competition is ‘a process of public events.
42 K. Paul Hensel

ACADEMIC CAREER: Undergraduate studies compared with the market economies of dem-
in Law and Political Sciences at the ocratic systems. No other institute, except per-
University of Vienna; 1929 post-doctoral haps the Eastern European Institute at the
lecturing qualification in Vienna. From the
Free University of Berlin, produced as many
end of 1931 onwards a professorship at the
dissertations, theses and postdoctoral theses on
London School of Economics; 1947 co-
founder of the Mont Pèlerin Society; 1950
this subject as Hensel’s research centre in
professor of Social and Moral Sciences at Marburg. Until the end of his life, Hensel
the University of Chicago; 1962 accepts a had a considerable impact on this branch of
position at Freiburg; 1968–1977 visiting economic research.
professor at the University of Salzburg;
1974 Nobel Prize for Economic Sciences Even before coming under the influ-
together with Gunnar Myrdal; 1991 the ence of his academic teacher Walter
Presidential Medal of Freedom from the Eucken (the founder of the Freiburg
United States President. School of Economics, which dealt with
questions of institutional order theory
and policy), Hensel’s experiences dur-
HAYEK, F. A. von (2003), Der Weg zur
ing his vocational training before he
Knechtschaft, 3rd edition, Munich; — (1991),
Die Verfassung der Freiheit, 3rd edition, was a student had awakened a particular
Tübingen; HABERMANN, G. (ed) (2001), academic interest in him in the intellec-
Philosophie der Freiheit. Ein Friedrich-August- tual approach to ‘socialist’ and ‘capital-
von-Hayek-Brevier, 3rd edition, Thun; ist’ economic systems, the way they
HENNECKE, H. J. (2000), Friedrich August function and the effect they have on
von Hayek: die Tradition der Freiheit, people.
Düsseldorf. This problem mattered not only for
abstract, theoretical reasons, but it kept
Gerd Habermann the world in suspense for decades while
playing a crucial role in the fate of mil-
lions of people (→socialism/planned econ-
Hensel, K. Paul omy).
Born 24 January 1907 Economic theory was grappling
Died 20 April 1975 with a controversy dating back to the
beginning of the previous century, but
→Eucken, Hensel’s teacher, had recognised started to deepen during the 1930s: the
the interdependence of the individual elements question was whether a ‘socialist’ econ-
of a social system. On this basis, Hensel made omy based on centrally planned eco-
the analysis of the economic and social systems nomic processes and collectively owned
of the previously ‘socialist’ countries (primari- material means of production could
ly the former German Democratic Republic accommodate rational and conclusive
and Eastern Europe) with their dictatorial, ‘economic calculations’ similar to those
centrally administered economies, the focal familiar with the different forms of the
point of the research programme which was market economy.
linked to his academic post. He was also in These calculations ensure that the
charge of the Institute for Comparative factors of production (labour, land, cap-
Economic Systems, where such systems were ital) that are always scarce and in limit-
Joseph Kardinal Höffner 43

ed supply, are allocated in such a way Marktwirtschaft – Zentralverwaltungswirtschaft,

that they are utilised in a macroeco- Munich.
nomically sensible and thus correct
Gernot Gutmann
manner (→market economy).
In his 1954 postdoctoral thesis,
Hensel contradicted Eucken in his con-
clusion that the abstract model of a cen- Höffner, Joseph Kardinal
trally controlled economy could indeed Born 24 December 1906
contain such a ‘calculation mechanism’. Died 16 October 1987
He was, of course, aware of the fact that
real life socialist economies no more More than anyone else, Höffner embodied the
lived up to such a model than the actu- church’s transition from social romanticism
al market economies lived up to the involving the utter rejection of the modern way
very abstract theoretical model of an of living and working in an industrialised
economy of ‘total competition’. Hensel society on moral grounds, to social reform and
was and remained extremely sceptical active participation in economic organisation
regarding the possibility of realising a in terms of ‘institutional order policy’. Höffner
genuinely effective centrally adminis- was undoubtedly the most influential repre-
tered economic order, and he was clear- sentative of Christian social doctrine: under his
ly vindicated in this by the collapse of guidance, it flourished as an academic disci-
the economic and social systems of pline in a way that was unmatched either
‘socialist’ states later on. before or after. Höffner stressed the ethical sig-
nificance of social institutions, saying that:
ACADEMIC AND PROFESSIONAL CAREER: 1925 ‘History teaches that freedom and human dig-
trained and qualified as a carpenter. 1931 nity largely depend upon the organisation of
successful completion of an exam for the the economy.’ He was a respected political
academically gifted followed by an under- adviser and made a significant contribution to
graduate degree in economics in Berlin and
the idea of subsidiarity anchored in the struc-
Freiburg. 1937 submission of his doctoral
ture of the labour and social systems of the
thesis followed by studies at the London
School of Economics. 1951 post-doctoral
German Federal Republic, while as an aca-
lecturing qualification in Freiburg. 1957 demic teacher he guided a whole generation of
accepts the Chair of Economics at the future decision-makers.
University of Marburg. 1963–1964 dean of
the Faculty of Law and Political Science at Sometimes a person has so many abili-
the University of Marburg, and 1965–1967 ties and talents that even a good 80 years
rector of that university. are not enough to express them to the
fullest. This definitely applies to Joseph
Höffner, who was born the son of a
HENSEL, K. P. (1972), Einführung in die Westerwald farmer on Christmas Eve of
Theorie der Zentralverwaltungswirtschaft, 2nd
1906. He had five sisters and, after the
ed, Stuttgart; HENSEL, K. P./ BLAICH,
premature death of his mother, two
F./BOG, I./ GUTMANN, G. (1971), Wirt-
schaftssysteme zwischen Zwangsläufigkeit und step-brothers. During his life, Höffner
Entscheidung, Stuttgart; HENSEL, K. P. managed to play a number of different
(1972), Grundformen der Wirtschaftsordnung. roles in quick succession, and in each
44 Joseph Kardinal Höffner

phase he achieved the sort of ‘excel- behind the social market economy. He
lence’ that is much talked about nowa- was later actively involved in its official
days but for which many lack the nec- acceptance.
essary self-discipline and inner
strength. It cannot have been easy for Höffner the priest
the father to give up his eldest to an aca- Even as a distinguished academic and
demic career; having been prepared for lecturer with his many doctorates,
senior school by the local priest, the Höffner – true to the tradition of
bishop saw to it that he was sent to the Christian social doctrine – did not feel
Gregoriana Papal University to study that pastoral work was beneath him.
theology right after receiving his From 1943–1945 he was the priest in
school-leaving certificate in 1926. charge of the working-class parish of the
Holy Cross in Trier. As a young curate
Höffner the academic in Saarbrücken, he decided to commit
In the years between 1929 and 1941, himself to lifelong abstinence out of sol-
Höffner collected no fewer than five idarity with a group of alcoholics. From
doctorates. He lived in Rome until 1934 March 1943 onwards Höffner kept
(theology, canon law, philosophy), then Esther Sara Meyerowitz, a seven-year-
in Saarbrücken after his time as a curate, old Jewish girl, in hiding under the
and then in Freiburg (theology, eco- assumed name ‘Christa Koch’. This was
nomics). It may seem uncanny that an offence in the National Socialist state
while the Second World War was turn- that, if discovered, would certainly have
ing Europe to ashes all around him, had fatal consequences for a clergyman
Höffner followed his economics degree like himself.
(graduation 1939) with a doctorate
under the reputable economist Walter Höffner, the professor of Christian social
→Eucken, one of the architects of the doctrine
social market economy. Höffner’s thesis Höffner had to wait until the regime of
dealt with ‘Economic ethics and mono- terror had ended before he could
polies in the fifteenth and sixteenth cen- become a professor – first at the semi-
turies’. But the young Höffner certainly nary in Trier, and from 1951 as incum-
did not hide from the horrors of his bent of the renowned chair of Christian
time in the ivory tower of academic pur- Social Sciences in Münster.
suits. The fact that he was able to bridge His time in Münster, which
the academic gap between historic and spanned just over a decade, was of par-
systematic research was a rare feat. It ticular importance in terms of his
was also proof that those who believed impact on the →social market economy.
that devotional Christianity and the Prepared through his research (together
modern world were fundamentally with contemporary teachers such as the
incompatible, were mistaken. Jesuit Oswald von →Nell-Breuning in
In his field, Höffner prepared the Frankfurt and Johannes Messner in
ground for a successful new start for a Vienna), Höffner helped the Catholic
post-war Germany by getting the Church in Germany to overcome its
Church to acknowledge the ideas hostile attitude towards the modern
Reinhard Kamitz 45

economy and society, which had con- REFERENCES:

tributed to its refusal to acknowledge HÖFFNER, J. (1983), Christliche

the Weimar Republic and consequently Gesellschaftslehre, 2nd edition, Kevelaer (new
edition 1999); SCHREIBER, W./DREIER,
to the totalitarian aberrations of the
W. (eds) (1966), Gesellschaftspolitik aus
20th century. Among other things,
christlicher Weltverantwortung. Reden und
Höffner was an academic adviser to the Aufsätze. (Sonderband Institut für
Catholic Employers’ Federation, a Christliche Sozialwissenschaften), Münster
national association that received cru- (2nd Vol. ed v. W. Dreier, Münster 1969);
cial input from him. HECK, E. J. (ed) (1986), In der Kraft des
Glaubens. Ansprachen, Aufsätze u. a. 1969-86,
Höffner, the church leader 2 , Freiburg i. Br.
Höffner became Bishop of Münster in
1962, Archbishop of Cologne in 1969 André Habisch
and a member of the College of
Cardinals as well as president of the
German Bishops’ Conference from Kamitz, Reinhard
1976 until shortly before his death in Born 18 June 1907
1987. Here, too, he was building bridges Died 9 August 1993
between the Church and the modern
economy and society: at the second More than anyone else, it was Kamitz who
Vatican Council, he helped to forge the introduced the concept and the principles of
groundbreaking methodical re-orienta- the ‘social market economy’ in Austria after
tion of the Church in the Council doc- 1945. He began while he was in charge of the
uments (particularly in the pastoral con- Economic Policy Department of the Federal
stitution Gaudium et Spes), in such a way Chamber of Trade and Commerce
that economics and the social sciences (1946–1951), and even more forcefully as
are basically granted autonomy. Finance Minister (1952–1960) and as
In the worldwide organisation of President of the Austrian National Bank
the Catholic Church, too, Höffner was (1960–1968). Taking such a clear stand
working towards a Christian social doc- regarding order policy required considerable
trine that was open to the secular world. courage since the economic policy programmes
Numerous honorary doctorates from of the two large parties, the Österreichische
Asian and Latin American universities Volkspartei (ÖVP) and the Sozialistische
reflect this involvement. Some 2.8 mil- Partei Österreichs (SPÖ), were both greatly
lion copies of his book have been pub- at variance with those of the social market
lished and it has been translated into 12 economy: the ÖVP in the direction of
languages. Christian social and class-related ideas, and
International honours include the the SPÖ in its tendency towards socialist cen-
Orders of Merit from the Federal tral planning concepts (Austromarxism).
Republic of Germany and the Republic
of Italy. Another major achievement Kamitz’s own stance was based on a
was his contribution to the financial combination of the main principles of
consolidation of the previously serious- the social market economy and ordo-
ly indebted Vatican State. liberalism (→liberalism), adapted to
46 Reinhard Kamitz

Austrian conditions. The economic the national borders through the grad-
policy contributions by Kamitz had the ual liberalisation of the former
effect of clarifying the politically con- Organisation for European Economic
fusing concepts about the ‘social market Cooperation, which led to the removal
economy’ to the extent that from the of quantitative trade restrictions for
time when Julius Raab became Federal goods and services. He also approved of
Chancellor and Kamitz became Minis- the regulations of the International
ter of Finance, the emerging economic Monetary Fund for the lifting of all
and social order in Austria was referred exchange restrictions in favour of the
to as a ‘social market economy’. Austrian schilling and the agreements
Kamitz believed in the ‘interde- in the General Agreement on Tariffs
pendence of the systems’ (W. and Trade for the gradual removal of
→Eucken). He also believed that in eco- customs barriers. For these reasons,
nomics, political and cultural liberty are Kamitz wanted to see Austria as an
indispensable. Kamitz brought about active participant in the fledgling
the independence of the Austrian European economic integration,
Central Bank in 1955 and made sure because he was sceptical about whether
that the stability of the currency was its a social market economy with the nec-
supreme goal; furthermore, the fund- essary economic policy consistency
ing of any sort of national organisation could be implemented politically in
was prohibited thanks to his efforts. Austria.
Both goals were also incorporated into Kamitz felt that it would be uneco-
the Treaty of Maastricht in 1992 nomical to fight anti-competitive agree-
(→European Economic and Monetary ments in isolation in the small Austrian
Union) with regard to the European market. He therefore advocated the
Central Bank. Through a number of tax expansion of regional →competition and
reductions which were spectacular at the liberalisation of the movement of
the time, he then succeeded in showing goods and services, as well as monetary
that such steps can increase state rev- and capital exchange.
enue and can act as an incentive for per-
formance and investments. ACADEMIC AND PROFESSIONAL CAREER :

Kamitz had already advocated the 1934–1939 Institute for Market Research,
adoption of these principles during the Vienna; 1938 professor at the World Trade
negotiations on international and mon- College, Vienna; 1939–1946 Chamber of
Commerce Vienna; 1946–1951 Federal
etary relations. For the stabilisation of
Chamber of Commercial Economy, direc-
price levels he considered a competitive
tor of the Department of Economic Policy,
policy which is implemented by the deputy secretary general; 1952–1960 Federal
government but extends beyond Minister of Finance; 1960–1968 President
national borders as the best option – of the Austrian central bank.
more effective than wage and price
agreements between unions and man- Wolfgang Schmitz
agement, and also more effective than
official price control. Kamitz whole-
heartedly agreed with the opening of
Friedrich Karrenberg 47

Karrenberg, Friedrich (1965). In 1950–1961 he was chairman of

Born 1904 the ‘Work and the Economy’ working com-
Died 1966 mittee in the German Protestant Church
Congress; in 1954 he was charged with the
publication of the Protestant Social
Karrenberg’s significance does not primarily
Encyclopaedia (2001, 8th edition). During the
derive from a personal contribution to eco- final years of his life he was an honorary
nomic theory or even from a theological inter- professor at the University of Cologne,
pretation of economic ethics; it rather came where he focused on the history of social
from his active involvement as a mediator ethics.
between church, society and the economy. As
a theological layman, entrepreneur and scien- REFERENCES:
tist he contributed in a variety of ways to KARRENBERG, F. (1959), Gestalt und
attract understanding for the →market Kritik des Westens, Stuttgart; HÜBNER, J.
economy in church circles. At the same time (1993), Nicht nur Markt und Wettbewerb.
he proposed that the economy must be com- Friedrich Karrenbergs wirtschaftsethischer Beitrag
zur Ausgestaltung der sozialen Marktwirtschaft,
mitted to the common good and show social
responsibility. Karrenberg’s powers of persua-
et al (1964), Christliche Gemeinde und
sion went beyond religious denominations, Gesellschaftswandel, Festgabe für F.
party politics and specific belief systems. Karrenberg, Stuttgart, Berlin.
Already in his dissertation on ‘Christianity,
Capitalism and Socialism’ in 1933, he took
a determined stand against the conservative Martin Honecker
Lutheran worship of the state. This – togeth-
er with the equally important affirmation of
individual liberty in Christian responsibility Lutz, Friedrich August
– forms a common bond between all the spir- Born 29 December 1901
itual representatives of the →social market Died 4 October 1975
economy whose rootedness in the Christian
human ideal has always been emphasised. When Lutz started his undergraduate studies
in political economy in 1920, the Historical
ACADEMIC AND PROFESSIONAL CAREER : School was dominating the subject at the
During the post-war era and the rebuilding German universities. But it had nothing par-
of Germany, Karrenberg was an independ- ticular to offer in relation to the galloping cur-
ent entrepreneur predominantly active in rency depreciation of the post-war period.
the Rhineland. He had numerous honorary
Lutz found that, like himself, the young assis-
posts in the Protestant Church, where his
tant professor Walter →Eucken, was
functions included that of a part-time mem-
ber of the administrative body of the
inclined to examine a problem theoretically in
Protestant Church and where he acted as order to uncover its true causes and the under-
chairman of the Committee for Social and lying economic facts. The acquaintance with
Ethical Questions of the Protestant Church Eucken made a profound impression on
in the Rhineland. He published significant Lutz. It was Eucken who made him leave his
socio-political statements during the 1940s job to become an assistant in Freiburg and
and 1950s. He founded and was in charge of embark on an academic career. This is how
the Institute for Social Sciences in Velbert Lutz gained access to the inner circle of the
48 Friedrich August Lutz

ordo-liberal Freiburg School which was gath- ing currency depreciation, whose ever-
ering around Eucken. Under National changing causes he managed to bring to
Socialist rule, when Lutz’s career at German light time and again. After an accurate
universities was blocked because of his liberal analysis of the facts he always managed
outlook, he emigrated to the United States, to get to the fundamental institutional
the country leading the way in contemporary order policy questions before working
theory. He returned to Europe soon after the out proposed solutions.
Second World War. Lutz was a leading proponent of the
opinion that a competitive economy
Lutz’s dedication to research was leg- not only depends on the free interna-
endary. His fields of research were inter- tional exchange of goods and capital,
est theory, monetary theory and interna- but that it will work properly in the
tional currency systems. In the same long term only if the purchasing power
way as for Eucken, his teacher, theories of the currency remains stable. Lutz felt
were never an end in itself for Lutz, but that it was wiser not to leave it to the
rather a means for an understanding of whims of the politicians to look after
economic reality. A clear rational mind the stability of the currency, but that the
and the incorruptibility of its judgment necessary regulations should be incor-
earned him the respect of his academic porated into the monetary and currency
colleagues. Instead of spoon-feeding his system.
students, he trained them in getting to Long before the international
the bottom of a problem step-by-step. Bretton Woods post-war monetary sys-
Lutz never came across as superior tem led to worldwide inflation and col-
because he saw himself as someone who lapsed, Lutz had advocated flexible
was always learning. This made him a exchange rates. His view was that in a
genuine teacher who led by example. world prone to inflation, only flexible
Apart from its efforts to gain an exchange rates make it possible for an
understanding of the way an economy individual country to commit its eco-
functions, the Freiburg School sought nomic policy to the goal of →price level
to work out the details of the economic stability.
and legal prerequisites of a competitive
economy free of power blocs. Lutz was ACADEMIC AND PROFESSIONAL CAREER :

especially productive in the field of 1920–1925 undergraduate and postgraduate

money and currency systems, where he studies of Economics and Political Sciences
in Heidelberg, Berlin and Tübingen (Dr.
acquired the reputation of being one of
rer. pol. – Doctor in Economics); 1926–
the top experts.
1929 Association of German Mechanical
In numerous shorter essays he dealt Engineering Institutions in Berlin;
with problems of his time: the collapse 1929–1932 assistant to Prof. Walter Eucken
of the gold standard, the bank crisis of in Freiburg; 1932–1938 assistant professor at
the early 1930s, the obstruction of the the University of Freiburg; one year in
international goods and payment trans- England and one year in the United States
actions through exchange controls, the on a Rockefeller Fellowship; 1938–1953 lec-
balance of payments equilibrium of the turing post at Princeton University (New
post-war period and above all the ongo- Jersey), US, from 1947 as full professor;
Fritz W. Meyer 49

1948–1952 visiting professor at the cal compromises might force him to

University of Freiburg; 1953–1972 profes- deviate from his theoretical convictions.
sor at the University of Zurich. He rather saw it as his task to provide
economic policy with useful concepts,
and his participation in numerous advi-
LUTZ, F. A. (1936), Das Grundproblem der
Geldverfassung, Stuttgart, Berlin, printed in:
sory committees gave him the opportu-
Lutz, F. A. (1962), Geld und Währung, nity to do just that. It was the combina-
Gesammelte Abhandlungen. Tübingen; — tion of his academic approach, where
(1956/1967), Zinstheorie, Zurich, Tübingen; diagnosis and therapy were inseparably
— (1971), Politische Überzeugungen und nation- linked with the incorruptible clarity of
alökonomische Theorie, Zürcher Vorträge, his thinking, writing and arguing, that
Tübingen (with bibliography). enabled him to come up with outstand-
ing and at times pioneering insights.
Verena Veit-Bachmann The topics Meyer worked on cover
a wide area, but he always reserved a
particular interest for international
Meyer, Fritz W. trade relations, labour and development
Born 8 November 1907 policies as well as currency problems.
Died 4 March 1980 His notable publication on The
Reconciliation of the Balance of Payments,
The Freiburg Circle had a formative influ- which appeared in 1938, still offers a
ence on Meyer as an academic. His research definitive analysis which cannot be
was crucial for the development and consoli- ignored by anyone who is looking for a
dation of institutional order theory and pro- practically applicable theoretical back-
vided a firm foundation for institutional order ground to balance of payments–related
policy. As a disciple of Walter →Eucken, problems.
Meyer developed a burning interest in Beyond that, it was above all specif-
→institutional order policy which stayed ic institutional order policy issues
with him throughout his academic career. The which challenged and fascinated him
tangible result of this was a number of com- again and again. For Meyer, it was an
pelling investigations and analyses of the sub- important economic policy objective
ject. They have repeatedly been made avail- and a compelling task to clarify the basic
able in publications, giving lasting testimony structure of the market system, but also
to the lucidity of the language and the apt to examine the elements forming such
examples and explanations which characterise an economy. In his investigations of
his style. pressing economic problems, Meyer
was masterful in that he was able to
Meyer was able to look back on a long reduce a problem down to fundamental
and successful career at the University economic principles and, at the same
of Bonn, where he remained despite time, to show how it related to institu-
being offered many prestigious aca- tional order policy. In his critical analy-
demic positions. He also turned down ses, he was as ruthless in uncovering
senior positions in government because cases of self-centred lobbying as he was
he saw the danger that inevitable politi- with the stubborn tendency to →inter-
50 Leonhard Miksch

ventionism and restraints of competition, name Leonhard Miksch is frequently over-

which he exposed with brilliant logic looked. His premature death notwithstand-
and wit as economically unfounded and ing, he made an important contribution to the
unacceptable. rebuilding of the fledgling Federal Republic,
both in his role as a university teacher and
Undergraduate studies in Economics; 1934 through his hands-on involvement in eco-
doctorate with Walter Eucken; 1934–1937 nomic policy.
assistant at the Institute for World Economy
in Kiel and with Eucken in Freiburg; 1938 In terms of his career development,
post-doctoral degree with Eucken; Miksch differs substantially from his
1938–1943 lecturer at the University of ordo-liberal fellow combatants. After
Kiel; 1946 assistant professor, 1948 full pro- initially studying chemistry, he
fessor at the University of Bonn; 1950 changed to political economics and
member of the Scientific Advisory Council graduated in economics in Tübingen in
at the Federal Ministry of Economic Affairs;
1926, completing his doctorate three
1962–1965 member of the Council of
years later. Walter Eucken, who
Experts for the Investigation of Economic
Development; 1973 professor emeritus.
remained a life-long friend, was his
supervisor. But instead of embarking
REFERENCES: on an academic career, Miksch started
MEYER, F. W. (1938), Der Ausgleich der working as a journalist for the
Zahlungsbilanz, Jena; —, many articles in: Frankfurter Zeitung in 1929, where he
Ordo Jahrbuch für die Ordnung von Wirtschaft was chief economics editor until the
und Gesellschaft; Weltwirtschaftliches Archiv; newspaper was closed down by the
Wirtschaftspolitische Chronik des Instituts
National Socialists in 1943.
für Wirtschaftspolitik der Universität zu
Miksch’s career in journalism did
Köln, in several anthologies; for a lengthy
evaluation of his scholastic achievements
not prevent him from writing his most
see, WILLGERODT, H. (1981), Fritz important work in 1937, entitled
Walter Meyer, Ordo, 32, pp. 199-217. ‘Competition as Responsibility –
Principles of a Competitive System’,
Helmut Gröner which he later submitted as his post-
doctoral thesis.
After the end of the Second World
War, Miksch was actively involved in
Miksch, Leonhard the rebuilding of the German economy,
Born 20 May 1901 and until his appointment to the
Died 19 November 1950 Business College in Mannheim and the
University of Freiburg, he was head of
Ordo-liberalism and the Freiburg School are department at the Economic Adminis-
most closely associated with names like Walter tration in Frankfurt. During this time,
→Eucken, Franz →Böhm and Alfred he was to become one of Ludwig
→Müller-Armack, who for good reason →Erhard’s closest confidants and advis-
count among the most outspoken representa- ers. It was thanks to Miksch that the
tives of this particular variety of economic pol- 1948 currency reform was embedded
icy. It is unfortunate that in this context the into an adequate framework of institu-
Leonhard Miksch 51

tional order policy and was thus a suc- at producing, through appropriate insti-
cess. The so-called ‘Guiding Principles tutional measures, a market result
Law’, on which Erhard based his waiv- equivalent to the result which one
er of price controls which came into would expect under →competition. Thus
force simultaneously with the currency Miksch advocated neither the absolute
reform and without which a free com- prohibition nor the nationalisation of
petitive system would not have been monopolies, but he endorses incentive-
possible, had largely been drawn up by oriented governmental regulations,
Miksch. Miksch died on 19 September such as they have been implicitly
1950, only six months after his great implemented today by the regulatory
supporter and friend, Walter Eucken, in authority for the postal service and
Freiburg. telecommunications.
As has been mentioned before, The arbitrary use of power by the
Miksch clearly belongs to the ordo-lib- state, however, can be contained by
eral tradition of the Freiburg School. democratic majority decisions. Miksch
Like Eucken and Böhm, he was not try- even came to the conclusion that
ing to promote a laissez-faire type of democracy and the market economy are
competitive policy or a policy which mutually interdependent. A liberal eco-
keeps aloof from economic processes. nomic system presupposes a stable
Instead, he developed a kind of ‘rule of democratic system, while the market
thumb’ on the basis of which adequate economy helps prevent the ‘dictator-
sets of rules (meaning an officially ship of the bureaucracy’, thereby rein-
enforceable institutional framework), forcing democracy.
can be assigned to the different types of
markets. This would imply that a ACADEMIC CAREER: 1920–1926 undergradu-

monopoly would have to be subjected ate studies in Chemistry and Political

to government control, while a market Economy in Prague and Tübingen. 1929
which subscribes to complete competi- receives his doctorate in Economics at the
University of Tübingen. 1937 post-doctoral
tion does not require any intervention.
qualification. 1949 professorship at the
Miksch calls this laying down of an
National Business College in Mannheim
institutional framework, ‘external coor- and at the University of Freiburg.
dination’. The procedural counterpart,
however, is referred to as the ‘internal REFERENCES:
coordination’. While internal coordina- MIKSCH, L. (1937), Wettbewerb als Aufgabe.
tion depends on the free will of the mar- Grundsätze einer Wettbewerbsordnung, Stuttgart,
ket participants and their assessment of Berlin, 2nd revised edition, Godesberg 1947;
mutual benefit, external coordination is — (1948), Die preispolitischen Grundge-
always an expression of power. danken, in: Miksch, L./Rubrath, W., Die
In order to prevent this power from Preisfreigabe. Wirtschaftspolitik und Recht,
Siegburg, pp. 3-18; — (1949), Die
being used arbitrarily by private indi-
Wirtschaftspolitik des ‘Als-Ob’, Zeitschrift für die
viduals, which can happen through
gesamte Staatswissenschaft, 105, pp. 310-338.
monopolies, Miksch developed the
model of ‘competition as-if ’. He felt Heinz-Dieter Smeets
that competitive policy must be aimed Michael Sket
52 Alfred Müller-Armack

Müller-Armack, Alfred of this premise, one topic runs through

Born 28 June 1901 Müller-Armack’s work like a thread:
Died 6 March 1978 the significance of social value orienta-
tions and whether there is a readiness to
assume the responsibility for their real-
His work on Economic Control and
Market Economy, published in 1946,
encapsulates his core concept of what a
social market economy should be. It
was also the first time Müller-Armack
developed the idea of a market econo-
my with social responsibility. Here, and
in his subsequent writings, the →social
market economy was conceived as an eco-
nomic style which must be able to adapt
to changing social conditions over time.
However, this adaptive ability should
not clash with the abiding fundamental
principle of the social market economy,
which for Müller-Armack consists of
the fusion of the precept of a free mar-
Müller-Armack prepared the ground for the ket with that of social compensation.
concept and coined the term social market From the perspective of →social iren-
economy. He regarded the implementation of ics propagated by Müller-Armack, the
a liberal and humane political system as a social market economy comes across as
societal task, to which in its practical form the a social idea greater than any specific
economy had to contribute. belief system, built on the principles of
economic institutional order theory and
Müller-Armack was prolific in his aca- unmistakably characterised by the coor-
demic work. In his writing, he used dination inherent in a market economy.
→business cycle policy – one of the hall- Having clarified this, he goes on to
marks of the social market economy – point out that, for him, the social mar-
as his point of departure, while his ket economy is not a →third way
socio-cultural and socio-religious between a →market economy and central-
works of the 1930s and early 1940s ly administered economy (→socialism/
were inspired by Max Weber, among planned economy), but that he sees it as a
others. This awakened his interest in special type of market economy with an
investigating economic styles. added, inalienable social quality.
According to Müller-Armack, it is Both through his political activities
attitudes, value judgments and power and his academic work, Müller-Armack
positions rather than immutable natural has earned lasting recognition. In the
laws which shape the different eco- field of institutional order theory and
nomic and social systems. On the basis policy, his concept of a social market
Oswald von Nell-Breuning 53

economy has perpetually stimulated ister; Müller-Armack withdrew from this

deeper reflection. To commemorate position in 1963, continuing in his universi-
what would have been his 100th birth- ty teaching post until 1969. He remained
academically and socially active until his
day in 2001, academic symposiums in
death, something which was reflected in the
Bonn and Leipzig provided an opportu-
plethora of tributes he received.
nity for his colleagues, students and the
experts on his theory both in Germany SELECTED PUBLICATIONS BY ALFRED MÜLLER-
and abroad to honour the memory of ARMACK:
Alfred Müller-Armack. Wirtschaftsordnung und Wirtschaftspolitik.
Studien und Konzepte zur Sozialen Markt-
ACADEMIC AND PROFESSIONAL CAREER : wirtschaft und zur Europäischen Integration,
Müller-Armack’s academic career started Bern, Stuttgart, 2nd edition, 1976; Diagnose
with a degree in Political Economy at the unserer Gegenwart. Zur Bestimmung unseres
universities of Giessen, Freiburg, Munich geistesgeschichtlichen Standortes, Bern, Stuttgart,
and Cologne. 1923, doctoral thesis under the 2nd revised edition, 1981; Genealogie der
supervision of Leopold von Wiese at the Sozialen Marktwirtschaft. Frühschriften und
University of Cologne (‘The Crisis in Social weiterführende Konzepte, Bern, Stuttgart, 2nd
Economic Theory’); 1926, post-doctoral revised edition, 1981; Religion und Wirtschaft.
thesis (‘The Economic Theory of Economic Geistesgeschichtliche Hintergründe unserer
Stabilisation Policy’). 1926–1938 assistant Europäischen Lebensform., Bern, Stuttgart, 3rd
lecturer and assistant professor in Cologne. edition, 1981.
After standing in for another lecturer at the
University of Münster in 1938, he became REFERENCES:

assistant professor there the following year, DIETZFFELBINGER, D. (1998), Soziale

before being appointed full professor of Marktwirtschaft als Wirtschaftsstil. Alfred Müller-
Political Economy and Cultural Sociology Armacks Lebenswerk, Gütersloh; MÜLLER,
with particular emphasis on the sociology of E. (1997), Evangelische Wirtschaftsethik und
religion in 1940. Concurrently, Müller- Soziale Marktwirtschaft, Neukirchen-Vluyn;
Armack was acting director of the Institute WATRIN, Ch. (1988), Alfred Müller-
for Economics and Social Sciences in Armack (1901 to 1978), in: Henning, F.-W.
Münster. This is where, in 1941, he co- (ed), Über den Beitrag Kölner Volkswirte und
founded a research department for general Sozialwissenschaftler zur Entwicklung der
and textile industry issues in the market Wirtschafts- und Sozialwissenschaften, Cologne,
economy. 1948 founder member of the Vienna, pp. 39-68.
scientific advisory committee at the Trade
and Commerce Administration in Friedrun Quaas
Frankfurt. 1950 Leopold von Wiese’s succes-
sor at the University of Cologne. The
Cologne Institute for Economic Policy in Nell-Breuning, Oswald von
1950/51 was basically established thanks to Born 8 March 1890
Müller-Armack’s initiative. 1952–1958
Died 21 August 1991
Müller-Armack combined his professorship
with the post of acting head of the depart-
ment for basic guidelines at the Federal Oswald von Nell-Breuning was very critical
Ministry of Economics. 1958 Secretary of in his comments both on neo-liberalism as the
State for Europe in the Federal Ministry of theoretical background and what he liked to
Economics under Ludwig →Erhard as Min- refer to as the ‘so-called‚ social market econo-
54 Oswald von Nell-Breuning

my’ as its practical derivative, at least during the practice of destructive individualist
its initial phase during the 1950s (see ‘Neo- theories’ (QA 88)? This is precisely
Liberalism and Catholic Social Doctrines’, what was also important to the ‘fathers’
1955). It was not until much later (‘Is there of the social market economy, and even
common ground between Neo-Liberalism today its proponents make this very
and Catholic Social Doctrines?’, 1975), with claim.
reference to a contribution by Franz
→Böhm (Ordo 24, 1973, pp. 11-84), that The ‘genuine’ regulatory principle
he signalled a conditional chance for reconcil- The core issue in the controversy
iation. between Nell-Breuning and certain
neo-liberal representatives of the social
In order to be able to understand this market economy – particularly that
position, one has to go all the way back political persuasion in Germany which
to the origins of the encyclical has made reference to the social market
Quadragesimo Anno (QA, 1931); Nell- economy since 1949 – is really this
Breuning considered himself to be one ‘genuine’ regulatory principle. In his
of its ghost writers. There, Pope Pius XI critical statements, Nell-Breuning fre-
submits ‘capitalist economies’, and quently repeats his suspicion that
most particularly their ‘empowerment despite all their protestations to the
as a result of freedom of competition’ contrary, the neo-liberals regard →com-
(see QA 105-109) to strong criticism petition as the chief ‘regulatory’ principle
while conceding at the same time that it because their ‘neo-Kantian’ theory of
is ‘not to be condemned as such’ (QA knowledge leaves them no alternative.
101). According to him, ‘freedom of He claims that for the neo-Kantians,
competition within certain limitations the (economic) common good is only a
is justified and of undoubted use’, but ‘regulatory idea’ devoid of a priori mate-
cannot be allowed to become the ‘regu- rial content. This means that they are
latory principle of an economy’. In his only able to correct the outcome of
view, competition cannot bring about competition in retrospect, while com-
economic ‘self-control’ because: ‘Power petition itself is given free reign. Nell-
is blind – force is tempestuous’. In Breuning argues that this comes down
order to be ‘beneficent to mankind, it to the familiar ‘old-liberal’ theory,
needs vigorous restraint and wise which is simply dressed up with the
supervision’. This has to be imposed label ‘social market economy’.
from outside with the help of ‘higher The social content of the social mar-
and nobler forces ..., which discipline ket economy in its practical, political
economic power sternly but with wis- application as part of the economic and
dom: →social justice and social love’. social policies of Ludwig →Erhard and
Thus, for Pius XI as well as for Alfred →Müller-Armack did not go far
Nell-Breuning, the crucial question is: enough for Nell-Breuning. Parameters
‘How can the economy once again be of his criticism were above all industri-
subordinated to a genuine and thor- al relations (Nell-Breuning was a pro-
oughly regulatory principle’, after in the ponent of ‘labourism’, according to
liberal capitalism of the past it ‘allowed which shareholders, staff and manage-
Oswald von Nell-Breuning 55

ment are supposed to be represented on demands of morality’, one has to turn to

the corporate supervisory boards in the ‘market economy which remains
equal numbers), and the distribution of functional while placing lower expecta-
the productive capital which in his tions on morality’. Böhm apparently
opinion was insufficient. To that extent, agreed to this statement with the
Nell-Breuning was closer to the remark: ‘The market economy repre-
German trade unions and the Social sents less temptation for man’ (all quota-
Democratic Party (SPD) than to the tions 469 f.).
Christian Democratic Union (CDU), This basically meant that Nell-
and he participated as much in the Breuning accepted Adam Smith’s ‘para-
drawing up of the SPD Godesberg digm change’ (Karl Homann) accord-
Programme as he made contributions ing to which the institution market rep-
to the magazine Die neue Gesellschaft, resents the ‘inherent morality’ in the
which touted the SPD party line. economic system, which achieves its
ethical goals as an institution and not
Conditional reconciliation due to the personal (high) moral quali-
But what would a ‘true’ social market ty of the market participants (competi-
economy look like, to which Nell- tors). This, however, is only a necessary,
Breuning would gladly give his and not by any means sufficient, condi-
approval? This term is found in the tion of a social market economy
commemorative publication for Franz because, for Nell-Breuning, competi-
→Böhm on his 80th birthday (1975) in tion is ‘not the regulatory principle of
his most important and final essay on the market economy’, but (only) a
this question. ‘peculiar regulatory instrument’ (1968 –
He mentions his ‘personal recollec- see QA 88).
tion’ of a meeting of the ‘academic advi- In anthropological terms, the mar-
sory council of the current Adminis- ket economy is a consequence of ‘pri-
tration for the Economy’ in 1948, vate autonomy’ and the associated
chaired by Franz Böhm, where the ‘removal’ of ‘obstacles’ which might
question ‘what economic order was to prevent its expression (ibid).
take the place of the war economy Since private autonomy can ‘degen-
which had by then collapsed complete- erate’ to the point of ‘the complete
ly?’ was discussed. destruction of the market economy’
A centrally administered economy (468), a ‘market economy requires an
‘expects every individual to go against institutional order policy’ to even be
his own self-interest almost all the time able to keep the ‘cultivated plant’
for the benefit of the common good’. (Böhm) market alive. The market as
Conversely, it applies ‘that in the mar- such only knows ‘one category of values’,
ket economy, self-interest and the which, in accordance with the principle
requirements of the common good are of a rational economy leads to the
largely compatible’. Since ‘morality is ... maxim: ‘Minimise costs, maximise
the scarcest of all the goods which are in profit’ (463). Therefore, to opt for a
scarce supply’, and since the centrally market economy is nothing more than
administered economy makes ‘excessive ‘an intelligence test’ (464).
56 Oswald von Nell-Breuning

The market has a value-based ‘con- omy on another path’ than the one where
trol function’ insofar as the market par- market forces are left to themselves’
ticipants have to react appropriately to (467).
the ‘scarcity conditions which are sig- A summary of Nell-Breuning’s atti-
nalled by the prices’. However, ‘private tude to the social market economy
autonomy’ with the market as a neces- must emphasise three main aspects:
sary regulatory instrument does not lead
‘so easily ... to an ordered economy’ • Nell-Breuning is deeply opposed to
(465). In order to achieve that, ‘a regula- the alleged ‘self-control’ of the econ-
tory policy which ensures both execution omy by a ‘hypostatisation’ of the mar-
and control’ is needed (469). ket, which is no more (but also no
The anthropological basis for this is less) than a regulatory instrument,
the ‘meaning’ of an economy. It is not which, however, is an inevitable con-
only supposed to provide the market sequence of human autonomy.
participants ‘with purchasing power ...,
but everybody alive, for no other reason, • Nell-Breuning warns particularly
than because they are alive’, as Nell- against the ‘agglomeration of exces-
Breuning approvingly quotes F. Böhm sive private power’, which has a
(461). destabilising effect on the ‘minimal
For Nell-Breuning, this means that market equilibrium of functional pri-
a ‘true’ social market economy must vate autonomy’ and which must lead
not be reduced to the bare bones of to the degeneration of the →market
government-secured competition, but economy. (468).
that the economy as a whole must be
regulated and organised in accordance • For Nell-Breuning, the social market
with ‘a world of multidimensional economy necessitates a →social state
human values’ (463). The market, with built-in redistribution and
which is like an ‘illicit worker’ (Böhm), structural policies. This is supposed
must not control the economy ‘exclu- to fulfil optimally the true objective
sively’, but one must include ‘the possi- of the economy, i.e. supplying all
bility of correcting state interventions’. men/women with ‘the basic necessi-
Besides the guarantee of private ties of life’ (461).
autonomy, they particularly consist of
‘private property’ and the ‘freedom of Nell-Breuning’s last word on the
contract’, and the procurement of subject is that if this view of the social
financial means (taxes, duties), through market economy is ‘authentic neo-lib-
which the government interferes with eralism’, ‘then, and only then, are neo-
‘the free income distribution of the liberalism and the Catholic social doc-
market economy’. They also include trines reconciled with one another’
the ‘monetary order which is anything (469).
but automatically controlled’, econom- The question remains, however,
ic stabilisation and structural policy. whether such a reconciliation would
According to Nell-Breuning, it is par- have been possible not only with the
ticularly the latter which puts ‘the econ- ideas of Franz Böhm, but also (even
Hans Carl Nipperdey 57

before 1975) with Alfred →Müller- by the principle of the social state in terms of
Armack and others who were disap- Articles 20(1) and 28(1) of the Basic Law,
pointed by Nell-Breuning’s critical atti- and which is modified into the social market
tude towards the theory and practice of economy, had to be seen as a constitutional
the social market economy which they principle inherent in the fundamental rights,
represented. above all the general freedom of action (Article
2(1) Basic Law), freedom of occupation
ACADEMIC AND PROFESSIONAL CAREER : (Article 12(1), Basic Law), freedom of associ-
From 1928, Dr theol., Dr rer. h. c. (honoris ation and coalition (Article 9(1) and (3,)
causa) Nell-Breuning was professor of Basic Law) and the guarantee of property
Moral Theology and Social Sciences at the
(Article 14(1), Basic Law). However,
College for Philosophy and Theology at St.
Nipperdey’s opinion was not universally
Georgen in Frankfurt. He was a member of
the Scientific Advisory Council at the
accepted, since the Federal Constitutional
Federal Ministry of Economics for 17 years, Court and the greater part of the literature were
as well as an honorary citizen of the cities of presupposing that the Basic Law was neutral
Trier and Frankfurt. as far as the legal aspects of the economic consti-
tutional framework were concerned.
NELL-BREUNING, O. v. (1955), Nipperdey’s extensive academic work,
Neoliberalismus und katholische Sozial- for which he received numerous hon-
lehre, in: Wirtschaft und Gesellschaft heute III ours both in Germany and abroad, is
Zeitfragen 1955-1959, Freiburg 1960, pp. 81- reflected in over 400 publications. He
98; — (1956), Die soziale Marktwirtschaft im
was involved in all areas of civil, com-
Urteil der katholischen Soziallehre, pp. 99-102;
mercial and economic law, in copyright
— (1975), Können Neoliberalismus und
katholische Soziallehre sich verständigen?, and competition law as well as in labour
in: Sauermann, H./Mestmäcker, E.-J. (eds), law.
Wirtschaftsordnung und Staatsverfassung (Anni- But Nipperdey also made a signifi-
versary publication on Franz Böhm’s 80th cant contribution to the establishment
birthday), Tübingen, pp. 459-470. of a constitutional framework in these
areas. During his Weimar period, he
Lothar Roos published the compendium The Reich
Constitution and its Basic Rights and
Obligations. It contained his commen-
Nipperdey, Hans Carl tary on the right of coalition in terms of
Born 21 January 1896 Article 161 of the Weimar Reich
Died 21 January 1968 Constitution.
After the Second World War,
In Nipperdey’s opinion, the Basic Law, Nipperdey, Scheuner, Neumann and
although it contains no special section on the Bettermann co-published the Manual
economic constitutional framework, incorpo- on the Theory and Practice of the
rates basic economic, constitutional and legal Fundamental Rights, which included his
principles which in their entirety guarantee the work on the topics ‘human dignity’ and
system of the social market economy. He felt ‘free personal expression’. Particularly
that the market economy, characterised as it is his views on the third-party effect of
58 Hans Carl Nipperdey

fundamental rights in civil law and the Dictated Contract’). There he became assis-
constitutional guarantee of the →social tant professor in 1924. 1925 Chair of Civil
market economy received a great deal of Law, Trade and Commercial Law and
Industrial Law at the University of Cologne
attention both in the literature and in
as a full professor. Despite numerous offers
the jurisdiction, and have retained their
from other universities, he remained loyal
validity to this day. to this university until the end of his life. In
Nipperdey’s comments on the legal 1954, he was appointed the first president of
content of the economic constitutional the newly established Federal Labour Court
framework in the Basic Law are equally at Kassel. He retired from judicial office in
still relevant today, in that they explicit- 1964 at the age of 68, but continued as a lec-
ly state that the neutrality of the Basic turer and researcher at the University of
Law is not absolute to the extent that Cologne even after his retirement, just as he
the government is free to adopt one of had continued to do while in judicial office
the types of a centrally administered in Kassel.
economy or turn to planned economic
coordination (→socialism/planned econo-
Comprehensive supporting documentation
my) at will.
compiled by REICHENBERGER, K.
In actual fact, the fundamental (1965), Festschrift für H. C. Nipperdey zum 70.
rights which have economic and legal Geburtstag, 2, Munich, Berlin, pp. 937ff.;
relevance impose boundaries on the NIPPERDEY, H. C. (1954), Die soziale
legislature, while establishing a basic Marktwirtschaft in der Verfassung der Bundes-
decentralised structure of competencies republik, volume 10 of a series of publica-
within the economy, making it indeed tions for the Juristischen Studiengesell-
possible to regard the fundamental schaft, Karlsruhe; — (1965), Soziale Markt-
rights as instrumental in the establish- wirtschaft und Grundgesetz, 3rd edition.
ment of this economic system.
Hans-Jürgen Papier
Nowadays, the EC Treaty (in particular
Article 4(1)) contains a declaration of
the principle of a →competition-based Röpke, Wilhelm
→market economy, so that at the level of Born 10 October 1899
the European Community at least, a Died 12 February 1966
solid legal framework secures the mar-
ket economy. Röpke is in no doubt that the framework of a
→social market economy must include
ACADEMIC AND PROFESSIONAL CAREER : the law, the state, customs and morals, firm
Nipperdey was the son of a general practi- convictions about norms and values and a
tioner. After graduating from high school in reliable monetary system that is not dependent
Weimar, he took up law at the universities of
on the automatism of the market, but for
Heidelberg, Leipzig and Jena. Having been
which the central bank and the government
a volunteer in the First World War, he
received his doctorate in 1917 (‘Limitations
have to take responsibility on a daily basis.
to Extortion by Threat, with Particular Then there have to be economic, social and
Reference to Industrial Action’). He was financial policies which are ‘beyond the mar-
awarded his post-doctoral qualification in ket’ and balance interests, protect the weak,
Jena in 1920 (‘Contracting Obligation and limit power, impose rules and monitor their
Wilhelm Röpke 59

keep striving for solutions which are appropri-

ate for their time in order to make the funda-
mental principles of the ‘social market econo-
my’ a reality.

For Röpke, economics was always polit-

ical economics. In his opinion, the eco-
nomic reality of his time was politicised
to an extent that was previously unheard
of or completely inconceivable. This
view was borne out by Röpke’s own
experiences. As early as 1931, as a mem-
ber of the Reichs Commission for the
investigation of the unemployment
issue (the Brauns Commission), Röpke
suggested that the private initiative
which, for a host of reasons was lacking,
should be replaced by suitable govern-
observance. The capital market, investments ment-financed demand for the purpose
and foreign trade are the key areas and they of giving the economy a boost. He
must not be distorted by government interfer- argued that economic activity could be
ence in the market process. The individual kick-started by giving it an ‘initial push’,
principle that lies at the heart of the market and that in this way →unemployment
economy has to be kept in balance by the could be gradually diminished.
social and humanitarian principles that char- As early as 1923, Röpke was trying
acterise the framework and its different ele- to communicate the need for an ‘inno-
ments. The will to justice generates a ‘concept vative’ synthesis of ‘liberalism, social
of liberty’, affirming solidarity as a basic responsibility and loyalty towards the
value. Part of this is an adequate share in the law’. In this way, he felt that the two
national income for everyone. In this way, extremes of laissez-faire on the one
gross inequalities in the manner in which the hand, and the exclusive focus on the
national income and the national capital are common good on the other could be
distributed can be balanced. avoided.
Röpke refers to his economic ideal as ‘eco- No intelligent individual could
nomic humanism’ or the ‘third way’. The deny the fact that the Western
theory behind his economic policies is based on economic system with its characteristic
the postulate that human dignity is sacrosanct. features including private ownership of
He wants to create a social and political envi- the means of production, highly differ-
ronment where respect for human rights is the entiated levels of production and a long
first essential. The proponents of a liberal state list of individual liberties was particu-
should see Röpke’s work as a beacon, a civi- larly suited to the creation of prosperity.
tas humana ‘beyond supply and demand’. To abolish these liberties in order to
He wants science, politics and the public overcome the ‘late capitalist’ system
always to be reminded of the fact that one must seemed to Röpke tantamount to con-
60 Wilhelm Röpke

sciously ushering in a ‘totalitarian state’ he returned to Marburg as professor of

or a political dictatorship. Röpke cau- Political Economics (1929). He remained
tioned against the National Socialist there until he was dismissed by the Hitler
regime in 1933 for political reasons. From
promise of a ‘new, grandiose, but other-
late-1933 until the winter semester of
wise nebulous 1000-year empire’ and
1937/38, he was director of the Institute for
the consequences of the political hyste- Social Sciences at the University of Istanbul,
ria that was a symptom of the time. He before taking up a professorship of
insisted that national socialism was a International Economic Affairs at the Institut
radical ideology incompatible with a Universitaire des Hautes Etudes Internationales
liberal state. Röpke predicted that on in Geneva, where he remained until his
top of the economic crisis, Germany death.
would be plunged into a political crisis
and that everybody who gave his vote to REFERENCES:

the National Socialists would be voting RÖPKE, W. (1944/1979), Civitas humana:

for ‘chaos instead of order and for Grundfragen der Gesellschafts- und
Wirtschaftsreform, 4th edition 1979, Bern,
destruction instead of construction’.
Stuttgart; — (1958/1979), Jenseits von Angebot
When Röpke opted for emigration
und Nachfrage, 5th edition 1979, Bern,
in 1933, his decision was prompted by Stuttgart; TUCHTFELDT, E./WILLGE-
the desire to remind the rest of the RODT, H. (1937/1994), Wilhelm Röpke –
world that there was still ‘another Leben und Werk, in: Röpke, W., Die Lehre
Germany’ (for example, the Freiburg von der Wirtschaft, Bern, Stuttgart, Vienna,
Circle with members like Franz 13th edition 1994; HAMM, W./
→Böhm and Walter →Eucken). He was KRÜSSELBERG, H.-G. et al (1999), sever-
drafting an economic and social order al contributions in: Ordo, 50, Stuttgart.
for the post-National Socialist era,
based on the idea of a society where Hans-Günter Krüsselberg
economic equilibrium is linked to the
postulates of social justice and equality,
and which is ‘aware of the significance Rueff, Jacques
of moral values for the socio-economic Born 23 August 1896
survival of the nations’. These are the Died 23 April 1978
words Ludwig →Erhard used on
Wilhelm Röpke’s 60th birthday to As a French political economist, a financial
highlight the significance of his think- expert and a politician in the fields of finance
ing for the development of the concept and economic affairs, Rueff combined, like
of the social market economy. almost no one else, innovative contributions to
economic theory with a successful activity in
the practical economic policy and public
Undergraduate degree in economics in
administration. He influenced the French
Göttingen, Tübingen and Marburg.
monetary and economic policy more strongly
Doctorate (1921) and post-doctoral qualifi-
cation, then assistant lecturership in Political than any other academic or politician. Rueff
Economics in Marburg (1922). After always advocated a liberal economic system
appointments to Jena as assistant professor and a liberal economic policy, even at times
(1924) and to Graz as full professor (1928), when this was not popular. With his theory of
Jacques Rueff 61

property rights, his battle against inflation, his theme for Rueff ’s practical work on
criticism of the application of the gold standard economic policy. Already in 1926 he
to foreign exchange, his suggested stability took important preliminary steps for
policies and his suggestions to tie the monetary the stabilisation of the exchange rate of
policy to rules, Rueff was ahead of his time. the franc and the re-establishment of
Some of his reform suggestions became accept- the gold convertibility of the franc by
ed practice; for example, in the European Prime Minister Poincaré.
monetary system and in the →European On the basis of purchasing power
Economic and Monetary Union. and wage parities, Rueff worked out an
exchange rate for the franc which was
Rueff ’s most important theoretical implemented through the introduction
work is L’ordre social (1st ed 1945). The of the ‘franc Poincaré’ and which was
title of the German translation as The stable and could be converted into gold.
Social Order (1952) is misleading; ‘The By choosing the correct exchange rate,
Economic and Social Order’ would be Rueff maintained that the return to the
more correct. On the basis of price, gold currency in France did not entail –
production, monetary and market theo- as it previously had in Great Britain –
ry, Rueff in this work develops an infla- deflation and falling wages.
tion theory and a theory relating to the Rueff ’s most important achieve-
economic and social order. He starts ment is certainly the conception of the
with the then innovative idea (hardly 1958 economic and currency reform in
appreciated by most critics) that each France, which even goes back to his ini-
good’s exchange (purchase, sale) in the tiative.
market is an exchange of property rights The economic situation in France in
(droits de propriété). This makes Rueff the 1958 had reached crisis point: a high
most important forerunner of the mod- budgetary deficit, inflation, flight of
ern property rights theory. capital, shrinking foreign exchange
Rueff also uses the property rights reserves, exchange control, import pro-
theory to explain inflation: the state tectionism, the loss of international
creates ‘fake’ (or ‘false’) property rights competitive ability and devaluation pres-
in order to finance budget deficits by sure. On Rueff ’s instigation, a commit-
forcing the (instruction-dependent) tee which he chaired compiled a consis-
central bank to accept basically worth- tent reform programme for the govern-
less government stocks as the basis for ment, which in 1958/59 was put into
the creation of central bank money, practice by Head of Government de
which is put at the disposal of the state Gaulle and the Finance Minister Pinay:
for the purpose of demand for goods
and services. If the price increases • In order to stop inflation, the financ-
caused by this additional demand are ing of household deficit by the central
suppressed by a price and wage freeze, bank had to be prohibited and the
instead of open inflation, ‘repressed’ deficit itself eliminated.
inflation (inflation réprimée) will develop.
The battle against inflation and for • For the elimination of the budget
currency stability forms a recurring deficit, taxes had to be increased and
62 Jacques Rueff

consumptive public expenditure – and included recommendations for the

especially →subsidies – had to be removal of restraints of competition,
reduced: however, national capital restrictions to market entry, govern-
expenditure was increased (→public ment price-fixing and the rigidity of the
expenditure). job market – as well as improvements in
the educational system and in adminis-
• Index-linked wages and other tration.
→incomes were abolished. Since 1961 Rueff made a name for
himself as a critic of the Bretton Woods
• In order to prevent price increases, a ‘world monetary system’, which was in
large number of quantity restrictions force at the time. The gold dollar stan-
for imported goods were waived: this dard of the time made it possible for the
generated competitive pressure from key currency country – which was the
imports. United States (US) – to maintain budg-
et deficits and balance of payment
• In order to restore the competitive deficits financed by inflation for many
ability of the French economy, which years, without being forced to devalue
had been impaired by inflation, the the dollar and impose an inflation
franc was devalued. freeze. Thus the dollar reserves of the
foreign central banks kept growing
• Simultaneously, as a ‘confidence- (which led to an imported inflation in
building measure’, a new currency, those countries).
the ‘new franc’ (= 100 old francs), Rueff soon saw the danger that the
was created and the convertibility of gold reserves of the US would no
the franc was introduced, i.e. longer suffice to keep the formally
exchange controls were abandoned. existing obligation for the redemption
of these dollar reserves in gold. He
The reforms proved a great success. feared as a consequence either a defla-
The French post-war inflation was sud- tion crisis in the US or the abolition of
denly over, the national budget was the gold convertibility of the dollar. The
reorganised, the exchange rate was sta- latter actually occurred in 1971.
bilised, the balance of payments was In order to overcome the instability
adjusted, economic growth was secured and susceptibility of the gold dollar
for years to come and the French econ- standard to inflation, Rueff suggested
omy was made competitive for the the return to the international gold
Common Market. standard: the monetary policy of the
For the elimination of the remain- central banks should thereby be sub-
ing obstacles, in 1959/60, again on jected to rules; for the reconciliation of
Rueff ’s initiative, a second committee the balance of payments deficits only
of experts chaired by Rueff and Louis gold transfers were to be used instead of
Armand compiled a report on the hin- foreign exchange. Countries with bal-
drances to economic growth (Rueff ance of payments deficits would there-
Armand report). This constituted the by have been subjected to an obligation
world’s first →deregulation programme to adopt stability policies. President de
Alexander Rüstow 63

Gaulle gave Rueff ’s reform suggestions Rüstow, Alexander

his support, but was not able to imple- Born 8 April 1885
ment them internationally. Died 30 June 1963


Subsequent to his military service, he
entered the École Polytechnique in Paris in
1919. From 1922, lecturer in Statistics and
Mathematical Economics at the University
of Paris. A pre-selection examination in
1923 (Concours) opened up the career of
Inspecteur Général des Finances, one of the
most distinguished positions in the French
administration. 1927–1930 member of the
Economic and Financial Committee of the
League of Nations (Geneva), 1930–1934
finance attaché at the French embassy in
London. From 1931, professor of Political
Economy at the École Libre des Sciences
Politiques, Paris (subsequently Institut des ‘If you need a helping hand, first look for it at
Sciences Politiques). 1934–1939 at the French the end of your right arm.’ This favourite
Treasury, 1939–1940 vice-president of the
expression of Rüstow’s illustrates his deep
French central bank. From 1945 on, he was
conviction that on the basis of freedom and
an economic adviser to the French Military
Government in Germany. From 1952 on, he individual responsibility, everybody should
was on the bench at the Court of Justice of make the effort to organise and secure his own
the European Community for Coal and existence to the best of his abilities, while
Steel. 1958–1962 at the European Court of expressing his creative energy in his (immedi-
Justice. During the 1960s, he was an eco- ate) environment. But it was a long time
nomic advisor to French President de before Rüstow came to this conclusion. After a
Gaulle. Member of the Académie Française broad classical education, he studied the theo-
and the Académie des Sciences Morales et ry of →socialism as well as that of →liber-
Politiques. alism in detail, ending up in the opposition
and eventually in exile during the Third
Reich. As early as 1932, and having experi-
RUEFF, J. (1977-81), Œuvres complètes
(Complete Works), 4 vols, Paris, available in
enced the ongoing economic crisis during the
English translation: New York (Lehrman Weimar Republic, Rüstow took a determined
Institute). Autobiography, in German trans- stand against interventionist economic policies
lation: Die soziale Ordnung, Bremen 1952; by the state (→interventionism). The state
KNAPP, F. (1972), Die Währungssünden der should rather be a referee, concentrating on
westlichen Welt, Frankfurt. the creation of and the adherence to the eco-
nomic and socio-political framework.
Josef Molsberger Competition as the fundamental coordinating
principle in a market economy helps to create
and preserve space for personal decision-mak-
ing and acting.
64 Alexander Rüstow

Rüstow’s aim was a liberal society which cy’. Through this vital policy he wants
puts people first and is organised in such a way to organise the daily life of the individ-
that the behaviour that comes naturally to ual in his family situation, in his living
humans is captured and put to good use. and work environment, thus ensuring a
Rüstow developed this concept of a social order humane existence. Rüstow sees his vital
because he was interested in a large variety of policy concept as a part of economic
topics, and finally put what he had learnt from policy and therefore subjects it funda-
his research in cultural history, sociology and mentally to the same expectations. For
economics together, as in a jigsaw puzzle. the vital policy, the principles of market
Because Rüstow was one of the pioneers of this conformity, subsidiarity and the basic
sort of concept, he is now, together with Walter equivalence of service and counter-
→Eucken, Wilhelm →Röpke, Alfred service as part of the economic
→Müller-Armack, Franz →Böhm and exchange process apply accordingly.
Ludwig →Erhard considered one of the Social policy issues, such as social
founding fathers of the →social market security, equal opportunities, equal
economy. access to education or housing and
→family policies, can only be dealt with
In the social system conceptualised by in the context of neo-liberal order con-
Rüstow, where democracy and the cepts. For Rüstow, the social question is
→market economy are totally intercon- thus essentially a part of the question of
nected, different spheres of interest the economic order.
exist, which he classifies as economic In order to implement this neo-lib-
and supra-economic. For Rüstow, the eral economic and social system,
economy holds a subordinate position Rüstow explains what he expects from
in that it merely serves the purpose of every member of society: he expects
satisfying the material needs of separate people to treat one another with con-
individuals and society as a whole. sideration and responsibility, while
→Competition is seen as the main organ- showing respect for the needs of others.
ising principle of the market. But at the In addition, he makes repeated appeals
same time, the institutional order poli- to the people to take their fate into their
cy framework imposes boundaries on own hands and to do their best to pre-
the competition among the economic serve their own personal freedom and
agents in the market, preventing the thus to ensure a free society.
formation of monopolies and distorted Rüstow had a marked influence on
competition. All the other areas of life – neo-liberalism and its development. In
such as culture, education and family, particular on:
ethics and religion – are more impor-
tant to Rüstow than the economy; he • the intellectual background of the
argues that in these areas of life, behav- neo-liberal economic and social
iour is controlled by moral values. order, and its distinction from
Rüstow wants to complement this →socialism and (old) economic liber-
institutional order policy framework alism;
with a comprehensive, coherent social
policy, which he refers to as ‘vital poli- • clarifying the importance of an insti-
Karl Schiller 65

tutional framework for a lasting 1914–1918 military service with the artillery,
peaceful economic and social order; later promotion to reserve lieutenant; award-
and ed the Iron Cross 1st and 2nd class.
1919–1924 consultant for cartel issues at the
National Ministry of Finance. 1924–1933
• the identification of the supra-eco-
head of the Economic Policy Department at
nomic variables with an impact on the Association of German Mechanical
human life. Engineering Institutes. 1933–1949 professor
at the University of Istanbul in the Chair of
In reality, the economic policy-mak- Economic Geography and Economic and
ers since 1948 have only paid limited Social History. 1949–1956 professor at the
attention to Rüstow’s principles of sub- University of Heidelberg, in the Chair of
sidiarity, performance-based reward Economic and Social Science. 1955–1962
and consistent economic behaviour. chairman of the ASM.
Besides the many occasions when
the realisation of the social market econ-
RÜSTOW, A. (1932), Freie Wirtschaft –
omy was compromised, it could be
Starker Staat (Die staatspolitischen
explained by the fact that the develop-
Voraussetzungen des wirtschaftspolitischen
ment of the complex neo-liberal eco- Liberalismus), in: Boese, F. (ed), Deutschland
nomic and social order on the one hand, und die Weltkrise, Schriften des Vereins für
and its political implementation on the Socialpolitik, Vol. 187, Dresden, pp. 62-69,
other, was handled by many different recently published in: Hoch, W. (ed),
people. It can therefore be assumed that Alexander Rüstow. Rede und Antwort, pp. 249-
those making the political decisions at 258, also available under the title:
the time lacked a detailed understanding Interessenpolitik oder Staatspolitik? in: Der
of the way a neo-liberal institutional deutsche Volkswirt, 7(6), Berlin 1932, pp. 169-
framework should be organised. 172; — (1945), Das Versagen des Wirtschafts-
liberalismus als religionsgeschichtliches
Until late in life, Rüstow never tired
Problem, in: Istanbuler Schriften, 12, Istanbul,
of lending support to a systematically
Zurich, New York, 2nd edition, Helmut
organised social market economy, for Küpper 1950; — (1950 et al)
example, in his capacity as head of the Ortsbestimmung der Gegenwart. Eine uni-
Social Market Economy Action Group versalgeschichtliche Kulturkritik. I. Vol.:
(ASM) and by way of political consul- Ursprung der Herrschaft, Erlenbach-Zurich
tancy. 1950, II. Vol.: Weg der Freiheit, Erlenbach-
Zurich 1952, III. Vol.: Herrschaft oder
ACADEMIC AND PROFESSIONAL CAREER: 1903 Freiheit? Erlenbach-Zurich 1957.
school-leaving certificate with emphasis on
the Classics in Berlin; 1903–1908 undergrad- Jan Hegner
uate studies in Classical Philology,
Philosophy, Mathematics, Physics, Law and
Economics in Göttingen, Munich and Schiller, Karl
Berlin. 1908 doctorate in Classical Literature Born 24 April 1911
on the Paradox of the Cretan Liar (‘The Liar. Died 26 December 1994
Theory, History and Solution’, Leipzig
1910). 1908–1914 editor at a renowned Not many people are able to combine academ-
Berlin publishing firm for classical texts. ic and political careers. But two who succeed-
66 Karl Schiller

ed left their mark on the economic policy of the 1935–1941 head of a research group at the
Federal Republic of Germany: first Ludwig Institute for Economics at the University of
→Erhard, then Karl Schiller. Both were aca- Kiel. 1939 postgraduate lecturing qualifica-
tion in Kiel. 1941–1945 military service.
demics before they became politicians, both
1944 offer of a position at the University of
experienced the tension between economic the-
Rostock (not taken up). 1946 visiting pro-
ory which is for the medium- or long-term, fessor at the University of Kiel. 1947–1972
and the short-term nature of political practice. professor at the University of Hamburg
Schiller had a gift for detailed analysis com- (1956–1958 rector). 1958–1960 member of
bined with great rhetorical brilliance and per- the Scientific Advisory Council of the
suasive power. In the course of his academic Ministry of Economic Affairs.
and ministerial career, he turned more and
more towards the →market economy. This POLITICAL CAREER: 1946 joins the SPD.
is why he bequeathed his extensive specialist 1948–1953 senator for Economic Affairs
library to the Walter-Eucken Institute in and Transport in Hamburg. 1949–1953
Freiburg. member of the Upper House of Parliament.
1961–1965 senator for Economic Affairs in
In 1953, Schiller coined his famous West Berlin. 1964 voted on to the executive
motto ‘Competition as far as possible, committee of the SPD. 1965 Member of
planning as far as necessary’, which Parliament, deputy party chairman and SPD
despite some resistance was incorporat- parliamentary group speaker on economic
affairs. 1966–1972 Federal Minister of
ed into the 1959 Godesberg Pro-
Economic Affairs, and from 1971 also
gramme of the Social Democratic Party
Federal Minister of Finance. 1972 resigna-
(SPD). The collection of essays pub- tion because of fundamental differences of
lished in 1964 under the title The opinion on fiscal policy. 1972 withdrawal
Economist and Society had the subtitle from the SPD, 1980 re-entry. Later exten-
‘Liberal and social elements in modern sive mediation and especially consultancy
economic policy’. work, also abroad.
While Schiller was Federal Minister
of Economic Affairs under the great REFERENCES:

coalition, the Stability and Growth Act SCHILLER, K. (1936), Arbeitsbeschaffung und
was adopted in 1967. It bore his stamp Finanzordnung in Deutschland, Berlin (disser-
in many essential passages. Schiller tation, banned after publication); — (1940),
Marktordnung und Marktregulierung in der
himself later assigned increasing impor-
Weltagrarwirtschaft, Kiel (Habilitations-
tance to competitive →institutional order
schrift); — (1964), Der Ökonom und die
policy and became the ‘market con- Gesellschaft. Das freiheitliche und das soziale
science’ of the SPD. He was in favour Element in der modernen Wirtschaftspolitik,
of the reunification of the two German Stuttgart; — (1994), Der schwierige Weg in die
states in general, while being critical of offene Gesellschaft. Kritische Anmerkungen zur
it in detail. deutschen Vereinigung, Berlin.

ACADEMIC CAREER: 1931–1935 undergradu- Egon Tuchtfeldt

ate studies in Kiel, Frankfurt, Berlin,
Heidelberg. 1934 graduated in economics.
1935 doctorate in political sciences.
Hanns-Martin Schleyer 67

Schleyer, Hanns-Martin 1972, he was elected chairman of the

Born 1 May 1915 Metal Industry Federation of Baden-
Died 18 October 1977 Württemberg, before becoming deputy
chairman of Gesamtmetall. In 1973,
Schleyer laid down his socio-political credo – Schleyer agreed to take over the office of
the conviction ‘that every political action is the president of the Federal Union of
determined by the concepts of liberty, toler- German Employers’ Associations
ance, performance’ – in his book The Social (Federal Employers’ Association) whose
Model, published in 1973. Here, he vice-president he had been since 1965.
uncompromisingly turns against any interfer- Schleyer was elected president of the
ence with the →market economy which is Federal Association of Industries with
not inherent in the system. effect from the beginning of 1977. This
is how, for the first time, both large fed-
Schleyer read Law and Political Science erations had the same chairman. On
(1933–1938) in Heidelberg and Schleyer’s initiative, they became more
Karlsruhe, and Economics in Prague focused on social and socio-political
(graduation 1941). He received a doc- problems. Schleyer, as a representative
torate in Law in Innsbruck in 1951. of the German economy, was kidnapped
During his academic training he was on 5 September 1977 by a terrorist
involved in student social work. group and found murdered in a parked
Following his military service, he saw car on 19 October 1977 in Mülhausen,
action and was discharged from the Alsace.
army on medical grounds. From 1942
to 1945, Schleyer held a position at the REFERENCES:

Central Industry Federation of Internet: www.dihk.de.

Bohemia and Moravia in Prague. From
Franz Schoser
1945 to 1948 he was first a French pris-
oner of war and then director of foreign
trade at the Chamber of Commerce
and Industry in Baden-Baden. In 1952 Schmölders, Günter
he joined Daimler-Benz, the Stuttgart Born 29 September 1903
automobile company, where he became Died 7 November 1991
a deputy board member in 1959 and a
full member in 1963 with responsibili- Schmölders was deeply sceptical of the idea of
ty for human resources, social and the state as the ‘benevolent dictator’, which
training policies. In 1976 his responsi- features in large tracts of contemporary eco-
bility in this large corporation was nomic theory and where market failure is
extended to basic company policy and mentioned more frequently than government
social issues. failure. During the Second World War, he
It was not long before Schleyer had been close to the Kreisau Circle and the
played a prominent role in the federa- men of the 20 July 1944 assassination
tions. From 1962 to 1968 he was chair- attempt on Adolf Hitler. After the war, he
man of the Metal Industrialists’ joined the Social Market Economy Action
Federation of Württemberg-Baden. In Group (ASM) and was an active member of
68 Günter Schmölders

the Mont Pèlerin Society, an international ACADEMIC AND PROFESSIONAL CAREER :

association of liberal economists. Thus Doctorate and post-doctoral lecturing quali-

Schmölders regarded it as an apt description fication in Berlin, 1934 professorship in
Breslau (as successor of Karl Bräuer); from
when, on his 85th birthday, a speaker referred
1940 until his retirement in 1971 professor-
to him as ‘a dyed-in-the-wool liberal’.
ship in Cologne (as successor of Erwin von
Beckerath) and at the Research Institute for
Schmölders was always concerned with Finance founded by Fritz Karl Mann in 1927;
the practical side of economics, with a 1965/66 rector, honorary doctorates from
special focus on public finance and Innsbruck and Gent. From its establishment
money. He did not develop mathemati- in 1950 until 1975, member of the Scientific
cal models but was involved in empiri- Advisory Council at the Federal Ministry of
cal research on socio-economic behav- Finance. From 1959, full member of the
iour on the basis of sociological and Academy of Sciences and Literature in
socio-psychological methods. Mainz. 1969, Order of Merit of the Federal
Titles like The Irrational Aspect of the Republic of Germany, 1st Class. Symposium
at the Berlin Centre of Sciences in 2003 to
Public Finance System (Hamburg, 1960)
mark the centenary of his birth.
and Finance and Tax Psychology
(Hamburg, 1970) yielded useful results REFERENCES:
for the study of finance (as public SCHMÖLDERS, G. (1988), Gut
finance theory) and were incorporated durchgekommen? Lebenserinnerungen, Berlin;
into the major works on financial theo- KIRSCH, G. (1993), In memoriam Günter
ry: Financial Policy (3rd ed, Berlin, Schmölders. Gedenkrede, Kölner Universi-
Heidelberg, New York, 1970) and tätsreden, 73, Cologne; ZIMMERMANN,
General Introduction to Taxation (5th ed, H. (1998), Schmölders, Günter, in: Killy,
Berlin, 1980, this edition in cooperation W./Vierhaus, R. (ed), Deutsche Biographische
with K.-H. Hansmeyer). He used the Enzyklopädie, 9, Munich, pp. 38.
same methods to deal with financial
Horst Zimmermann
issues. Accordingly The Psychology of
Money (Reinbek, 1966) and Good and
Bad Money (Frankfurt, 1968) can be seen
as preliminary studies for his Monetary Schreiber, Wilfrid
Policy (2nd ed, Tübingen, Zurich, 1968). Born 17 September 1904
Today, one would group Schmölders Died 23 June 1975
with the new →institutional economics and
the public choice school because – Schreiber was surely one of the outstanding
ahead of his time – he considered the social politicians of the post-war period. Before
personal interests of those involved embarking on his academic career, he held the
(Politicians and the Currency, Frankfurt, position of general secretary of a federation of
1959), and the influence of the parties industrialists. Even then, he used to voice his
and federations on the formation of the opinions, based on the →Catholic social
political will and thus on economic pol- doctrines, on issues of family burden com-
icy. pensation, →co-determination, →wealth
accumulation policies for the workforce
and especially →pension reform.
Wilfrid Schreiber 69

His most important scientific contribu- otherwise identical circumstances, the

tion was the Schreiber Plan, whose same pension payouts as those who
underlying idea was that ‘an adequate have brought up and looked after chil-
proportion’ of wage-earners’ incomes dren, →social justice is seriously compro-
should be allocated to children and ado- mised.
lescents not yet capable of, and engaged In the commemorative publication
in, gainful employment (as a youth (Festschrift) mentioned below, Federal
pension) on the one hand and, on the Chancellor Kiesinger was right to stress
other hand, to those no longer earning that Schreiber had ‘made a significant
an income (as an old-age pension). contribution through his scientific
Old-age pensions were to be initial- research, his socio-political involve-
ly determined by the level of income ment in the Federation of Catholic
earned in each case and by the contri- Entrepreneurs and in advising the fed-
butions paid by each member during eral government on social policy issues
his active working life, while the so- for the advancement of our social poli-
called existing pensions were supposed cy’.
to be linked to the annual development
This ‘dynamisation’ of pensions 1922–1930 studies in Economics and Social
means that those no longer gainfully Science (Cologne), Engineering (Aachen
employed are able to partake in pros- and Munich) and Mathematics and Physics
perity developments. (Cologne). 1931–1947 journalist. 1947 fur-
Schreiber’s idea of a youth pension ther studies in Economics and Social
dates back to 1951, but has gained new Science at the University of Bonn leading to
topicality. It is based on the view that a his doctorate in 1948 under Erwin von
Beckerath. 1955 post-doctoral lecturing
society not only has the duty to look
qualification. 1949–1959 general secretary
after those no longer gainfully
of the Federation of Catholic Entre-
employed, but that it should also pro- preneurs. 1960–1972 chair for Social Politics
vide for those who are not yet capable at the University of Cologne.
of, or engaged in, earning an income.
His suggestion that not only parents but REFERENCES:
society as a whole should provide finan- ANON. (1969), Schriftenverzeichnis zu
cially for the younger generations, was Schreiber, in: Greiß F./Herder-Dorneich,
not implemented. This political omis- P./Weber, W. (ed), Der Mensch im
sion was bound to undermine the long- sozioökonomischen Prozess, Festschrift für
term financial stability of old-age pen- Wilfrid Schreiber zum 65. Geburtstag,
Berlin; SCHREIBER, W. (1955),
sions in a society where, because of an
Existenzsicherheit in der industriellen
increased lifespan on one hand and a
Gesellschaft. Vorschläge zur Sozialreform,
strong decline in the birth rate on the in: Schriftenreihe des Bundes Katholischer
other, fewer and fewer employed peo- Unternehmer, Cologne; — (1951),
ple have to provide for more and more Kinderzulage für alle Arbeitnehmer, in:
pensioners. Rheinischer Merkur, 21 September 1951.
In a society where those who have
not brought up children receive, under Heinz Lampert
70 Gerhard Stoltenberg

Stoltenberg, Gerhard (CDU) in 1947 and was, as a young

Born 29 September 1928 student of history, the social sciences
Died 23 November 2001 and philosophy, deeply impressed by
Erhard’s liberating act of abolishing
Stoltenberg’s personal experience of the misery rations and similar economic interven-
of the war and post-war years – he was a tions and by the optimism, confidence
young anti-aircraft auxiliary in British cap- and economic dynamism this created.
tivity when the war ended – and the fact that Economic prosperity had proved to be
he had grown up as the son of a protestant the right foundation for a stable demo-
minister, his broad knowledge of history and cratic system.
the arts as well as firm Christian values pro- Stoltenberg was planning to bring
duced in him a profound scepticism of euphor- about a renewal of the social market
ic planning and faith in the controllability of economy. The excessive demands on
social and economic processes, which dominat- financial policy during the 1970s meant
ed the ‘modern financial policy’ of the late- that budgetary expenditure had to be
1960s and the 1970s. Stoltenberg wanted, curbed in order to reduce the govern-
promoted and practised a financial and eco- ment’s share of total expenditure.
nomic policy based on social and ethical prin- Furthermore, a restructured tax system
ciples along institutional order policy lines and was to stimulate growth and ensure the
functioning as a conceptual unit of budgetary, recognition of personal achievement.
fiscal, monetary and privatisation policies. In 1982 Stoltenberg set out to break
the pattern of a constantly growing state
His goal was an economic order con- share of the total economy and con-
ceived as the core of a liberal constitu- stantly growing public expenditure.
tion, while he saw a need to resuscitate Consolidation became the main aim
the revitalising forces of the social mar- of his financial, economic and social
ket economy. The situation at the begin- policies. The state ratio decreased from
ning and at the end of his term in office 51.9% in 1982 to 45.8% in 1990. In
as Federal Minister of Finance from 1989, both the regional government
1982 until 1989 reflect the effectiveness authorities and the social security
of Stoltenberg’s policies. But he was at schemes achieved their first budget sur-
times only able to implement these in pluses in almost 20 years, and in the
greatly diminished form because of a same space of time the regional govern-
lack of support by the governing bodies ment authorities reduced their deficit
of the coalition and by the public, whose from s32.2 billion to s6.4 billion. The
faith in the basic tenets of institutional federal government’s net borrowings
order policy tended to be fickle. decreased from DM37.2 billion in
Konrad Adenauer and Ludwig 1982 to DM19.2 billion in 1989.
→Erhard were the main points of refer- Stringent economic measures together
ence for Stoltenberg’s practical policies, with increased revenue thanks to a
with Walter →Eucken, Alfred →Müller- prospering economy, were responsible
Armack and Wilhelm →Röpke forming for this development.
the theoretical background. He joined It would have suited Stoltenberg’s
the Christian Democratic Union economic policy thinking if after the
Gerhard Stoltenberg 71

successful quantitative consolidation of distribution policy issues together with

the early years, he could have focused tax exemption for aviation fuel, dis-
his energies on the qualitative improve- counts for one-year-old cars, extra pay
ment of public budgets, by allocating for Sunday work and taxation at the
more money to investments for the source were beginning to dominate the
future. He had succeeded in doing this picture. And there were setbacks associ-
as Federal Minister of Science and ated with the expanding assessment
Research under Federal Chancellor basis, i.e. the reduction of fiscal →subsi-
Erhard, but the markedly more relaxed dies.
financial situation in general meant that Stoltenberg overestimated the key
the coalition, as well as the federal states figures in politics and economics and
and municipalities, did not feel an their commitment to institutional order
urgent need for reforms. Nobody policy and genuine reforms as much as
realised then that the social security sys- he overestimated the level of economic
tem should have undergone far-reach- expertise in public debate. Science, eco-
ing reforms; on the contrary, more nomics and politics nevertheless regard
long-term projects causing increased his fiscal policy in an extremely positive
expenditure were approved and the cut- light, not least in view of the situation
back of subsidies ground to a halt. before and after his term of office.
Without these palpable successes In close cooperation with the
and consistent consolidation policies, Federal Bank, Stoltenberg achieved the
the three-phase tax reforms of 1986, stability-oriented union of monetary
1988 and 1990, with net savings of and fiscal policy. Just like the markets,
approximately s25.6 billion, would not the financial guardians trusted his poli-
have been possible. In 1990, the tax rate cies. The discount rate, which in 1983
reached a 30-year low at 22.5%, com- was still 7%, came down to 3% in 1987
pared to 23.8% in 1982. Special burdens and the capital market interest rate fol-
for the federal states and municipalities lowed suit. Everybody at home and
were avoided and their financial posi- abroad was impressed to see the central
tion was improved. bank and the treasury closing ranks
The objective was a complete over- when it came to the organisation of the
haul of the tax system, which would go monetary institutional framework.
far beyond lower taxation. Direct taxes The cooperation with the Federal
were to be lowered for good, while the Bank proved its value during the turbu-
tax law was supposed to promote growth lence of financial crises, the parity
and favour families, making Germany debate in the European Monetary
more attractive as a location for future System (EMS) and in the debt crises of
investments in a climate of increasingly important emerging markets, as well as
fierce international →competition. in the stock exchange crash in the
Despite the fact that the first phase autumn of 1987. Stoltenberg’s unusual
mainly helped smaller →income earners, competence and reliability made him
incorporating patently family-friendly the unofficial leader of the G-7 minis-
elements, the new linear-progressive ters of finance. On 15 March 1988, in
tariff had lasting advantages for all. But his declaration of principle on the
72 Wolfgang Stützel

future of the European currency area, the CDU/CSU faction in the Bundestag;
Stoltenberg highlighted the German 1971–1982 State President of Schleswig-
point of view with regard to a stable Holstein. 1982–1989 Federal Finance
Minister, then until 1992 Federal Minister
development of the EMS, clearly dis-
of Defence; from 20 January 1993 until 30
tinguishing it from nebulous and unre-
March 2001, Deputy Chairman of the
alistic foreign policy concepts. Konrad-Adenauer-Stiftung.
Stoltenberg’s comprehensive out-
line of federal privatisation and public
investment policy, which was adopted REFERENCES:

by the Federal Cabinet on 26 March STOLTENBERG, G. (1954), Der Deutsche

1985, reflects the absolute priority of Reichstag 1871 bis 1873; — (1960), Die poli-
private →property and private initiative tischen Strömungen im schleswig-holsteinischen
Landvolk 1919-1933; — (1968), Hochschule
in his theoretical and practical approach
Wissenschaft Politik; — (1969), Staat und
to the market economy. In the years to
Wissenschaft; — (1978), Schleswig-Holstein
come, the federal government priva- heute und morgen; — (1986), Unsere
tised a large proportion of its industrial Verantwortung für eine gute Zukunft; —
properties. (1997), Wendepunkte; KONRAD-ADE-
The almost seven years of Stolten- NAUER-STIFTUNG (ed) (1999), Das
berg’s responsibility for financial policy Konzept der Sozialen Marktwirtschaft, (with a
were proof that a renewal of the social foreword by Gerhard von Stoltenberg),
market economy can bring success, Sankt Augustin; SCHLECHT, O./STOL-
greater prosperity, social justice and TENBERG, G. (ed) (2001), Soziale
faith in democracy. Thanks to these Marktwirtschaft. Grundlagen, Entwicklung-
policies, the Federal Republic was able slinien, Perspektiven, Munich.
to carry the economic burden of
Peter Wichert
German unity.
PROFESSIONAL CAREER: 1944–1945 military
service, 1949 school-leaving certificate,
Stützel, Wolfgang
undergraduate studies in History, Social
Science and Philosophy at Kiel, 1954 doc- Born 23 January 1925
torate, assistant lecturer at the University of Died 1 March 1987
Kiel, 1956 assistant lecturer, then lecturer, at
the Kiel Educational College. 1965 and Wolfgang Stützel was one of the most
1969–1970 director of Friedrich Krupp creative, versatile and perhaps also controver-
GmbH. 1947 member of the CDU, sial German economists of the 20th century.
1955–1961 Federal chairman of the Junge The spectrum of his research covered legal
Union, 1955–1971 deputy state chairman of issues and questions of business management
the CDU in Schleswig-Holstein, from and included the micro- and macroeconomics
November 1971 state chairman, 1969
of closed and open economies.
deputy Federal chairman of the CDU.
Member of the Federal State Parliament of
Schleswig-Holstein 1954–1957 and 1971–
Stützel was an uncompromising cham-
1982. Member of the Bundestag 1957–1971. pion of market principles without
1965–1969 Federal Minister of Science and belonging to a particular school of
Research, thereafter Deputy Chairman of thought. Many of his scientific insights
Wolfgang Stützel 73

initially met with opposition, but they fixed exchange rate system of Bretton
then became generally accepted as part Woods, which was in force at the time.
of economic policy because they were Stützel resigned from the Council of
built on a solid institutional order poli- Experts early, since he felt that the coun-
cy foundation, which Stützel developed cil’s majority was restricting his views.
with great consistency. His clarity of It is Stützel’s great intellectual
vision and his readiness to contradict, achievement that he recognised in the
animated the academic debate and 1960s how unstable a system of flexible
influenced the organisation of econom- exchange rates would be. He pointed
ic structures in Germany. out that it was hardly likely that the
In his dissertation (1952), Stützel adoption of flexible exchange rates
focused particularly on the phenome- would lead to greater financial autono-
non of economic power, which he my, particularly in smaller countries.
attributed to the relationship between In the 1970s, Stützel concentrated
the value and the price of a commodity. on an analysis of why, after the reces-
One of his simplest and most memo- sion of 1974/75, →unemployment had
rable messages was the sentence: ‘Paying gone up so much. He quickly under-
and receiving market prices means pro- stood that the problem was not so
tecting one’s freedom and dignity’. much economic as structural. He
His post-doctoral thesis (1958) dealt therefore argued in favour of a reduc-
with the ‘balance mechanisms’ of tion of social welfare assistance (→basic
macroeconomic interactions. An social security) and of protection against
important outcome of his analysis was unfair dismissal, as well as a complete
that free loan conditions are necessary re-organisation of the German social
to keep a national economy solvent, i.e. security system. Stützel gives an
a complete and liberalised banking sys- overview of these concepts in his book
tem is required. In a report on German Market Price and Human Dignity (1981).
banking regulations (‘Banking Policy – His contributions on the opera-
Today and Tomorrow’, 1964), Stützel tional systems of banks are just as inno-
insisted on the complete removal of vative – for example, those regarding
government regulations of debit and the development of insider regulations
credit interest which were still in force and his commitment to the individual
during the early 1960s. One significant share certificate (‘no-par share’), for the
result of this study was the ‘maximum obligation to disclose secret reserves in
load theory’, which can be regarded as a the balance sheet and for an imputation
forerunner of the ‘value at risk’ models. system (‘partner tax’) in the corporation
Through being a member of the tax. Many of his innovations went into
→Council of Experts for the Investigation legislation, although the imputation
of Economic Development (1966– system was later phased out with the
1968), Stützel found himself in the 2001 tax reforms.
crossfire of the heated debate about ACADEMIC CAREER: Doctorate 1952; post-
German exchange rate policy. In con- doctoral lecturing qualification 1957; 1958-
trast to the majority of the council, 1987 professor at the University of
Stützel supported strict adherence to the Saarbrücken.
74 Helmut Thielicke

REFERENCES: Theological Ethics deals with the competi-

STÜTZEL, W. (1978), Volkswirtschaftliche tive economy as a universal system.
Saldenmechanik, 2nd edition, Tübingen; —
(1981), Marktpreis und Menschenwürde,
Thielicke’s ethics were based on the
Stuttgart; SCHMIDT, H./KETZEL, E./
‘Doctrine of Eons’ (theory of the ages).
PRIGGE, S. (ed) (2001), Wolfgang Stüzel
Moderne Konzepte für Finanzmärkte,
It teaches that man is in a state of conti-
Beschäftigung und Wirtschaftsverfassung, nuity and discontinuity with this eon,
Tübingen. the age between the creation of the
world and its end. Continuity consists
Peter Bofinger in the fact that we are subjected to the
laws and systems of this world. God did
not dissolve this eon; its ‘structural
laws’ impose order on life. Christians,
Thielicke, Helmut however, have been saved and are thus
Born 4 December 1908 no longer subject to worldly powers.
Died 5 March 1986 They live in Jesus Christ under the lib-
erating grace of the gospel. This is
The conservative protestant theologian where the aspect of discontinuity is
Thielicke taught dogma and ethics – ulti- expressed.
mately in Hamburg. He subscribes to Thielicke places the Lutheran doc-
neither the capitalist economy nor to trine of justification, which describes
→socialism. For Thielicke, there are no this area of conflict, at the centre of his
hybrids. Thielicke does not promote a God- considerations. This doctrine sees man
given economic system; rather he feels it is our as sinning and righteous (saved) at the
responsibility to organise the material aspects same time. The concept of the systems
of the way we live. The competitive economy, (orders) (politics, the state, economics,
which can be seen as a worldly structural law etc.) was borrowed from Lutheranism.
since it uses egoism as the driving force of For Thielicke, these function as organ-
human existence, has a specific ‘affinity for ising emergency directives (from the
human nature’ (and is most suited to time of creation until the end of the
humans). This means that in human nature, world). He saw them as protecting the
God is pitching ‘the egoism of competition world after the Fall. In his view, only
against the egoism of laziness’. The state has family and marriage were conceived
to be strong enough to be able to ensure that even before creation as ordering princi-
competition is based on performance. It has to ples for the world.
intervene and control when →competition, In times when the inherent laws of
which has a tendency to run to excess, starts to the different spheres of life (‘practical
use the human need to earn a living as an constraints’) are interpreted as a superfi-
‘unrestrained driving force’ (Alexander cial world view, the law is necessary as a
→Rüstow) and an end in itself. constant warning (as a pointer to the
Thielicke was one of the few prominent provisional nature of the present age).
Protestant-Lutheran theologians who sincere- For Thielicke, the economy serves the
ly concerned themselves with ethical and insti- satisfaction of needs with its own inher-
tutional problems in the economy. His ent laws. He sees its theological and eth-
Otto Veit 75

ical task in marking out a path for future REFERENCES:

acting. That means inherent laws of ‘rel- THIELICKE, H. (1958ff.), Theologische

ative rank’. Christian theology and the Ethik, 4 vols, Tübingen; — (1968ff.), Der
Evangelische Glaube, 3 vols, Tübingen.
Church will therefore only endorse an
economic system which recognises this
Rolf Kramer
relative rank of the inherent laws and
which is in tune with human nature.
Both – in the form of Christian ethics –
have to make the ‘pitfalls of evil’ visible. Veit, Otto
For the state, the relative nature of Born 29 December 1898
the inherent laws means two things: Died 31 January 1984
having to police the market strictly; and
having to implement a →social policy. Veit, the son of a general, is seen as one of the
This means that the state has the task of most outstanding post-Second World War
steering the economy between →liberal- currency and monetary theoreticians in the
ism (laissez-faire) and dirigism. Any Federal Republic of Germany. He made an
other influence on the economy is important contribution to the implementation
unacceptable to Thielicke. Therefore of a stable financial and monetary constitu-
he is also against any kind of →social- tional framework and thus has helped to
ism/planned economy. In his positive atti- make the concept of the social market economy
tude to the competitive economy, a reality. Beyond that, Veit had a great inter-
Thielicke comes close to Rüstow’s est in philosophy and sociology and acquired a
thinking. But, for him, one thing is cer- reputation as a universal scholar. The fact that
tain: any economy, however intact, is he saw himself as a ‘liberal’ and was an active
branded by the fallen eon. member of the Freiburg Ordo Circle, are
proof that he must be counted among the
architects of the social market economy. Veit
Thielicke was a disciple of the Lutheran had a reputation as an excellent writer and
theologian Paul Althaus in Erlangen and
speaker, had a classical education and was
remained faithful to the Lutheranism which
respected for his strong and highly principled
was practiced there without being commit-
ted to the political outlook of its teacher. personality.
During the Third Reich he was on the side
of the Confessional Church. This is why he Veit’s academic publications primarily
lost his temporary professorship in refer to currency and monetary policy
Heidelberg. After the war, he was professor and partly even pre-date his time at uni-
of Systematic Theology and Ethics in versity. One of his most important
Tübingen and Hamburg; he co-founded works, Real Theory of Money (1966), was
the Faculty of Theology in Hamburg and born out of ideas dating back to the final
subsequently became rector of the weeks of the war; it developed inde-
University of Hamburg. It took him from
pendently of the predominant monetary
1943 until 1964 to write his Theological
theory. Veit’s interpretation of money as
Ethics; the central part numbers over a 1,000
pages. He personally updated the two mid-
a commodity, which does not differ
dle volumes just before his death. He was, from other goods except in the degree of
in addition, a renowned preacher. its liquidity, i.e. its power of disposal
76 Otto Veit

over other goods, runs like a thread joined Hardy & Co. Bankers in Berlin, first
through his publications on monetary as a business consultant, and later, until the
theory and justifies his independent end of the war, as managing director. His
first monetary policy publications date back
position on liquidity theory.
to this time, which is why it is not surpris-
In his compendium Monetary Policy
ing that in 1946 he first became general
as the Art of the Impossible, and in what manager of the Nassauische Landesbank
was a standard work on monetary poli- (Nassau State Bank) in Wiesbaden and a
cy theory during the 1960s and 1970s, year later was made president of the Hesse
Basic Outline of Currency Policy, Veit State Bank in Frankfurt. This also made him
processed the experiences from his time an ex officio member of the central bank
as president of the Hessen State central council of the German States Bank, the
bank. In his books and essays, Veit is not predecessor of the →German Federal Bank
only concerned with monetary theory (central bank). Veit was its acting chairman
and policy, but also with socio-cultural during the early months of its existence and
and philosophical topics. His key inter- he remained in his position at this nerve
centre of currency and monetary policy in
est here is – as in the case of Walter
Germany until 1952, when he was appoint-
→Eucken and Alexander →Rüstow –
ed to the newly established Chair of
personal liberty, which he was keen to Economic and Political Science (Lehrstuhl für
protect even during the National Wirtschaftliche Staatswissenschaften), with a
Socialist dictatorship. This also forms special emphasis on monetary and banking
the basis of his economic theories. policy, at the Johann Wolfgang Goethe
In his main sociological work, University in Frankfurt. At the same time
Sociology and Freedom, published in 1957 he became director of the Institute for
as a revision of The Escape from Freedom, Banking Systems in Frankfurt, where he
which had appeared 10 years before, taught until his retirement in 1969. He was
Veit is discussing the danger of a loss of considered the grandseigneur of German
monetary policy and, in his capacity as head
liberty as a result of ‘excessive material
of the supervisory board, he maintained his
development’. Again and again, Veit is
connection with the Issuing Bank even after
trying to find an explanation for the ter- he had become a university professor.
rible events during National Socialism.
His book Christian-Jewish Coexistence, REFERENCES:
which was published in 1965, is his VEIT, O. (1947), Die Flucht vor der Freiheit:
attempt to prepare the ground for a har- Versuch zur geschichtsphilosophischen Erhellung
monious coexistence in Germany. der Kulturkrise, Frankfurt/M.; — (1948), Die
Volkswirtschaftliche Theorie der Liquidität,
ACADEMIC AND PROFESSIONAL CAREER : Frankfurt/M.; — (1957), Soziologie der
Having completed his military service as Freiheit, Frankfurt/M.; — (1961), Grundriss
well as a degree in political economy and der Währungspolitik, Frankfurt/M.; — (1965),
philosophy in Frankfurt, Veit in 1929 Christlich-jüdische Koexistenz, Frankfurt/M.;
accepted a position as chief editor of — (1968), Währungspolitik als Kunst des
Industrie- und Handelszeitung (Journal for Unmöglichen, Frankfurt/M.; — (1966), Reale
Industry and Commerce) (subsequently Theorie des Geldes, Tübingen.
Nachrichten für den Außenhandel (Foreign Trade
News). In 1934 he had to resign from his Hans Jörg Thieme
position for political reasons. After that, he
Erich Welter 77

Welter, Erich ACADEMIC CAREER: Doctorate in Berlin in

Born 30 June 1900 1921 (under Hermann Schumacher); post-

Died 10 June 1982 doctoral qualification in Frankfurt in 1941
(under Wilhelm Gerloff); from 1944 assistant
professor; from 1948 until his retirement in
Welter tried all his life to familiarise non-
1963 full professor of Economics at the
economists with institutional order policy University of Mainz; founder of the
thinking, which entails thinking in terms of Research Institute for Economic Policy at the
economic interconnectedness, couched in sim- University of Mainz in 1950; 1949–1971,
ple language accessible to everyone. His merit member of the Scientific Advisory Council at
in his fight for a liberal order can hardly be the Federal Transport Ministry; 1953–1975,
exaggerated. His motto was: ‘We cannot hope member of the Research Advisory Council
that the truth will gain the upper hand just for German Reunification.
because it is true. One has to fight for the
truth.’ Among the awards Welter received for PROFESSIONAL CAREER: 1921 joins the edito-

his courageous journalism was the Great rial staff of the business section of the
Frankfurter Zeitung; 1933-1934, editor-in-
Order of Merit of the Federal Republic of
chief of the Vossische Zeitung, which was
Germany (1975), as well as the Ludwig
closed down due to pressure from the
Erhard Medal (1978). Nazis; 1934, returned to the Frankfurter
Zeiting, where in 1943 he was promoted to
Welter was an academic, journalist and deputy editor; in 1943, after the banning of
newspaper entrepreneur, and in each the Frankfurter Zeitung, he became a reserve
one of these roles he was equally com- officer and ‘scientific observer’ in the
mitted to a liberal economic and social Planning Department of the Ministry of
order. At a time when the →social market Armament and War Industries; in 1946, he
economy still had to prove its worth, and helped establish the Wirtschaftszeitung (trade
when a general strike was to force the journal) in Stuttgart (later the Deutsche
Zeitung und Wirtschaftszeitung), from which
resignation of Ludwig →Erhard from
Welter had to resign for reasons related to
his office as Federal Minister of
the legal regulations imposed by the occu-
Economic Affairs, Welter, in close con- pying allied forces; in 1949 the Frankfurter
tact with Erhard, fought for the removal Allgemeine Zeitung (FAZ) was established,
of the remnants of state control in the with Welter remaining its chief editor and
economy, for the →Act Against Restraints thinker until 1980.
of Competition, for the liberalisation of
foreign trade relations, for an independ- REFERENCES:
ent central bank and for a stable curren- WELTER, E. (1954), Falsch und richtig planen.
cy. He also wanted the state to restrict Eine kritische Studie über die deutsche
itself to institutional order policy tasks, Wirtschaftslenkung im Zweiten Weltkrieg,
to withdraw from entrepreneurial Heidelberg; — (1960), Der Staat als Kunde.
Öffentliche Aufträge in der Wettbewerbsordnung,
activities, and to reduce →intervention-
Heidelberg; — (1953), Die wirtschaftspoli-
ism. In his view, the government had to
tische Bildungsaufgabe, in: Hunold, Albert
behave like a consumer along the lines (ed), Wirtschaft ohne Wunder, Erlenbach,
of a market economy. A large number Zurich, pp. 339ff.
of articles in the Frankfurter Allgemeine
Zeitung dealt with these topics. Walter Hamm
Accident insurance 79

employers’ contributions. The level of

Themes these contributions depends on the
salary of the insured employees and on
the accident hazard categories to which
the →enterprises are assigned on the basis
Accident insurance of the frequency and extent of damages
arising in the individual branches of an
Compulsory Accident Insurance (AI) industry.
was first introduced under Bismarck in Measures for the prevention of
1884 and was originally intended as a industrial accidents are among the core
protection mainly for workers and tasks and services of the AI. Within
employees in the industrial sector in the their respective fields of competence,
event of accidents in the workplace. the employers’ liability insurance asso-
Today the number of different func- ciations are entitled to issue and enforce
tions of the AI has grown significantly regulations for the prevention of acci-
in terms of both content and eligibility. dents. In the event of an industrial acci-
The AI extends its cover to basically all dent, the AI provides services for the
workers and employees but also to rehabilitation of the health of the
farmers, people who work from home, injured parties, their reintegration into
entertainers, acrobats, artists and certain working life and, if necessary, financial
small business owners. compensation for them or for their sur-
Also insured are prisoners who vivors. The industrial accident must not
engage in work, lifesavers, blood be intentional, however, or be associat-
donors and persons who give assistance ed with a criminal act. The insurance
at the scene of an accident, as well as cover extends not only to accidents in
those who help protect a person who the workplace but to accidents which
has been unlawfully attacked and those happen en route between the various
who take part in the pursuit or arrest of workshops of an enterprise, on the way
a person suspected of a criminal act. to work or on the way to the bank
The coverage also extends to children where the wages have been deposited
attending nursery schools, pupils by the employer.
attending day schools, learners during Occupational diseases resulting
basic and advanced vocational training, from activities related to certain jobs –
honorary teachers and students during for example, contact with chemicals,
their undergraduate and postgraduate radiation or infectious agents – are also
studies at university. classified as accidents in the workplace.
The commercial and agricultural During the past decades, the report-
employers’ liability insurance associa- ed number of industrial accidents and
tions, which are divided into professions the number of fatal industrial accidents
and industries, and the respective gov- has gone down significantly, both in
ernment accident insurance bodies are absolute terms and relative to the num-
responsible for the implementation of ber of the workers employed. This pos-
AI. The employers’ liability insurance itive trend must be partly attributed to
associations receive their funding via the efforts of accident prevention and
80 Achievement principle

partly to the increasing use of machin- If in liberal systems those who have
ery for the execution of dangerous tasks. been evaluated can go to other evalua-
tors and markets, they are protected
REFERENCES: from an arbitrary judgment.
LAMPERT, H./ ALTHAMMER, J. (2004), In centrally managed economies,
Lehrbuch der Sozialpolitik, 7th edition, Berlin where the markets are not free, this
et al; LAMPERT, H./BOSSERT, A. (2004), escape route does not exist (→socialism).
Die Wirtschafts- und Sozialordnung der
It is true that the socialist principle may
Bundesrepublik Deutschland im Rahmen der
be valid: ‘Everyone according to his abil-
EU, 15th edition, Munich, Vienna.
ities, for everyone according to his
Albrecht Bossert achievements.’ Economic achieve-
ments, however, are only imperfectly
assessed and rewarded depending on the
extent to which politically motivated
Achievement principle programmes are fulfilled. They are not
very flexible and predominantly evalu-
It is essential for every society that its ate achievements according to technical
members are motivated to perform, standards.
thereby attaining benefits for them- The achievement principle is not
selves and others. In the world at large, perfect: markets are often imperfect;
achievements for others usually attract the value, particularly of immaterial
public recognition and in most cases a achievements, is often only recognised
reward. This applies regardless of the too late or the achievements are never
economic system. rewarded; and standards of evaluation
In →market economies, countless buy- change, just like objectives and value
ers are in →competition with one anoth- judgments.
er, evaluating the benefits they can Some see competition as a source of
derive from the achievements of com- ‘self exploitation’ (neglect of relaxation
peting sellers by offering a financial and leisure time), liable to poison
reward which they can pay, because human relationships, particularly with
they themselves have sold an achieve- one’s competitors. The pursuit of the
ment in the market which is useful to maximisation of profit and the avoid-
others. Both partners have to agree to ance of loss are supposed to be the
this exchange and, to this extent, they result of a faulty evaluation of social pri-
have equal rights. orities. A comprehensive assessment,
In hierarchical systems (govern- however, depends largely on the way
ment authorities, schools, →enterprises), earned income is used. In addition, only
on the other hand, superiors, who do one’s own →income and capital permits
not have to be recipients of the achieve- generosity, but it can be gained through
ment, evaluate the achievements of anti-competitive behaviour, obstructing
those who are subject to their judg- others and other privileges.
ment. There can be room for arbitrary Competition leads to better and
decisions restricted by rules, controls or cheaper products and thus allows the
the possibility to escape into markets. results of one’s own efforts to benefit
Act Against Restraints of Competition 81

others. Only if achievements have nomic level that are in →competition

yielded sufficient income and capital with one another. These include, above
reserves, can social security benefits for all, exceptionally damaging pricing and
those who are unable to achieve be territorial agreements. Violations of this
financed. As long as the pressure to prohibition can be penalised with fines
make financial contributions does not running into millions.
excessively weaken the will to achieve The trust prohibition is first of all
and achievement remains recognised, complemented by evasion facts, in par-
income distribution can be modified ticular the recommendation prohibi-
and taxes can be linked to the individ- tion (price recommendations). Second-
ual’s ability to perform. ly, the trust prohibition is limited by
exemptions. Trusts that have been
REFERENCES: legalised based on exemption regula-
WILLGERODT, H. (1973), Das Leistungs- tions are subject to abuse supervision by
prinzip – Kriterium der Gerechtigkeit und the →Federal Cartel Office.
Bedingung des Fortschritts?, in: Rauscher,
The ARC also prohibits certain ver-
A. (ed), Kapitalismuskritik im Widerstreit,
tical restraints of trade, or those between
Cologne, pp. 89-115; GEHLEN, A. et al
(1974), Sinn und Unsinn des Leistungsprinzips,
a business and its suppliers or customers,
Munich; KAMMER DER EKD FÜR such as manufacturers and wholesalers
SOZIALE ORDNUNG (1978), or retailers. The most problematical case
Sozialethische Überlegungen zur Frage des is that of the retailer who is tied to a
Leistungsprinzips und der Wettbewerbs- resale price by the manufacturer (retail
gesellschaft, Gütersloh. price maintenance). Basically, only pub-
lished items (such as books) are exempt
Hans Willgerodt from this prohibition.
The German antitrust law is not
opposed to existing enterprises in dom-
Act Against Restraints of inant market positions in the form of
Competition monopolies or oligopolies or their
emergence through internal growth,
Cartels and other restraints on compe- but it prohibits the abuse of such posi-
tition have played a role for as long as tions. This prohibition serves to pre-
there has been commercial activity. vent the abuse of behavioural leeway
However, the implementation of com- based on power, which cannot be effec-
prehensive legal measures has been tively controlled by competition, but
slow. The first German antitrust law which harms competitors, higher or
worthy of the name was the Act Against lower economic levels, and consumers.
Restraints of Competition (ARC) If the prohibition is violated, it can also
(1958). One of the key regulations of be penalised with fines. In practice to
this law is the so-called monopolies date, the prohibition has never played
prohibition of s. 1 of the ARC. The an important role. The main reason for
prohibition concerns horizontal this is the difficulty of proving cases of
restraints of competition, which apply abuse. The courts rightly insist on
between →enterprises on the same eco- watertight proof.
82 Act Against Restraints of Competition

The general prohibition of the fulfil certain conditions. This specifical-

abuse of market power is complement- ly includes the condition that the enter-
ed by the discrimination prohibition, prises involved must have had total
which has substantial practical signifi- international sales returns of at least
cance. According to this rule, enterpris- s500,000.
es that dominate the market as well as The FCO has to veto mergers that
certain other enterprises with relative would either establish or reinforce
market power are forbidden to obstruct positions of market dominance. If,
other businesses wrongfully or to treat however, the enterprises involved can
them inequitably without material jus- prove that their mergers would result in
tification. significantly improved competitive
The ARC makes provision for conditions, they can go ahead. A merg-
merger control (the control of company er that has been vetoed by the FCO can
mergers) without authorising measures be authorised by the Federal Minister
for the re-establishment of functional of Economic Affairs if its competitive
competition in markets that have disadvantages are counterbalanced by
become concentrated through internal overall economic benefits, or if it is
growth or through past mergers. It can, overwhelmingly justified by being in
however, prevent further structural the public interest. So far, the minister
deterioration due to mergers. For con- has rightly used this option only with
trol purposes, mergers have to be regis- great restraint.
tered with the Federal Cartel Office Antitrust authorities in the legal
(FCO) prior to their execution if they sense are the FCO, the (federal) state

Turnover in percent of the six largest companies in Germany in their respective

industries, 2001–2004

Rate of concentration CR6

2001 2004

Mining, coal and lignite; extraction of peat 93.4 93.6

Extraction of crude petroleum and natural gas; service activities
incidental to oil and gas extraction; excluding surveying 97.5 91.0
Manufacture of food products and beverages 9.9 8.2
Publishing. printing and reproduction of recorded media 10.7 11.0
Manufacture of chemicals and chemical products 26.4 22.8
Manufacture of basic metals 24.0 25.5
Manufacture of machinery and equipment 8.7 7.9
Manufacture of office machinery and computers 70.6 79.6
Manufacture of radio, television and communication equipment
and apparatus 46.8 49.5
Manufacture of motor vehicles, trailers and semi-trailers 67.5 66.4
Recycling 48.6 50.3

Source: Federal Cartel Office, 2007

Agricultural policy 83

antitrust authorities and, for certain Agricultural policy

tasks, the Federal Minister of Economic
Affairs, who is essentially responsible In almost every country, agricultural
for the authorisation of mergers vetoed policy holds a special position within
by the FCO. The competence alloca- economic policy. A high degree of
tion between the FCO and the national interference with the agricultural com-
trust authorities – except for certain modities markets by the state is com-
tasks which are the exclusive domain of mon. In developing countries, agricul-
the FCO (merger control) – depends tural produce prices are frequently kept
on whether or not the effect of a below world market levels in order to
restraint of competition goes beyond make food more affordable for the
the borders of one of the states of the poorer population groups. In the indus-
Federal Republic. If it goes beyond the trialised countries, however, the goal is
Federal Republic, the European to ensure that farmers earn a sufficient
Commission has the competence to →income. There, agricultural produce
deal with larger mergers (→EU: compe- prices are typically subsidised – often
tition policy). considerably – above the level at which
The ARC is enforced by way of free markets would be expected to set-
three categories of procedures, namely: tle. At the same time, in many industri-
alised countries substantial →subsidies
• regulatory offence procedure; are paid to the agricultural sector and
the agricultural commodity markets are
• administrative procedure; and manipulated in various other ways
• civil procedure. The background for this protection-
ist bias of the agricultural policy in most
The first two are the domain of the industrialised countries is the fact that,
trust authorities; in both categories the in comparison with the overall eco-
authorities have comprehensive rights nomic growth rate, farmers’ incomes
of information and investigation. In have a tendency to remain below the
civil proceedings, private entities that income levels seen in other sectors of
have sustained losses are entitled to the economy. The reason for this lies in
claim compensation. the specific nature of the development
of →supply and demand on the agricul-
REFERENCES: tural commodities markets. The
SCHMIDT, I. (1995), Wettbewerbspolitik und demand for food, and thus for agricul-
Kartellrecht. Eine Einführung, 6th edition, tural produce, tends to grow more
Stuttgart, New York; BERG, H. (1999),
slowly than the overall economic rev-
Wettbewerbspolitik, in: Vahlens Kompendium
enue, since food represents saturation
der Wirtschaftstheorie und Wirtschaftspolitik, 2,
7th edition, Munich.
goods: the income elasticity of the
demand for food is small.
Kurt Stockmann This is expressed in Engel’s Law
(named after the Prussian statistician
Ernst Engel). When consumer income
84 Agricultural policy

rises by one per cent, the demand for trend of agricultural produce prices.
agricultural produce rises by significant- This was achieved mainly through tar-
ly less than one per cent. Simultan- iffs and similar measures, which made
eously, however, productivity levels in goods imported from abroad more
agriculture go up more (e.g. due to expensive while exports were supported
increased yields in plant and animal pro- by subsidies and, on the domestic mar-
duction), than the national economic ket, agricultural products received sub-
average. This is why the supply of agri- sidies too. Market signals were thereby
cultural produce on offer grows particu- rendered ineffectual. In many cases, a
larly fast. Thus, the rapidly rising supply surplus of agricultural produce result-
to the agricultural commodity markets ed, which would initially be left in gov-
is met by a level of demand which grows ernment storage (transitional storage).
much more slowly. The consequence is Subsequently, however, it was propped
that food prices tend to decrease (or up by subsidies and dumped on the
rather: are trailing behind the price global marketplace or it was at times
development of other goods). This puts even destroyed.
farmers’ income levels under pressure. If the world markets ran out of
In reaction to this pressure on capacity or funding for the surplus
income levels, the number of persons removal, supply would in some cases be
employed in the agricultural sector restricted by means of quotas (quantity
continues to go down. In Germany (the limitations) imposed on individual
former federal territory) in around 1950 farmers, or by the administratively
for instance, there were still about five enforced cessation of farming activities
million people employed in the agricul- in certain areas. The main political
tural sector. Today, this number has objective was thus to keep domestic
shrunk to just over 700,000 (today’s agricultural produce prices higher than
federal territory). Other industrialised they would have been had market
countries have experienced a similar forces been given free rein.
trend. This particular preoccupation with
This move away from agriculture agricultural policy was, however,
and the underlying financial pressures extremely problematical for two reasons.
are naturally accompanied by social First, the most difficult dilemma in the
problems. The extensive assistance set farming sector – a continuously growing
aside by the agricultural policy-makers supply faced with a small increase in
for the farming sector is a manifestation demand – could not really be solved in
of the desire to alleviate these social this manner. It is true that national agri-
problems by means of economic policy. cultural policy-makers could, by subsi-
While this desire is politically laudable, dising agricultural products, make
from an economic point of view the domestic farmers believe that the
choice of instruments which were tra- demand for their products was high. But
ditionally used by agricultural policy- it is obvious that, internationally, it was
makers is unsatisfactory. impossible to increase overall demand
Essentially, these instruments were using the same method. In the final
aimed at combating the downward analysis, each country tried through its
Balance of payments equilibrium 85

respective agricultural policy to secure a REFERENCES:

market for its own farmers, which, as a HENRICHSMEYER, W./WITZKE, H. P.

result, was lost to the farmers from other (1991), Agrarpolitik, 1, agrarökonomische
Grundlagen, Stuttgart; HENRICHSMEY-
countries. Accordingly, this agricultural
ER, W./WITZKE, H. P. (1994), Agrarpolitik,
policy, which was deployed by nearly all
2, Bewertung und Willensbildung,
industrialised countries to similar effect, Stuttgart.
led to ever more deeply entrenched
commercial conflicts. Stefan Tangermann
Second, the policy of agricultural
subsidies was not implemented where
it was needed most, i.e. at the social Balance of payments equilibrium
problems it was supposed to alleviate.
Direct grants to farmers (transfers) The legal basis for the goal of ‘balance
could have achieved this without ren- of payments equilibrium’ is the 1967
dering market forces powerless. But the Act to Promote Economic Stability and
agricultural policy-makers resisted this Growth (Gesetz zur Förderung der
political alternative for a long time since Stabilität und des Wachstums der Wirtschaft
it was feared that this type of agricultur- [StabG]).
al subsidy could make the system more Section 1 StabG specifies that
transparent and thus politically more through their economic and monetary
susceptible. policy decisions, the federal govern-
Several years ago, however, a world- ment and the federal states have to help
wide reorientation in the sphere of agri- sustain macroeconomic balance. They
cultural policy started, and many coun- are to act in such a way that, in the con-
tries began to reshape their agricultural text of a market economy, the objectives
policy. At the international level, this of →price level stability, a high level of
was entrenched through the new agri- →employment, constant and appropriate
cultural trade rules, which were agreed economic growth and a balance of pay-
during the General Agreement on ments equilibrium are realised. Since
Tariffs and Trade (GATT) negotiations these four goals cannot be realised at
held in Uruguay (1986–1994) (→inter- the same time, one refers to it as the so-
national organisations). It was hoped that called magic square.
this would appease the violent conflicts Even if at the beginning of the 21st
in the international agricultural trade century the Keynesian concept of sta-
arena. bilisation (→Keynesianism) – which was
At the national level, more and dominant at the time of the introduc-
more countries have started to reduce tion of the StabG – has ceased to be the
interference with the agricultural com- prevalent economic policy model, the
modities markets and instead to sub- StabG is still in force and unchanged to
sidise agricultural incomes by means of this day.
direct grants (→EU: agricultural policy). While, on the one hand, the balance
Thus, at present, agricultural policy of payments equilibrium is supposed to
worldwide is setting its sights on new neutralise existing instabilities in the
horizons. global economy, internal economic pol-
86 Banking system, structure and supervision

icy measures on the other hand are REFERENCES:

aimed at stabilising the domestic econ- CASSEL, D/THIEME, H. J. (1999),

omy and must not be put at risk by the Stabilitätspolitik, in: Bender, D. et al (ed),
Vahlens Kompendium der Wirtschaftstheorie und
effects of foreign economic instability.
Wirtschaftspolitik, 2, 7th edition, Munich.
A definition of the balance of pay-
ments equilibrium is difficult and con- Marcus Cieleback
troversial. Many regard it as realised
when the balance of payments is equal
to the balance of international move- Banking system, structure and
ments of capital. However, depending supervision
on the economic policy orientation, it is
also possible to aspire to the equalisa- The balancing of liquidity, which is one
tion of other components of the balance of the functions of financial institu-
of payments. tions, helps to overcome frictions in the
In its annual reports, the federal monetary flow of a national economy.
government defines the objective ‘bal- The seller and the potential buyer of
ance of payments equilibrium’ as the capital may be in different locations,
percentage share of the foreign contri- and their preferences regarding the
bution (export minus import of goods amount, the term and the risk category
and services) in the nominal gross of the investment and/or loan may dif-
domestic product (GDP) (= sum of all fer.
domestically produced and evaluated Financial institutions justify their
goods and services). existence by bringing buyers and sellers
In the past, a surplus of between of capital together indirectly, as financial
0.5% and 0.9% of the GDP was envis- intermediaries (finance middlemen),
aged. A comparison of the goal values and more cost-effectively than this
with the actual data shows, however, would be possible in the case of a direct
that this objective was only rarely contact. In the context of ‘classical’
achieved. In the present system of free deposit or credit transactions (commer-
international exchange of goods and cial banking), they offer to undertake
services and of flexible exchange rates, the transfer of cash amounts and to
the aim of a balance of payments equi- transform the terms, volumes and risks
librium is difficult to achieve. involved.
This is because the target variable, In dealing with the capital surplus
determined by the federal government and deficits of an economy, this can
as the external balance, is not easily lower the costs of identifying contrac-
influenced by economic policy actions tual partners while at the same time
since foreign demand escapes any direct making it cheaper to initiate, sign,
control and since restrictions on foreign implement and monitor agreements.
trade do not fit into a liberal system of Typical of the German economy is
international trade (→world trade order). the universal banking system. Contrary
to the situation in the United States
where until 1999 banks were subject to
government regulations, forcing them
Banking system, structure and supervision 87

to specialise in certain types of business Deka Bank, which specialises in pay-

(separation banking system), Germany ment transactions and bond invest-
knows no restrictions on the choice of ments.
products banks are allowed to offer. Considered together, these spe-
Regardless of this, however, and cialised institutions – which adhere to
depending on the respective legal the same legal framework as insurance
framework, a distinction must be made or capital investment companies and
between several different sectors of the building societies – become a recognis-
banking system. able group of bodies of the public law,
All four major banks with their structurally similar to the major banks
supra-regional branch networks with their headquarters in Frankfurt
(Deutsche Bank, Bayerische Hypo-und and their branches spread out all over
Vereinsbank, Dresdner Bank and Germany. Differently from the major
Commerzbank), as well as certain pri- banks, however, they function in a
vate banks, take the form of public lim- decentralised manner and are made up
ited companies. Over the past several of independent enterprises. Unlike pri-
decades, the major banks have expand- vate banks, though, the institutions of
ed their foreign business significantly this sector are expressly not pursuing
and successfully and now rank among the goal of profit maximisation.
the top financial institutions in the According to the legal regulations
world in the sectors of executive level which apply at regional level, they have
and standardised private customer busi- been officially appointed to protect the
ness (but due to the legal restructuring ‘public interest’ by ensuring that the
of private pension schemes increasingly loan requirements of the economically
in competition with the insurance weaker population groups as well as the
industry), and in the financing of large middle class are dealt with, and at the
industrial and commercial companies same time playing a balancing role with
as well as medium-sized companies. respect to regional policy and also stim-
The savings banks, on the other ulating →competition in the banking sys-
hand, are under public responsibility tem. While there are opinions question-
and do business in (single or several) ing strongly the involvement of local
cities and/or districts. Since this means government in these matters, European
that the scope of their business activities directives that came into force in 2005
is geographically limited. There are also require the regional and savings banks
the regional banks which are the prop- to do without their liability guarantee
erty of either one or more German fed- from the state or the municipality.
eral states, as well as the regional associ- The third important sector includes
ations of the savings banks. In terms of the community and Raiffeisen banks,
the subsidiarity principle, they are sup- which are organised along the lines of
posed to deal with those transactions cooperatives. In contrast to the focus on
for which individual savings banks lack public interest, cooperatives – which
the requisite size or know-how (e.g. originally started as self-help groups
foreign business). The leading institu- and where only the members of the
tion of the organisation is the DGZ cooperative could also be customers –
88 Banking system, structure and supervision

pursue a promotional task. Today, this (→globalisation), the competitive pres-

has actually come to mean that the dis- sure on the banking system in Germany
tribution of their operating profit has also increased. Thus traditional
among the members of the cooperative commercial banking is being put under
has become the priority. Their tradi- increasing pressure by investment
tional target groups were above all the banking, which is all about stocks and
private clients wanting to execute so- shares – either for the financial invest-
called bulk transactions, as well as busi- ments of private households (e.g. in the
ness clients from commerce, the trades, form of shares as an alternative to sav-
small business and agriculture. ings deposits) or for corporate finance
In the same way as official institu- (e.g. the replacement of traditional bank
tions, this sector forms a grouping con- credits by bonds) (→capital markets).
sisting of the major cooperatives and Besides technical advances (the sale
one leading institute (the DZ Bank); of financial services over the internet),
however, as a consequence of structural this preference for documented financ-
crises in the organisation, the interme- ing (securitisation) has contributed
diate level of the central bank, which is greatly to the wave of increased concen-
comparable to the regional banks, has tration of the banking system in
shrunk and there is only one institution Germany. Since 1970 when there were
left (the WGZ Bank). Apart from that, more than 8,000 independent banking
there are insurance companies, building institutions, the numbers declined to
societies and savings and investment just over 5,000 in 1980, to 4,500 in 1990
enterprises which are comparable due and to as few as about 2,300 in 2003.
to the fact that the credit cooperatives Indeed, the years 2002 and 2003 were
operate in geographically limited areas the darkest in the history of German
of business. banking since 1945. The simultaneous
Apart from these three large sectors occurrence of a destabilisation of the
relevant to the banking system, there economy and a crisis on the stock
are several smaller groupings, mostly exchange led to a financial decline and
specialising in certain types of business. the loss of 50,000 jobs in the banking
Among these are: the distinguished old sector.
private banking houses, which tradi- As in the case of the insurance
tionally look after the capital invest- industry, government regulations leave
ments of a select number of private the banking system much less room for
clients and which deal with complex manoeuvre than other industries. The
corporate finance issues; the mortgage reason for this has been attributed to
banks and building societies with their the fact that trustworthiness is a specif-
emphasis on real estate financing; for- ically sensitive issue for banks. Particu-
eign banks; and also the recently estab- larly for economically less enlightened
lished banking arms of industrial com- small-time investors – so the argument
mercial companies (e.g. VW Bank, goes – vague rumours about a bank
Quelle Bank). being in financial difficulties are
Particularly due to technical pro- enough to make them withdraw their
gress and international integration deposits. This could trigger a rush for a
Basic rights, the Basic Law and social market economy 89

place at the front of the queue in the ously rigid instructions from the finan-
bank (‘run’), which would eat up the cial supervisors, which were not linked
liquidity of that bank. As a result, the to the specific risk profiles of the var-
institution could be forced to call up ious banks. They do reserve the right,
funds from other banks, thereby gradu- however, to undertake detailed, regular,
ally causing problems for the entire local controls of the system (qualitative
banking system (domino effect). Even- supervision). In addition, Basel II stipu-
tually, the financial system as a whole lates more detailed written communi-
could be plunged into a crisis, which cations from the banks.
could lead to the loss of the retirement
savings of large sections of the popula- REFERENCES:

tion, but equally the credit supply of the SÜCHTING, J./PAUL, S. (1998), Bank
entire economy might be brought to a management, 4th edition, Stuttgart;
THIEßEN, F. et al (ed) (1999), Enzyklopäd-
isches Lexikon des Geld- Bank- und Börsen-
Since such nightmarish crisis situa-
wesens, 2 vols., 4th edition, Frankfurt/M.;
tions can never be completely excluded, HAGEN, J. v./STEIN, J. H. v. (eds) (2000),
state interference with the economic Obst/Hintner – Geld-, Bank- und Börsenwesen,
process is considered justified (→inter- 40th edition, Stuttgart.
ventionism). Through the German
Banking Act, the state puts banks under Stephan Paul
an obligation to keep financial reserves Peter T. Baltes
in the form of ‘own capital funds’ for
the compensation of losses. These
funds must be in proportion to the Basic rights, the Basic Law and
banks’ exposure (e.g. borrowers’ social market economy
default, the exchange rate or fluctuating
share prices or interest rates). The The German Basic Law (Grundgesetz)
observation of these and other rules for (constitution) formally permits any
the handling of risks is supervised by type of economic system provided it
the Federal Financial Supervisory abides by the Basic Law, in particular
Authority (→supervisory offices) in coop- the fundamental rights. The funda-
eration with the →German Federal Bank mental rights – freedom of action,
as the ‘bank of the banks’. equality before the law, freedom of
At present, banking regulations are association, freedom of movement, the
undergoing an unprecedented restruc- freedom to choose and carry out an
turing process. The Basel Committee occupation and the right to own and
on Banking Supervision – a committee dispose of private property and also the
comprising the financial controllers means of production – are incompatible
from the major industrial nations – is with a fully evolved and permanent
planning to allow financial institutions central administration economy
to consult their own risk management (→socialism/planned economy), which
and rating systems for the calculation of requires that complex economic tasks
the amount of own capital funds they and rights have to be assigned according
require. This would replace the previ- to a central plan. For the sake of this
90 Basic rights, the Basic Law and social market economy

plan, associations of independent eco- engaged in gainful employment, and it

nomic interest groups, which include can do the same for those who have
free trade unions, and the free choice of become victims of →competition or who
place of residence and occupation, have are out of work. It can also promote the
to be suppressed. integration of individuals who are able
This system is therefore a form of to work, open up opportunities offered
political dictatorship that generally does by the education system and ensure that
not grant freedom of opinion. Only a the consequences of government inter-
→market economy can guarantee the fun- ventions on the specific situation of
damental rights which safeguard free- those involved are taken into consider-
dom. The Basic Law is therefore not ation.
politically and economically neutral. In certain cases, however, the con-
The prescription of an ‘open market temporary social security and regula-
economy with free competition’ effec- tion state does protect the privileges of,
tively represents the →European Union for example, specific industries (agri-
constitutional provisions, with the con- culture, coal mining) and the owners of
sequence that the formal neutrality of jobs and housing, endangering both the
the constitution has been repealed. state under the rule of law and the mar-
At the same time, the Basic Law pre- ket economy through short-term legis-
scribes a constitutional state under the lation and interventions which do not
Rule of Law (Article 28 (1)), which conform with the system. Frequently,
(because of Article 20(1)) has often been social fundamental rights translate into
abbreviated to a social state (→social state claims for free services of a social or
and welfare state). This can be interpreted financial nature, for which, in a market
as governmental adjustments of rights economy, the state under the rule of law
and data which influence market should either not be at all responsible or
processes, as well as social and political only partially responsible (full employ-
alliances and redistributions of →income ment, jobs, education, housing and
and capital. The Basic Law thus encap- income). Thus, more social security for
sulates the two components of the some comes at the price of greater
→social market economy, i.e. a free and uncertainty for others (e.g. taxpayers).
competitive market and social security.
In relation to privileges and anti- REFERENCES:

competition restrictions, the open mar- WILLGERODT, H. (1996), Soziale

ket naturally includes certain helpful Marktwirtschaft – ein unbestimmter
elements, such as performance results Begriff?, in: Immenga, U./ Möschel, W./
Reuter, D. (ed), Festschrift für Ernst-Joachim
which are passed on in the form of
Mestmäcker, Baden-Baden, pp. 329-344;
lower prices, better product quality and
PAPIER, H.-J. (1999), Soziale Markt-
higher net compensation, as well as wirtschaft – ein Begriff ohne verfas-
offering career advancement opportu- sungsrechtliche Relevanz?, in: Nörr, K. W./
nities which do not exist in closed sys- Starbatty, J. (ed), Soll und Haben, 50 Jahre
tems. The →basic social security policy is Soziale Marktwirtschaft, Stuttgart, pp. 95-114.
able to protect those from hardship
who are not, not yet or no longer Hans Willgerodt
Basic social security 91

Basic social security The services available under the Social

Security Code II consist of services
Basic social security is considered as the aimed at securing work, and of cash
ultimate safety net of the social security payments to cover living expenses.
system. The overall aim of basic social Apart from the general services for job
security is to protect all members of creation, according to the Social
society against poverty and hardship Security Code III, is assistance for the
and to enable everyone to lead a digni- support of dependants who are under
fied life. The intention is to enable the age or in need of care, as well as coun-
beneficiaries of these services to live selling for debt, addiction and psy-
independently of assistance where pos- chosocial problems.
sible. In all states, persons capable of gain-
The basic social security system is ful employment but in need of assis-
summed up in the different volumes of tance receive normal benefits of s347
the Social Security Code and includes (since July 2007). The costs for appro-
the Basic Social Services for Job-seekers priate housing and heating as well as
(Social Security Code II), Social supplementary benefits for single par-
Assistance (Social Security Code XII) ents and handicapped persons are extra.
and the Asylum-Seekers’ Benefits Act. The regular amounts are adjusted on
All the basic social security services are the basis of the government pension
public assistance, i.e. the allocation of contributions, i.e. they are index-
the services presupposes need, and any linked. Recipients of assistance who
legal claim for these services has to be were previously in receipt of unem-
justified. The type and level of the serv- ployment pay receive an additional
ice depends on the individual case. The amount of s160 (s320 with partners)
funds come from general government plus s60 for each child, for a maximum
tax revenue. of two years. After the first year, this
Persons capable of gainful employ- additional amount is reduced by around
ment but in need of assistance are enti- 50%. This is supposed to encourage the
tled to basic social security benefits for unemployed person to take the initia-
job-seekers, while the same applies to tive and find new employment. The
persons living with entitled individuals financial incentive is increased further
in a shared household. Persons between by certain allowances which do not fea-
the ages of 15 and 65 are considered ture in the final income account.
employable, unless they are incapable, Persons incapable of gainful
due to illness or handicap, to be gain- employment who live in a shared
fully employed for a minimum of three household with persons entitled to
hours daily under the normal condi- claims, are entitled to public welfare
tions of the general job market. benefits. Up to the age of 14, the public
The primary purpose of basic social welfare benefit equals 60%, and from
security for job-seekers is to reintegrate the age of 15 up to a maximum of 25
the unemployed person into a working years it increases to 80% of the regular
life, but the beneficiary of the services is amount, as long as the children live at
expected to show active participation. home and do not work.
92 Basic social security

Persons in need of assistance who party, which are generally passed on to

are not employable or who cannot rea- social security. Persons over 65 years of
sonably be expected to take up gainful age and persons with severely reduced
employment, are entitled to public earning capacity are exempted from this
assistance in terms of Volume XII of the rule, and alimony claims from their
Social Security Code. It is considered children and parents are not considered,
unreasonable for a person to have to provided that the total annual income of
take up gainful employment if a child of the persons claiming social security does
less than three years of age has to be not exceed s100,000. This extremely
cared for, or if the care of a family generous income limit is intended to
member would be compromised. prevent an existing need for social secu-
Public assistance includes seven dif- rity being concealed for fear of recourse
ferent types of service; the more impor- by social security authorities to close
tant of these are supplementary pay- family members (so-called covert or
ments to cover living expenses, basic ashamed →poverty).
social security for the aged and, in the Social services for foreign refugees
event of reduced earning capacity, assist- occupy a special place within the basic
ing handicapped individuals to become social security system. Since 1
integrated, and assistance with nursing November 1993, social security servic-
care. The services are calculated on stan- es for asylum-seekers have been
dard regular rates which are specified by replaced by services offered in terms of
ordinance of the federal state. the Asylum-Seekers’ Benefits Act.
In July 2003 the basic rate per per- By comparison with social security,
son amounted to between s297 the entitlements of asylum-seekers are
(Baden-Württemberg and Hessen) and clearly reduced. For the first three
s282 (Thuringia, Saxony and Mecklen- years, these are basically supposed to
burg-Western Pomerania). Every five take the form of services in kind. For
years, the standard regular rates are the duration of the asylum proceedings,
adjusted to the empirically determined the basic services provide the necessary
consumer habits of the lower-income food, accommodation, clothing and
brackets (statistical model). Besides the health care.
standard regular rate, social security also The monetary value of the basic
covers the cost of accommodation and services is s184 for the head of the
heating. For certain groups of people, household, and for members of the
such as single parents, the elderly, preg- household up to the age of 7, s112, and
nant women and the disabled, lump- for household members from the age of
sum supplements of 17–36% of the 8 it is s158. These rates have been
basic regular rate are planned; for valid unchanged since the introduction of
reasons, higher amounts of supplemen- the Asylum-Seekers’ Benefits Act.
tary payments can be granted. The introduction of basic public
Prior to being awarded public assis- social security for job-seekers and the
tance, the recipient has to disclose his or revised public social security system in
her total income and all assets. This also the Social Security Act XII (Social
applies to alimony claims from a third Security Code XII) are better suited to
Business accountancy: Basic concepts 93

the complex situation of the recipients have been defined, some of which are
of assistance than was the old Federal also colloquially used. There are four
Public Assistance Act. The Unemploy- distinct concepts in accountancy:
ment Pay II for persons capable of gain-
ful employment but in need of assis- Deposits and disbursements
tance constitutes a social security serv- Each procedure which adds to the liq-
ice, which was clearly designed accord- uidity of a business (cash in hand, assets
ing to the principle of encouragement in financial institutions, cheques, etc.)
and demand. is considered as a deposit, while each
The Social Security Act II combines procedure which leads to a reduction of
financial incentives for the acceptance liquidity is called a disbursement. The
of a new job with significant penalties difference between deposits and dis-
in the event that work which has been bursements is called payment surplus
offered is not taken. Persons incapable and/or cash flow. This basic mathemat-
of gainful employment and a closely ical system forms the basis of invest-
defined circle of persons who cannot ment and finance calculation.
reasonably be expected to take on gain- Example: A company sells a product
ful employment, receive assistance to the value of s10,000 to a customer,
according to the revised version of the who pays cash instantly. The liquid
Public Assistance Act. This means that means have increased, meaning that a
public social security is obliged to assist deposit of the value of s10,000 has
only in certain exceptional cases speci- been made.
fied in the Act, but otherwise it has
largely been relieved of the cost of Receipts and expenses
unemployment. Receipts designate the financial value of
goods and services sold, while expenses
REFERENCES: designate the financial value of goods
LAMPERT, H./ALTHAMMER, J. (2004), and services received. Thus receipts
Lehrbuch der Sozialpolitik, 7th edition, Berlin; (expenses) are present if the financial
RIBHEGGE, H. (2004), Sozialpolitik,
resources (liquid means plus receiv-
ables minus liabilities) are increased
Jörg Althammer (decreased) by means of a business
transaction. The difference between
receipts and expenses is called financial
Business accountancy: Example: A company sells goods to
Basic concepts the value of s10,000 on 1 June which
the customer receives and has to pay for
Accounting as a subsection of business by 1 July. On 1 June no deposit takes
management is understood as the place, since the liquid means have not
numerical illustration of economic facts yet increased. The company, however,
at a specific point in time. For the already has a claim against the customer
description and demarcation of stocks, on 1 June, so that a receipt of s10,000 is
debts, equity capital, etc., certain terms present.
94 Business accountancy: Basic concepts

Revenue and expenditure tain legal stipulations, in particular the

These represent the assessed goods pro- accounting regulations of the code of
duction and/or the assessed goods con- commercial law. Since company out-
sumption by the company within one siders (e.g. suppliers, banks, sharehold-
accounting period (financial year). A ers, the tax office) are also permitted
revenue is present if actual assets, i.e. access to the annual report, its compila-
the sum of financial resources and tion is considered part of the external
material property (e.g. stocks, accounting system.
machines, securities, etc.) increase. In
Germany, revenues comprise all Proceeds (performance) and costs
increases of the company’s sharehold- Contrary to the pairs of terms described
ers’ equity, while expenditures com- so far, which are predominantly used in
prise all reductions of a company’s the external accounting system, pro-
shareholders’ equity. The balance of ceeds and costs form the basis of costing
revenue and expenditures is called an and performance calculations. The
annual surplus or an annual deficit. costing and performance calculations
The two terms relate to the date of are part of the internal accounting sys-
consumption of goods and/or the pro- tem, which is not legally regulated and
duction of goods. By contrast, the can thus be tailored to the company’s
deposit disbursement calculation refers individual needs, while generally not
to the date of payment for goods being accessible to outsiders. Perfor-
received and/or to the payment receipt mance represents the assessed value of
for goods supplied. goods produced by the company during
The receipts/expenses account a certain period, costs represent the
relates to the date of purchase of goods assessed value of goods consumed,
and/or the supply of goods. while the balance is called the operating
Example: The company sells goods, result. Proceeds and revenue as well as
which the accountants have valued at expenditure and costs do not corre-
s8,000, for s10,000. A receipt at a value spond entirely. This is made particular-
of s10,000 develops. An increase of the ly clear with reference to so-called cal-
financial resources to the amount of culated costs which commonly form
s8,000 takes place, but no increase in part of cost calculations. Costs which
net assets because an equal reduction of are not offset by an equal expenditure
the material property occurs. or an expenditure of a different amount
Only the difference between the are called calculated costs, because they
higher selling price and the book value are calculated particularly for costing
represents a receipt and a revenue and performance calculations.
exceeding the existing expenditure, and One differentiates between calculat-
thus an actual increase of net assets at a ed write-offs, calculated interest, calcu-
value of s2,000. lated entrepreneurial salary, calculated
The , required by the rules of com- venture cost and calculated rent.
mercial law, is based on these calcula- Example: Calculated interest is the
tions. It has to be drawn up by compa- interest which the capital tied up in the
nies in Germany and must follow cer- running of the business would have
Business cycles 95

yielded from an alternative investment. controversial, are supposed to assist the

Not only interest on loan capital, which subdivision of the elements (growth/
must be paid, for example, for credits, is business cycle), which is didactically
taken into account, but also fictitious and methodically necessary.
interest for equity capital. While a com- In the history of economic theory,
pany’s equity capital does not actually abstract representations of economic
cost interest, it nevertheless represents a cycles of uniform shape and duration
loss of benefit when it does not yield played an important role: for example
interest since it could be profitably the division into the four phases of
invested elsewhere (alternative costs, recession, recovery, boom and down-
opportunity costs). turn, as well as the representation of
three Kitchin cycles (3.5–4 years) as one
REFERENCES: Juglar cycle (7–11 years) and of six
BUSSE VON COLBE, W./PELLENS, B. Juglar cycles as a Kondratieff cycle
(1998), Lexikon des Rechnungswesens, Munich, (50–60 years).
Vienna; COENENBERG, A. G. (2003), More recent market research con-
Kostenrechnung und Kostenanalyse, Stuttgart;
centrates on the identification of recur-
WÖHE, G. (2002), Einführung in die
ring patterns and temporal as well as
Allgemeine Betriebswirtschaftslehre, Munich;
causal relationships within and between
CHERMANN, B.(2004), Grundzüge der dop- macroeconomic entities. Particularly
pelten Buchhaltung, Wiesbaden. the construction and application of sta-
tistical indicators which appear before,
Marc Richard with and after the GDP as key reference
values (e.g. orders received, utilisation
of capacity, unemployment levels) are
selected in order to examine whether
Business cycles there is a (self-replicating) pattern
between the economic parameters. If
Economic fluctuations are waves that there is, then these relationships can be
affect the economy as a whole (accord- distilled into a theory of business cycles,
ing to Gottfried Haberler, 1937). The which can be used for empirical diag-
statistically observable development of noses, prognoses and (quantitative) rec-
macroeconomic activities is usually ommendations for an effective and
made visible in the altered positive/neg- appropriate economic stabilisation poli-
ative fluctuations of the gross national cy.
product (GNP), the gross domestic This sort of statistical agreement
product (GDP) (→circular flow of (concordance) inevitably takes the defi-
incomes, national income and national prod- nitions of the concept of business cycles
uct), as well as the rate of utilisation of as its point of departure:
the production capacities. However,
these indicators are not the only param- • Business cycles are the periodic ebb
eters with which economic →growth and flow of growth rates of the gross
and its cyclic development are national income in real terms or the
explained. Several processes, all of them GDP. A modern representation of
96 Business cycles

Haberler’s concept of the wave-like (neo)-→Keynesian School (see the mul-

movement of the economy would be tiplier-accelerator models according to
referred to as a growth cycle. Paul A. Samuelson [born 1915] or John
R. Hicks [1904–1989]). But there are
• Business cycles are more or less reg- also the theories of the (neo-)classical
ular deviations from an equilibrium period (real business cycle theory).
growth rate, which is equated with An alternative categorisation subdi-
the statistical trend of the growth vides the models of business cycle theo-
rates (see the above division of the ry depending on whether they include
elements into growth and business the real macroeconomic sector of the
cycle). economy only, or both the real and the
monetary sectors (potential production
• Business cycles are the assumed dif- volume during times of utilisation to
ference between the growth rate of capacity). Regarding the purely real sec-
the estimated production potential tor of the economy, the question is
and the growth rate of the actual whether the commodity market exclu-
demand (gross national income plus sively is considered or both the com-
imported goods). One is looking at a modity and service markets.
period of economic recovery if the
potential growth rate is smaller than REFERENCES:

the demand increase. A period of eco- BARRO, R. J./GRILLI, V. (1996), Makro-

nomic downturn is characterised by a ökonomie – Europäische Perspektive, Munich,
Vienna, pp. 8-16, 402-415; KROMP-
rate of potential growth that exceeds
HARDT, J. (1993), Wachstum und
the demand increase.
Konjunktur. Grundlagen der Erklärung und
Steuerung des Wachstumsprozesses, 3rd edition,
• Business cycles are the ups and downs Göttingen; WAGNER, A. (1998),
in the rate of utilisation of the esti- Makroökonomik. Volkswirtschaftliche Strukturen
mated overall economic production II, 2nd edition, Stuttgart, pp. 293-322.
Adolf Wagner
Since the Federal Republic of Sabine Klinger
Germany came into existence, cycles of
four to five years’ duration – of which
two were years with an economic Business cycle policy
upward trend and three were years of
economic downturn – could be identi- Economic stabilisation policy or busi-
fied along the lines of the first point, ness cycle policy is a form of process
although there are exceptions to this policy that takes place within a specific
rule. (usually national) framework of eco-
Theories on business cycles that are nomic order (→institutional order policy
supposed to explain the empirically and process policy). It requires empirically
determined ups and downs differ sound knowledge of business cycle the-
depending on their basic scientific ory for a specific country and a specific
structure, which either belongs to the period in time in order to influence the
Business cycle policy 97

economic activity in both the short- cycles are weak, tax increases when
and medium-term. trade cycles and demand are booming).
The main goal is the stabilisation of The economic stabilisation policy
macroeconomic variables whose exces- instrument of the central bank refers to
sive fluctuations would be seen as the expansive or contractive regulation
endangering welfare and social free- of the money supply by adjusting the
dom. The preservation of economic central bank discount rate through
→growth as well as the avoidance of open market operations or a compulso-
inflation and cyclical unemployment ry minimum reserve.
are among the macroeconomic vari- Most recently, economic stabilisa-
ables and thus also the object of macro- tion inactivity is enjoying renewed pop-
economic goals. These and other goals ularity (economically neutral budget,
are politically determined and therefore laissez-faire, →liberalism). Besides con-
exogenous to ‘macroeconomic balance’. fidence in the self-regulating mecha-
Based on the fact that the individual nism of the market – reinforced in
goals often contradict one another some cases by the reliance on corre-
(trade-off) – meaning that they cannot sponding efficiency enhancing inter-
all be realised at once – one speaks of a ventions (→interventionism) – the lag
magic square. Therefore, the immedi- structure also justifies economic meas-
ate economic policy implementation ures that exercise just such a restraint
requires consideration of the objectives. towards an active state economic stabil-
The business cycle policy-makers isation policy. (Between the recognition
are usually the state (→fiscal federalism) of a problem and the time where a deci-
and/or the central banks (→monetarism). sion on what is to be done can be made,
When a problem is registered, the there is a time-lag between when the
instruments of monetary policy can measure has been implemented and
adapt to the current situation at their when the effects can be felt.)
discretion and can, depending on the The required knowledge of the
aims of the economic policy-makers causal and temporal consequence cor-
and the legal circumstances, be imple- relations between instruments and goal
mented or be subject to predetermined variables for an effective economic sta-
regulations. Business cycle policy meas- bilisation policy is documented in
ures are automatically selected and macroeconometric models, which
implemented in doses according to pre- make it possible to judge the planned
determined regulations. measures based on statistical and
The state has the option to dynamic multipliers in a simulation.
stabilise the macroeconomic demand This implies that these models are real-
anti-cyclically with business cycle poli- istic and that the structure as well as the
cy, such as spending programmes, or developmental direction of a national
with the help of a skilfully constructed economy is documented appropriately.
fiscal system by structuring the contri- The business cycle policy-maker’s real
bution amounts of the general public workday, however, does not meet these
according to the cyclical circumstances requirements: one has to be happy with
(tax reductions when demand and trade vague images of the economy and to
98 Capital markets

make decisions based on hypothetical This collecting function and period

rough structures. Thus, modesty is the transformation function are utilised by
real virtue of business cycle policy. the financial institutions too. Risks are
also spread out (diversified) and bal-
REFERENCES: anced, while at the same time any infor-
DÜRR, E. (1975), Stichwort Prozesspolitik, mation gradient between the market
in: Ehrlicher, W. et al (ed),: Kompendium der participants is levelled out. These trans-
Volkswirtschaftslehre, 2, 4th edition Göttingen,
formational steps will take place in the
pp. 95-177; MANKIW. N. G. (2001),
capital market, however, only if they are
Grundzüge der Volkswirtschaftslehre, 2nd edi-
tion, Stuttgart, pp. 773-801; WAGNER, A.
more profitable there than through a
(1994), Volkswirtschaft für jedermann. Die mark- financial intermediary, such as a bank.
twirtschaftliche Demokratie, 2nd edition, The different types of market organisa-
Munich, pp. 113-121. tion and the associated costs – for exam-
ple, for the provision of information
Adolf Wagner and processing as well as the trading of
Sabine Klinger financial products – therefore play an
important role.
Frequently, the term capital market
Capital markets is used for the longer-term segments of
the investment and/or procurement of
The capital market is the place where funds in the form of (above all) shares
the supplier and the potential buyer of and loans. Conceptually, a distinction
available capital meet. Macroecono- must be made between the (short-
mically, the task of the capital market is term) money market and the so-called
the coordination of the individual credit market (for the agreement of
investment and finance plans of the more individualised, non-tradable
economic agents. On the one hand, the financial contracts with banks, insur-
intention is to put the capital to the ance companies, etc.).
most profitable use possible while, on A share is a document that confirms
the other hand, material investments ownership of a portion of an enterprise.
are supposed to be made with the most The money paid to the enterprise
suitable type of funding (allocation through the issue (emission) in the pri-
function), in order to maximise the mary market is put at its disposal for an
prosperity of all members of society. unlimited length of time. Independ-
The capital market, just like the ently of that, the owners of the share
financial institutions, plays a transform- can trade it on, for example, a stock
ational role. The capital which flows exchange – the so-called secondary
from many smaller sources is pooled. market – which means that they own a
The large amount of collected capital piece of paper which can be liquidated
makes it possible to lend even short- quite easily (i.e. be transformed into
term capital on a long-term basis; i.e. liquid means). Its claim to proceeds
the commitment periods of the finan- (dividends) is variable insofar as it
cial sources and the recipients are not depends on the profit which was earned
linked. and distributed by the relevant enter-
Capital markets 99

prise. This means that there is a chance private portfolios was represented by
of receiving high dividends while the shares, with an added 2% through
enterprise is doing well. On the other funds; while between 1988 and 2000 the
hand, the investor runs the risk – and number of shareholders rose from 3.2
this makes a share a risky piece of paper million to 6.2 million, meaning that in
– that when times are bad no dividend 2000 one in 10 of all those older than 14
is paid and, in addition, the share price owned shares. These record numbers
can go down. have since declined somewhat – with
These dangers, however, have to be the German stock market having lost
weighed against the opportunity to half of its value between 2000 and 2004.
influence the destiny of the enterprise, The number of shareholders in 2006
which can be utilised in the context of was 4.24 million.
the annual general meeting. But only a The buying and selling of shares
few shareholders make use of this through the stock exchange takes place
option. They can delegate their right to in different segments. The shares with
vote to, for example, a financial institu- the highest turnover are quoted in the
tion where they keep their deposit of official trade; its development is reflect-
securities. ed in the DAX (German share index);
Since the mid-1990s, the financing the so-called price formation and/or
of enterprises through the stock markets signal function of the stock exchange.
has increased markedly in Germany. The new market segment for the new,
While not even 20 new companies were technology-based companies had to be
listed in 1996, the number of companies closed down after a share price collapse,
issuing shares for the first time rose to mainly due to criminal activities in
170 in 1999 and 130 in 2000, with the individual companies. Since that time –
new share value totalling some s5 bil- depending on the extent of information
lion in 1999 and s3.6 billion in 2000. published by the →entrepreneurs – a dis-
Thus in Germany, the market for share tinction is made between prime and
capital (or venture capital), which was general standard.
still in its infancy a few years ago, is While an enterprise gains access to
beginning to catch up with develop- shareholders’ equity (or its own capital
ments in the rest of the world. This is funds) by issuing shares, it can raise
helped by a greater readiness of private loan capital by issuing bonds (obliga-
investors to add shares to their portfolio. tions, debentures). They basically have
This in turn came about through a num- the same characteristics as bank loans
ber of large, high-profile share issues by but, unlike these, they can be traded on
former →public enterprises (Telecom, the the stock exchange. They document the
Post Office); this is further enhanced by right of the creditor to repayment of the
the fact that larger strata of society are capital amount borrowed by the enter-
economically better informed, and by a prise at the time of issue, inclusive of
changed attitude to risk-taking within interest at a rate which is not linked to
the ‘generation of heirs’. the company profit. This interest falls
By the end of 2002, for example, due prior to the distribution of possible
more than 5% of direct investments in dividends so that from the investor’s
100 Catholic social doctrines

point of view, bonds have to be regard- isches Lexikon des Geld-, Bank- und
ed as less risky than shares. Börsenwesens, 2 vols, 4th edition, Frankfurt/
Besides that, the capital is only made M.; HAGEN, J. v./STEIN, J. H. v. (eds)
(2000), Obst/Hintner – Geld-, Bank- und
available for a limited period. The bond
Börsenwesen, 40th edition, Stuttgart; DAI,
owner is not entitled to get involved in
DAI Factbook, DAI – German Stock Institute,
the company’s management as, unlike March 2007.
the shareholder, he does not become a
joint owner. Stephan Paul
In 2002, the circulation of securities
at fixed interest rates (annuities) as the
most important segment of the bond
market, amounted to s2.5 billion. Catholic social doctrines
Securities represent 11% of the average
private investor portfolio (added to this The economic system in the social
must be fund certificates from invest- encyclicals
ment companies, which also like to put The contemporary Catholic social doc-
some of their funds into annuities) – trine dates back to the time when the
compared to the 24–26% which go into Church was wrestling with the social
traditional investments in insurance question and when →liberalism and
companies and/or bank deposits. The →socialism were the two economic
lifting of restrictions and taxes on these theories competing for its solution.
forms of investment and the advances in While liberalism predicted that free
information technology meant that in global markets would result in the
Germany too during the 1990s, funding ‘wealth of nations’ (Adam Smith),
and investing through the financial mar- socialism (Karl Marx, Friedrich Engels)
kets gained strongly in significance. believed in the necessity of a ‘class
And yet much still has to be done struggle’ which would lead, through a
before Germany has caught up with the historical process and via the ‘dictator-
level of development of the capital mar- ship of the proletariat’, to a ‘classless
ket in the United States, where for society’ (communism).
decades a large proportion of old-age In the first social encyclical (world
pensions has had to be privately arranged circulars) Rerum Novarum (1891), Pope
and where ‘certified documents’ which Leo XIII levels harsh criticism at the
provide liquidity and good returns, such early capitalist class society of the time
as shares and bonds, are in great demand. (RN, nos 1/2). And yet, the liberal theo-
Although certified documents have ry is not rejected outright, unlike the
increased in Germany, the financial sys- programme of the socialists. It is said to
tem remains more focused on banks be a long way away from being able ‘to
than on capital markets. contribute’ something to the solution
and is actually doing damage to ‘the
REFERENCES: working classes themselves’ (RN, no 3).
SÜCHTING, J./PAUL, S. (1998), Bank Instead of liberalism, Leo XIII
Management, 4th edition, Stuttgart; demands ‘fair wages’ and a modification
THIEßEN, F. et al (ed) (1999), Enzyklopäd- of the pure market principle, and pro-
Catholic social doctrines 101

claims the freedom of coalition (free- The encyclical Centesimus Annus

dom of association) of the worker as a (1991) by Pope John Paul II forms the
‘natural right’. He demands a national closing chapter of the statements of the
→social policy in favour of the workers. Catholic social doctrine on the idea of a
He thus saw the possibility of combin- social market economy. Although the
ing the related concepts of liberty as a pope did not avail himself of this pecu-
fundamental value and the institution liarly German term, he still described
of the market with the idea of →social the issue down to the finest details of
justice in such a way that they were in a the ethical principles of a social market
state of equilibrium, which would be economy. While the terms ‘liberty’ and
able to ‘carry’ the economic system and ‘social justice’ defined the basic ethical
thus to ‘tolerate’ the tension between values, the terms ‘→market mechanisms’
liberty and social equality. and ‘public control’ described the two
This is the exact starting point of the fundamental organising elements.
social market economy which was sub- ‘Good employment opportunities’ and
sequently set down by Walter →Eucken a ‘solid system of professional and social
and Alfred →Müller-Armack. It is also the security’ stressed the special protection
very topic of the second papal social of human labour and of those who are
encyclical Quadragesimo Anno (1931) 40 socially weak. The elements ‘stable cur-
years later. Despite all the criticism of rency’, ‘healthy economic growth’ and
specifics, the ‘capitalist way of running ‘security of social relationships’ were
the economy cannot be condemned as also mentioned. At the same time, a
such’. The point is, rather, ‘to organise it →market economy which lacks a legal
properly’ (QA, no 101), because framework, which is untamed and
‘unhampered competitive freedom’ can devoid of values, was rejected (see CA,
easily lead to ‘the survival of the fittest, no 19, 40-42).
who all too often tend to be more brutal
and lacking in conscience’ (QA, no 107). Principles of social ethics
Competitive freedom alone must According to the most important sen-
never be made the ‘principle which reg- tence in the Catholic social doctrine,
ulates the economy’. On the other the ‘origin, carrier and goal’ of all social
hand, it is ‘justified and of undoubted processes always has to be the person.
usefulness within the necessary limita- To that extent, he or she also has the
tions’, provided it is ‘firmly controlled right and the duty to look after his or
and wisely governed’ by the public wel- her economic affairs with liberty,
fare authority (QA, no 88). The pope responsibility and solidarity.
also criticised the unfair distribution of A successful economy – understood
wealth at the time (QA, no 60) and as the best possible supply of goods for
recommended the transformation of all in an atmosphere of liberty and social
the wage-for-labour relationship into a justice – first of all requires the institu-
‘business relationship’, so that workers tion of the market. The fundamental
and employees can achieve ‘co-owner- rights of freedom of production and
ship or co-management or some sort of consumer liberty, the free choice of
profit-sharing’ (QA, no 65). occupation and of a workplace, and the
102 Catholic social doctrines

autonomous handling of →property in all diction, serve this purpose. The third
its forms can be satisfactorily realised goal is the solidarity with the ‘economi-
only by a free market order. This makes cally weak and the economically pas-
the market, as the institution of econom- sive’, as it was systematically developed
ic self-determination, the system’s polit- through the ‘system of social security’.
ical consequence of the basic value of Today, the ecological compatibility and
liberty. For a Christian anthropology to the ‘global economical reasonableness’
defend a free market system, is the nec- of a fourth goal – ‘renewed social mar-
essary consequence of its view of human ket economy economic processes’ –
beings as free, responsible subjects. have to be taken into account as a new
A successful economy, however, ethical goal of a social market economy.
cannot be achieved through the institu- The goals of a social market econo-
tion of the market alone. Since not my cannot be reached through →com-
nearly every human being ‘can prosper petition alone, but only through a basic
in the market’, the public welfare legal framework which is instituted by
authority and its ‘social balancing’ insti- the state and within which the market
tutions have to ensure that all society process plays itself out.
members are at least provided with The Christian image of humans
those material goods which enable stresses both the liberty and the autono-
them to lead their lives with dignity. my of the person as well as the fact that
This criterion sets the social market all people have equal dignity. The con-
economy apart from the individualism cept of ‘social justice’ as equality born
of the pure barter economy of the era of out of solidarity, is possible only to the
palaeo-liberalism (→liberalism). extent to which liberty, autonomy and
self-interest – which is ever present – can
Old and new goals unfold. Only in that way can an econo-
The original theory of the social market my generate the sort of productivity that
economy knows three ethical goals. The makes prosperity and social equality pos-
first and most important of these is an sible. Over time, the social market econ-
optimal goods supply, which can be omy and the social security state associ-
achieved only when the economic ated with it have brought about an enor-
agents enjoy the freedom that forms the mous redistribution – one that is respon-
basis of their economic creativity. The sible for the allocation of one-third of
second economic goal is the guarantee the national product. There is, however,
of decent conditions in the workplace. the danger that the inherent link
While classical liberalism sees even the between personal achievement and the
labour market as exclusively subject to social efficiency of the social market
the law of supply and demand, Leo XIII economy may fall into oblivion.
(Rerum Novarum) already envisaged a Gradually, an ‘insurance-against-all-risks
framework of public legislation for a mentality’ that considers the ‘compre-
‘reasonable minimum level of protec- hensive supply’ to be normal at all times
tion of human labour’. Today, the indi- has started to take hold.
vidual and collective industrial law, and The combination of increasing eco-
also a specific independent labour juris- nomic →globalisation with a continually
Chamber system 103

ageing society means that the relation- (2001), Subsidiarität, Solidarität und
ship between expenditure and returns Gemeinwohl als ‘Baugesetze der Gesell-
must be ‘re-set’. The service base of our schaft’, in: Fortbildung des Arbeitsrechts nach den
Grundsätzen der Subsidiarität, Solidarität und
welfare state that is based on the sub-
Gemeinwohl, Munich; SCHÜLLER, A.
sidiarity principle has become too nar-
(1997), Die Kirchen und die Wertgrundlagen
row to be able to continue holding up der Sozialen Marktwirtschaft: in: Soziale
the social superstructure in the same Marktwirtschaft: Anspruch und Wirklichkeit seit
way. We therefore need to change our 50 Jahren, Ordo, 48, Stuttgart, pp. 227-255.
course in the direction of more person-
al self-help, socially organised solidarity Lothar Roos
and economic autonomy.
Under today’s conditions the ques-
tions that have to be repeated include:
Which solidarity services are indispen- Chamber system
sable for dignity’s sake and for the sake
of the social rights associated with it?’ Chambers are generally based on the
And which previous social security principle of autonomy. Autonomy
benefits should partly be replaced by means that the members of a self-gov-
reasonable personal contributions? erning corporation accept sole respon-
If anyone wants to prevent this sibility for their affairs and deal with
debate (→types of market economy) in the them independently. First initiated by
name of a misunderstood ‘social jus- the Stein-Hardenberg reforms at the
tice’, the result will be that everybody beginning of the 19th century, autono-
loses out. A transformed social market my is an important organising principle
economy therefore includes, above all, of democratic states.
an emphasis on the subsidiarity princi- Autonomy carries special signifi-
ple according to which each individual cance for regional government authori-
not only has the right but also the duty ties (municipalities and municipal asso-
to do all that he or she is capable of ciations) whose right to self-government
doing. This applies to integration in the is constitutionally guaranteed in Article
job market, the acquisition of knowl- 28 of the Basic Law. In this way, the citi-
edge and education, and the ability to zens are encouraged to become more
accumulate assets and to make financial involved in public administration.
arrangements for their retirement and Apart from municipal autonomy,
times of need. there is economic autonomy, autonomy
of the professions and social autonomy.
REFERENCES: Bodies responsible for economic auton-
RAUSCHER, A. (1985), Katholische Sozial- omy are the → chambers of commerce and
lehre und liberale Wirtschaftsauffassung, in: industry; for the professions, for exam-
— (ed), Selbstinteresse und Gemeinwohl, Berlin,
ple, the physicians’ chambers, legal
pp. 279-318; ROOS, L. (1999), Ethische
chambers and architects’ associations;
Grundlagen und Zukunft der Sozialen
Marktwirtschaft, in: In christlicher
for social autonomy, the social security
Verantwortung. 50 Jahre Bund, Katholischer system. The following organisational
Unternehmer, Frankfurt/ M., pp. 69-91; — principles apply to all chambers:
104 Chambers of commerce and industry

• They are bodies of the public law, i.e. Chambers of commerce and
they have been legally instituted by industry
the state and they have been entrust-
ed with the responsibility for certain German chambers of commerce and
tasks. industry are corporations established in
terms of the public law and are thus the
• The law specifies who belongs to the official representatives of the commer-
chambers as (compulsory) members cial sector of the economy in its deal-
(e.g. all business people, all trades ings with the state. Regional chambers
people, all physicians, etc.). of commerce and industry look after
→enterprises of all sizes.
• Through their own contributions, the A total of 3.5 million enterprises are
members of the chambers raise the grouped together in members’ associa-
funds required to fulfil their objec- tion of the chambers of commerce and
tives and they supervise the appropri- industry in Germany. The membership
ate and economical use of these funds. of all commercial enterprises in the
chambers of commerce and industry
All self-governing corporations typ- guarantees that each enterprise can
ically have representatives who have exercise equal influence. There is no
been elected by the members and who weighting of votes with majority deci-
have been accorded significant rights to sions according to size; each enterprise
participate in the appointments for the has an equal right to vote. This repre-
highest and honorary offices, as well as sentation of enterprises has the effect of
with the determination of the budget balancing the interests of enterprises
and decision on fundamental issues. and industries.
The state establishes the chambers The members of the chamber
in order to benefit from their expert (enterprises) elect their representatives
knowledge so that appropriate local and to the chamber’s plenary assembly,
national tasks are undertaken, and in which elects the president, the vice-
order to reduce the load on its own president and the managing director of
administrative mechanisms. The cham- the chamber. This means that the pres-
bers are also an extension of the sub- ident of a chamber also has to be an
sidiarity principle, in terms of which entrepreneur. Since most representa-
smaller units (e.g. the family or a tives come from enterprises which
municipality) should settle their affairs belong to the middle class, the cham-
themselves and call on the support of bers of commerce and industry are par-
larger units (e.g. a state or a federation) ticularly focused on the needs of this
only if the involvement of higher group. The fact that membership of
authorities is required for the successful regional chambers of commerce and
undertaking of a particular activity. industry is compulsory, allows them to
remain independent of government
Hans Werner Hinz subsidies and secures their objectivity
and reliability when they have to give
political advice.
Chambers of commerce and industry 105

The task of the chambers is to pro- Another important characteristic is the

mote regional commerce and industry. cooperation between full-time staff and
The preparation of reports – on some the 250,000 odd voluntary staff mem-
200 different areas of expertise – for bers who have business backgrounds
courts, authorities and private petition- and who are active in chamber organi-
ers is of particular importance, since sations and committees.
they are prerequisites for trading and Selected examples of what the
professional licences. chambers of commerce and industry
The chambers are particularly keen information service can achieve are the
on the promotion of the education sys- Business Start-up Forum, the company
tem and on the improvement and effec- information system (for the exchange
tiveness of in-house training and fur- of suppliers’ and manufacturers’
ther education systems. Their advisory details), the e-trade centre as well as the
role towards companies that take in Technology and Recycling Forum.
trainees, their apprentice-mentoring The umbrella organisation of the
scheme, and the involvement of more German chambers of commerce and
than 120,000 honorary examiners in industry is the Association of German
examinations, commit the chambers to Chambers of Industry and Commerce,
lending the skills-training sector their which employs more than 160 staff
continued structural support. members at its headquarters in Berlin.
It is hoped that in this way a quali- The association represents the interests
fied workforce will bring competitive of the individual chambers in its deal-
advantages and that long-term market ings with the federal government,
positions will be able to be established issues press releases and statements on
and evolved. In the area of →environ- topical issues in the realm of politics
mental protection, statements by the and the economy, and assists interested
chambers of commerce and industry parties with the establishment of inter-
generally serve the purpose of modify- national contacts. The chambers set the
ing environmental policy measures in guidelines for the association and
the interests of industry and commerce. finance its activities.
Altogether the chambers offer their The growing importance of the
member enterprises a broad range of organs of the →European Union in the
information and services aimed at mak- field of economic and social policy has
ing their businesses structurally more necessitated the establishment of a
efficient and improving their market transnational lobby which can deal with
position. A total of 6,600 experts are European policy issues on behalf of
responsible for the area-specific support commerce and industry. This role has
of the enterprises in the chambers. been adopted by Eurochambres in
Innovative economic trends as well as Brussels in its capacity as the umbrella
practical business activities are brought organisation of more than 800
to the enterprises’ attention in regularly European chambers, which in turn look
edited chamber publications – there after 10 million enterprises.
are, for example, a total of 79 different The Association of German
magazines totalling 2.5 million copies. Chambers of Industry and Commerce
106 Circular flow of incomes, national income and national product

coordinates the 120 bilateral foreign working on a model of the national

trade chambers of commerce in 80 economy in cycle form. Typical of this
countries. These bilateral chambers are form of representation is a network of
the first dialogue partners for German circulatory nodes, which take on the
or foreign business people. role of functional and institutional
REFERENCES: The functional transactors are usu-
DIHT – DEUTSCHER INDUSTRIE – ally markets (changing capital assets),
UND HANDELSKAMMERTAG (ed) and the institutions are sectors of the
(2000), Industrie- und Handelskammern in der
economy (the government, private
Bundesrepublik Deutschland: Aufgaben und
households, enterprises and possibly
Gesetz, Bonn; — CHAMBER OF COM-
other countries). The interactions
der Marke, Bonn; — (2006), Kammerrecht, between the circulatory nodes are rep-
Bonn. Internet: www.verlag.dihk.de resented by currents, with each goods’
current being paired with an equivalent
Dagmar Boving monetary counter-current (e.g. con-
sumer goods from enterprises to house-
holds, consumer expenditure from
households to enterprises).
Circular flow of incomes, national The operational pattern of the cir-
income and national product cular flow of incomes rests on the fun-
damental idea that income is obtained
The idea that money changes hands, through expenditure (and not vice
circulates and, perhaps, forms a cycle is versa), and that the conditions for the
based on everyday experience. Inspired repeatability of this circulatory process
by scientific discoveries on the circula- depend on this.
tion of blood and water, 18th century This is the main focus of cycle analy-
economists were the first to see the pos- sis, which investigates the equilibrium,
sibility of representing economic structure and level of the economic cur-
processes as a cycle. rents and existing stock in the cycle, and
The first cycle theoretician was also the resulting behaviour of the eco-
François Quesnay (1694–1774) who, nomic agents (ex ante cycle analysis).
besides his duties as personal physician The circular flow of incomes serves as a
to the Marquise de Pompadour at the theoretical model for the national
Court of Louis XV at Versailles, dedicat- accounting in an economy.
ed himself to studies on philosophy and The interdependence of the compo-
economics. Quesnay tried to show how nents of the cycle means that this book-
the landowners’ annual capital advances keeping system has three different ways
can be recovered through agriculture of calculating the national product. The
and trade, so that they become available output method, the incomes received
again in the following year. method, and the consumption-savings
In the next century, Karl Marx method taken together add up to an
(1818–1883) and after him Eugen von algebraic representation of the circular
Böhm-Bawerk (1851–1914) were flow of incomes.
Circular flow of incomes, national income and national product 107

The ‘consumption-savings method’ incomes from other countries (income

indicates how the economic units earned at home which is transferred
spend their →income and how manufac- abroad, minus the income that was
tured goods are used in one period: pri- obtained abroad and was transferred
vate households and the state consume, back home) and via the →subsidies and
private →enterprises and the state invest. production and import duties within the
In an open national economy, the exter- European Union, become mutually
nal balance (the surplus of exports over exchangeable. The difference between
imports) also counts. gross and net entities determines the
The ‘output method’ shows the level of depreciation. Finally, govern-
relationship between production and ment interventions in the form of direct
income. The overall result is the sum of taxes and subsidies distort the original
the gross values added (gross produc- factor costs and thus the actual market
tion value less the costs of what had to prices so that, strictly speaking, the
be used in the production process) of appropriate evaluation basis should be
the individual businesses and the state. indicated for each aggregate.
The ‘incomes received method’ ini- The widely used concept of nation-
tially determines the national income al income can now be translated into
and shows how the factors of produc- the terminology of macroeconomic
tion used in the manufacturing process interdependence: the issue is net
(labour, capital, land) participate in the national income at factor cost.
final income. It must be roughly subdi-
vided into the gross wages and salaries REFERENCES:

for employees and into profits for the MEIER, R./REICH, U.-P. (2001), Von
self-employed and factor capital Gütern und Geld, Kreisläufen und Konten: eine
Einführung in die Volkswirtschaftlichen Ge-
(income from entrepreneurial activity
samtrechnungen der Schweiz, Bern, Stuttgart,
and capital assets). The income distrib-
Vienna; STOBBE, A. (1975), Stichwort
uted by the market in this way is usual- Wirtschaftskreislauf und Sozialprodukt, in:
ly subject to a secondary distribution Ehrlicher, W. et al (ed), Kompendium der
through the national tax transfer system Volkswirtschaftslehre, 1, 5th edition,
and is then available for use – this is how Göttingen, pp. 16-56; WAGNER, A. (1998),
the circular flow of incomes closes. Makroökonomik. Volkswirtschaftliche Strukturen
Sophisticated methods of calculation II, 2nd edition, Stuttgart, pp. 48-80.
produce different varieties of national
product. Besides gross national income Adolf Wagner
(GNI) (which used to be referred to as Sabine Klinger
gross national product – GNP), gross
domestic product (GDP) plays an
important role for economic stability Co-determination
(→business cycles, →business cycle policy).
The difference between the two vari- Co-determination is the participation of
ables is due to the application of the the workers in the decisions of their
home and/or the domestic concept →enterprise. Depending on the form and
which, via the balance of the factor size of the enterprise, the participation
108 Co-determination

rights of the workers differ. In the min- The extent to which the workers
ing as well as the iron and steel industries can exercise co-determination depends
(Montan Co-determination), workers on the legal form of the enterprise. It is
have the most extensive rights to co- most visible in the case of public limit-
determination: here, the supervisory ed companies where the supervisory
boards have equal numbers of employ- board is in control of the board of direc-
ers’ and workers’ representatives (pari- tors: the appointment of the executive
ty); in addition, the appointment of the committee is incumbent upon the
labour relations manager requires the supervisory board and not the general
approval of the majority of the workers’ shareholders’ assembly. This ensures
representatives on the supervisory board. that the supervisory board can influ-
Other large-scale incorporated ence the board of directors on an ongo-
enterprises (corporations such as public ing basis, which for its part is exclusive-
limited companies, limited partnerships ly accountable to the supervisory board.
by shares, limited liability companies, In the case of a limited liability com-
mutual insurance companies and coop- pany, provided that it is large enough to
eratives) with a minimum of 2,000 require co-determination, the executive
employees also have to have an equal directors are equally appointed by the
number of workers’ and employers’ supervisory board, which is itself
representatives on their supervisory accountable to the partners – and thus
boards with the proviso that, in the case the shareholders. This means that in
of a deadlock, the employers’ side has limited liability companies, the com-
the final say. In addition, employees in mittees with co-determination rights
managerial positions have representa- have only limited influence.
tion in the workers’ quota. In medium- In comparison with other countries,
sized enterprises with between 500 and German co-determination law is very
2,000 employees, the workers are entitl- comprehensive. Historically, co-deter-
ed to a one-third representation on the mination – above all in the mining, iron
supervisory boards. and steel industries – represented an
Non-incorporated firms (private alternative to the nationalisation which
firms, general partnerships, limited is discussed elsewhere and which was
partnerships) are not subject to co- hotly debated after the Second World
determination regulations. The same War. Capital and labour were to be insti-
applies to government enterprises, tutionally integrated and forced to coop-
where special legal regulations for the erate. And it is true that in Germany a
representation of employees in the culture of partnership between employ-
administrative councils are applied. ers and employees developed.
Co-determination refers to all deci- For many years now, conflicts of
sions that have to be taken by an enter- interest have been almost exclusively
prise’s supervisory board. This has to be dealt with in a climate of social harmo-
distinguished from the participation of ny: industrial action is less frequent,
the works council in terms of the shorter and usually less irreconcilable
industrial relations law, which exists than it is in comparable industrial
alongside co-determination. nations. As a result, workers are in a
Collective agreements 109

position to partake in the increasing ing and remuneration conditions inde-

prosperity. It is thanks to the concept of pendently of government directives and
the →social market economy that the eco- in their own responsibility. This is done
nomic system was accepted virtually mainly through collective agreements
from the start. In the meantime, howev- that can refer either to a single →enter-
er, the traditional division between cap- prise or to an entire industry.
ital and labour is becoming increasingly The area of application of these
blurred: an ever-increasing number of agreements can be limited to a specific
workers have become shareholders region or cover the Federal Republic as
either in their or in other enterprises. a whole. Collective agreements may
In view of the increasing interna- specify the actual rights and obligations
tionalisation of the economy (→globali- of workers and employers – such as
sation), the criticism has repeatedly been regarding wage levels or working hours
raised that the German co-determina- – but they may also contain legally
tion law is beginning to turn into a loca- binding standards, which for those con-
tional disadvantage; it complicates deci- cerned are directly valid and as such
sion-making processes and decreases similar to a law. They concern all
profitability. However, co-determina- employers in the area of application
tion enables the workers to identify with membership in the respective
better with company objectives. Thus, employers’ association, and all employ-
the criticism is usually less targeted at ees who belong to the participating
the underlying idea than at certain trade union. But it is normal practice to
forms of co-determination. allow non-aligned workers to share in
the outcome of collective agreements.
REFERENCES: Collective agreements regulate
WLOTZKE, O./WIßMANN, H./ KOBER- working conditions collectively and are
SKI, W. (2002), Mitbestimmungsgesetz, 3rd edi- regularly brought in line with new eco-
nomic developments. This means that
the individual clauses of employment
(1999), Mitbestimmung in Deutschland Tradition
und Effizienz, Frankfurt/M.; NIEDEN-
contracts do not have to be renegotiated
HOFF, H.-U. (2000), Mitbestimmung in der every time. Thus collective agreements
Bundesrepublik Deutschland, 12th edition, play an important logistical role. They
Cologne. also have a protective function for the
Gernot Fritz individual worker facing an employer,
who is usually in an economically
stronger position. But collective agree-
ments also protect the individual
Collective agreements employers who, when faced with the
organisational power of a large trade
Article 9(3) of the German Basic Law union, would achieve little on their
guarantees bargaining autonomy: work- own. Lastly, collective agreements play
ers and employers have the right to club a peace-making role when, over long
together in trade unions and employers’ periods of time, they keep the work-
associations, and to organise their work- place free from exhausting conflicts.
110 Collective agreements

While industry-wide agreements on collective agreements. Such company

conditions of employment usually agreements may deviate from collective-
remain valid for longer periods, wage ly agreed regulations only when they are
and remuneration agreements have to in favour of the workers – unless an
be amended more frequently, with ‘opening clause’ in the collective agree-
terms that make it easier to monitor ment specifically grants the right to
developments. But there are many more exceptions.
collective agreements on additional ben- Attempts to influence collective
efits such as entitlement to vacation, agreements through industrial action
payments for the purpose of wealth are permissible. The right to →industri-
accumulation or irregular payments. al action is guaranteed in Article 9 of the
These collective agreements apply Basic Law. Its details have nevertheless
simultaneously and usually for different not been legally regulated, but are based
lengths of time. At present, more than on precedents. A strike is an example of
50,000 collective agreements are in industrial action and is defined as the
force. joint refusal to work with the intention
Collective agreements cannot over- of achieving a collective agreement by
rule any laws or regulations. A deviation force. A lockout is the employers’
from the national minimum standards answer to a strike; it means that work-
is in theory permissible provided, how- ers are not allowed access to the work-
ever, it is in favour of the workers. place and are refused wages. Both the
Works councils are empowered to trade unions and employers’ associa-
finalise company agreements but not tions lay down procedural rules that

Percentage of employees in Germany with binding wage agreements, 1996–2006

Collective agreements 111

apply in the event of industrial action, and if more than half of the workers in
such as a call for a strike ballot on the the area of application of the collective
workers’ side, or an appropriate joint agreement are working for employers
resolution on the side of the employers. who are aligned.
Any kind of industrial action is Minimum wages, which have not
required to adhere to the rule of pro- been legally specified in Germany, can
portionality at all times. Equally, be achieved only via the detour of uni-
nobody can be made to participate in a versally binding collective agreements.
labour dispute by force. Industrial But to declare collective agreements
action can relate to any aspect of tariff universally binding is legally and politi-
negotiations, but selective strikes cally controversial because they also
restricted to individual companies are place an obligation on employers who
also allowed. While industrial action is openly state that they do not wish to be
taking place, the workers and compa- aligned with tariff negotiations. A judg-
nies involved usually receive financial ment of the Federal Constitutional
support from their associations. Court has, however, declared them per-
In principle, industrial action may missible. Collective agreements regu-
be taken only when the truce has late minimum requirements. They do
expired after an existing collective not prevent anyone from granting
agreement has come to the end of its workers benefits that are above the col-
life. Short token strikes in close associa- lectively agreed wage limits. Benefits
tion with collective bargaining are, that are above the collectively agreed
however, considered admissible. But wage limits can be granted either
industrial action is illegal if it is a politi- through company agreements or
cal strike whose target is the legislator. through a single contract.
Meanwhile, the initial controversy over
the validity of lockouts has been REFERENCES:

resolved by a judgment of the Federal GAMILLSCHEG, F. (1997), Arbeitsrecht.

Constitutional Court and the Federal Kollektives Arbeitsrecht, Munich; WIED-
MANN, H./ STUMPF, H. (1999), Tarif-
Labour Court.
vertragsgesetz; Munich; HALBACH, G./
A collective agreement can some-
times be extended to workers and WLOTZKE, O. (1998), Übersicht über das
employers who are non-aligned, pro- Arbeitsrecht, 7th edition, Bonn.
vided that the collective agreement was
declared universally binding. This Gernot Fritz
applies at present to fewer than 600 col-
lective agreements. In order to be
declared universally binding, an appli-
cation from at least one of the parties to Competition
the collective agreement and a vote in
favour by a wage committee where Competition means people fighting
both parties are equally represented are over something. Economic competition
required. It is furthermore permissible exists in the rivalry for business deals.
only if there is interest from the public In order to be successful in the market,
112 Competition

suppliers and bidders have to offer their But competition also has economic
business partners favourable trading functions. First, competition requires
conditions. These depend equally on that a finished product has to suit the
attractive prices (price competition), needs of the customer as closely as pos-
high product quality (quality competi- sible (focus on consumer demands).
tion), the right approach to sales and Second, in order to maximise profits the
marketing, and possibly also on suc- scarce factors of production – labour,
cessful advertising. land and capital – are used in such a way
In a →market economy, competition that their productivity is highest
fulfils a number of important tasks. (decreasing factor costs). The third
These are listed as the different func- point is that the income distribution
tions of competition (see box below). First taking place is a function of one’s per-
and foremost, the power of the state ver- formance in the market process – i.e.
sus the private citizen needs to be what sort of contribution is made to
restricted. Different from a planned overcoming the scarcity of goods
economy (→socialism), the economic (income in accordance with market per-
process is not mainly controlled by the formance). Fourth, competition sends
state but directly by the private actors in out incentives for the introduction of
the economy (the controls inherent in new or improved products and produc-
the market economy on the basis of tion methods (incentive to be innova-
liberal economic rights). Secondly, com- tive). Fifth, competition accelerates the
petition controls the economic power of speed at which competitors react to such
private actors. Only those whose busi- innovations or other changes in the eco-
ness conditions are permanently attrac- nomic environment (e.g. changes to
tive have the chance to be successful international trade relations) and thus
(competitive self-check). These two contributes to making the innovation
functions of competition are socio-polit- known to the entire economy (imitation
ically important and are therefore of innovations and general high flexibil-
referred to as ‘classical political func- ity of the economy).
tions’. The first three functions are called

Competition and its functions in a market economy

Classical political functions of competition

• Limiting the impact of state power on the private citizen
• Control of private economic power

Static functions of competition

• Composition of the goods supply according to consumer needs
• Optimal utilisation of factors of production
• Income distribution according to market performance

Dynamic functions of competition

• Innovative products and production methods
• Imitations and a high degree of adaptability
Competition 113

‘static competition functions’, because in different markets. The situation is

they work particularly well when the completely unproblematical if new
economic indicators are static. In con- suppliers (potential competitors) can
trast, the fourth and fifth functions are enter a market at any time, i.e. if the
referred to as ‘dynamic competition market has low entry barriers and is
functions’ because they take into ‘open’. Here, the current suppliers can-
account overall economic changes over not successfully restrict competition
time, consumer needs, the available fac- and, for example, raise prices, because
tors of production, the technical and they would otherwise be quickly dis-
organisational knowledge of how to empowered by new market entrants
combine the factors of production (newcomers). In this case, a special
(→production and supply), as well as the competition policy is not necessary
legal and the →social system within (→open markets: market entry, market exit).
which the competition takes place. In reality, however, potential suppli-
Beyond that, innovative suppliers in ers to the market are often hampered by
their constant search for profit opportu- economic barriers – and sometimes also
nities are also a source of change. by legal barriers – which are difficult to
Through competition, they have to test overcome. It is then important to main-
whether their new ideas are actually tain the rivalry between the current
suited to need satisfaction. The truth is suppliers: the competition policy must
that only the most successful new prevent these suppliers from entering
developments are rewarded with high into restrictive contracts, for example,
→profits (competition as a process of in the form of monopolies or mergers.
search and discovery). Even if there are a great many enter-
The more successful an adventur- prises in the market (polypoly), compe-
ous pioneer-entrepreneur is, the more tition could be eliminated to the detri-
pressure others will feel to catch up ment of the consumer.
with his or her competitive advantage But competition is even more at risk
or even to overtake him or her. This if there are only a few enterprises in the
may be based on the hope of being able market (wide oligopoly). They may dis-
to participate in the innovator’s suc- pense with contracts altogether and
cesses. There is, however, always the agree trading conditions jointly and
fear of not doing enough and of having severally, through informal telephone
to quit the market. calls or conferences which are open
At the same time it is plausible that only to the industry. If the number of
market participants will try to ease the suppliers becomes smaller still, all other
constant competitive pressure by means things being equal, the enterprises may
of restrictive cooperation with other even exhibit solidarity without any pre-
→enterprises, or by seizing individual vious contact whatsoever (close oligop-
control of the market. Without a pro- oly). In that case, if one supplier
tective governmental policy, therefore, increases prices, the others follow suit
the competition process could be rapid- ‘spontaneously’. The enterprises be-
ly suffocated. It also has to be consid- have like a quasi-monopoly. Excep-
ered that competitive conditions differ tional cases may force the government
114 Concentration

to intervene by changing the market the readiness of the market participants

structure and increasing the number of to perform will decline, undermining
suppliers. This may be done, for exam- the control function of competition.
ple, by making it easier for newcomers Finally, the state tries to flatten
to gain access to the market or, in extreme economic fluctuations which
extreme cases, by breaking up the estab- do occur when competition is given
lished enterprises in order to resuscitate free rein. The specific targets here are
competition. full →employment, →price level stability,
Even if, due to its functions, compe- →balance of payments equilibrium and eco-
tition makes an important contribution nomic growth.
to social prosperity, it nevertheless can-
not fulfil all the requirements of a mar- REFERENCES:

ket economy (the limitations of compe- BARTLING, H. (1997), Von der

tition). This is why the government Wettbewerbstheorie zur Theorie der
Wettbewerbspolitik, in: Kruse, J. et al (ed),
complements competition with its eco-
Wettbewerbspolitik im Spannungsfeld nationaler
nomic policy. Apart from the policy
und internationaler Kartellrechtsordnungen,
against restraints of competition (→Act anniversary publication for I. Schmidt, 65th
Against Restraints of Competition), it is of birthday, Baden-Baden, pp. 17ff;
primary importance that regulations for SCHMIDT, I. (2001), Wettbewerbspolitik und
those sectors of the economy are put in Kartellrecht, 7th edition, Munich; WOLL, A.
place where competition has no chance (1992), Wirtschaftspolitik, 2nd edition,
of success. This applies especially to the Munich.
supply of public goods by the state (e.g.
internal and external security). In addi- Hans Peter Seitel
tion, the state can correct – through, for
example, environmental policies –
detrimental developments due to com- Concentration
petition, making sure that third parties
do not suffer negative external conse- The →social market economy, which is the
quences. accepted way of life in Germany and
Next, it has to be taken into account enjoys majority support, can only func-
that the income distribution which tion if economic and political powers
results from the market process reflects are not excessively concentrated and
the market performance of the individ- thus out of control. Only in this way
ual participants in the economy, with- can socially relevant political and eco-
out necessarily paying attention to their nomic decisions be made and imple-
neediness. For this reason, the state mented in an essentially decentralised
undertakes to correct the income distri- manner.
bution – for example, in favour of ill or The most important aspect of the
disabled persons as well as families with problem in terms of market and com-
children (→social policy). However, the petition criteria is enterprise concentra-
greater the deviation from a →distribu- tion, which depends on the number of
tion in accordance with market per- →enterprises operating in a market.
formance, the greater is the danger that From the point of view of competition
Concentration 115

– or considered more generally in terms tain criteria have to be registered with

of the goals of a social market economy the →Federal Cartel Office prior to their
– enterprise concentration can be seen execution.
either in a positive or a negative light. It The main criterion is that the enter-
must be seen as positive if it is thanks to prises involved must have had total sales
the concentration that an enterprise revenues of more than s500 million
manages to remain competitive and during the past financial year world-
profitable and offers secure jobs. A neg- wide, and at least one associated enter-
ative evaluation is appropriate if there is prise in the same country must have
actually only one enterprise on the sell- made sales revenues in excess of s25
er’s or the buyer’s side. In such monop- million.
oly situations →competition cannot work In terms of the Act Against Restraints
and achieve the desired results. For this of Competition, such mergers are gener-
reason, modern antitrust legislation ally not permissible if they either justify
envisages rules designed to prevent an or strengthen a dominant market posi-
excessive enterprise concentration, tion, thus leading to an excessive con-
which would have a negative impact on centration. The Act against Restraints of
competition. Competition defines an enterprise as
Just like the rest of modern antitrust ‘dominating the market’ when there is
legislation, German law is not designed no competitor in the relevant market,
to hamper the internal growth of enter- when the enterprise is not being exposed
prises. This sort of concentration and to any significant competition, or when
market presence is usually based on the it has an ‘outstanding market position’
superior performance and capability of relative to its competitors.
the enterprise, and is not a punishable For the regular review of the level of
offence. If this has allowed an excessive enterprise concentration and the imple-
enterprise concentration to develop, mentation of merger control, an inde-
then only the law against abuse of mar- pendent monopolies commission has
ket position applies. The state replaces been established, consisting of five
the control function of competition expert members. Every two years, the
with government controls, which can commission submits a major report and
naturally only be a temporary measure it also compiles special reports on indi-
(supervision of abuse). vidual cases and problems.
It is better to prevent an excessive Enterprise concentration in a social
enterprise concentration from the start, market economy – and this equally
unless it is due to internal growth and applies to wealth concentration – is not
superior efficiency. The ‘merger con- merely of ‘economic’ importance in the
trol’ in modern restrictive trade practice narrower sense of the word. Both forms
acts, serves this purpose. That also of economic concentration can also give
applies to the German and the access to political influence. This can be
European law valid in Germany. The seen at the level of the municipality, for
→Act Against Restraints of Competition instance, where a large enterprise opens
requires that for control purposes, up. To prevent the sort of concentration
mergers of companies which fulfil cer- of political power typical of totalitarian
116 Concerted Action and Alliance for Employment

and other undemocratic forms of gov- today, was legally established. What is
ernment, the German constitution not the purpose of the establishment of
only insists on the classical division of such institutions, what are their chances
power between the legislature, the of success, and what kind of unfavour-
executive and the judiciary, but beyond able consequences are to be expected?
that there is also the decentralisation of Concerted actions and alliances are
power at the federal level, the states, the information and negotiation systems
municipalities and, on the other hand, through which government representa-
Europe, which has attracted significant tives and the representatives of organ-
areas of control by now (→Federal ised interest groups endeavour to
Republic, federal states, municipalities). answer contentious questions regarding
In a social market economy, the sort which way would be beneficial for the
of procedures for the decentralisation economy as a whole.
of political power which are also effec- The Concerted Action which was
tive in other federal democracies are created in 1967 was supposed to deter-
usefully supported by the prevention of mine reference levels for economically
an excessive concentration of power in justifiable wage increases and in this
the economic sense, which might be way keep inflation and →unemployment
converted into the sort of political down. The resolutions were only
influence which is not legitimate in a equivalent to recommendations and
democracy. thus not binding for the participant rep-
resentatives of the employers’ associa-
REFERENCES: tions and trade unions.
SCHMIDT, I. (2004), Wettbewerbspolitik und The purpose of the Concerted
Kartellrecht, Eine Einführung, 8th edition, Action in the Health Service is to slow
Stuttgart, New York, Chapter 6, Section V.
down the steep rise in expenditure of the
Kurt Stockmann compulsory →health insurance and thus to
prevent contribution increases (rising
wage additive costs). Members from all
Concerted Action and Alliance for sectors of the health service are expected
Employment (Konzertierte Aktion/ to commit themselves to the economical
Bündnis für Arbeit) use of funds.
The Alliance for Employment,
The red-green (Social Democratic Education and Competitive Ability,
Party-Green Party) federal government which was started in 1998, is particular-
officially declared alliances with interest ly focused on effective measures against
groups a core component of their con- high unemployment through agree-
sensual economic policy. A ‘Concerted ments between trade unions, employers
Action’, organised by the state, with and the federal government. Political
representatives from government, the decisions were to be taken in agreement
trade unions and the employers’ associ- with the trade unions and employers’
ations already existed from 1967 to associations (corporatism).
1977. In 1977, the Concerted Action in In fact, the success of institutions of
the Health Service, which still exists this kind was short-lived. An important
Concerted Action and Alliance for Employment 117

role in this is played by moderate wage that have been made in their organisa-
demands of the trade unions. After tions. If individual groups violate
1967, these were necessary due to shared resolutions they may benefit as
weakening economic stability (→busi- long as most of the other associations
ness cycle policy) and, in 2000, they were do not follow suit: in this way, one
caused by the high levels of long-term small trade union which decides to go it
unemployment, particularly among alone and to disregard tariff guidelines
poorly skilled workers (minimum wage causes its members to be financially
unemployment) for which wage poli- better off, because unfavourable conse-
cies were partly to blame. quences in the shape of rising inflation
In the Concerted Action in the rates (falling real wages) do not occur.
Health Service, after expenditure had But once the dam of moderate wage
gone up excessively, cost-curbing demands has been broken, other trade
appeals initially bore fruit. But there- unions will do the same. There are no
after, the expenditure dynamics sanctions for offences.
returned in full force. Concerted actions and alliances
The reasons why concerted actions cause false incentives: those who violate
and alliances of all kinds fail are obvi- resolutions benefit; those who stick to
ous. At first, all those involved are keen them are worse off. The durability of
to show their goodwill and to work for alliances is therefore questionable.
the common goals. Initially it is even Also, constitutional doubts exist
possible to garner the sympathy of the against the Alliance for Employment,
members of the represented bodies and although it is praised as an instrument
to persuade them to relinquish their of consensual economic policy. The
claims. Threats of legal enforcement federal government ought not to share
action (as in the case of the Concerted the political power with which it has
Action in the Health Service) from gov- temporarily been entrusted, with inter-
ernment bodies can also have a disci- est groups which have no democratic
plining effect. All corporations are unit- legitimacy. Furthermore, it is question-
ed at all times in their demands for able that only a few privileged individu-
more government funding. In order to als are invited to consensus discussions
be able to present alliances as success when large sectors of the population,
stories, governments often agree to including some 25 million pensioners
such requests (e.g. the employment and unemployed, are excluded. There
programme for unemployed adoles- is a danger that those sitting around the
cents). negotiating table come to an agreement
However, the consensus between which is to the detriment of the groups
the participating associations usually of the population that are not repre-
starts to crumble early on: dissatisfac- sented.
tion grows; members rebel; association A further shortcoming is the fact
leaders and trade union bosses are con- that all alliance participants are con-
cerned about their re-election; and cerned about their re-election, which
those sitting around the alliance table means that they only consider the
have no way of enforcing the promises immediate future. Successes need to be
118 Conflicting aims in economic policy

achieved quickly, while lasting, long- Wirtschaftspolitik, in: Volkswirtschaftliche

term advantages are not considered. Korrespondenz der Adolf-Weber-Stiftung, 39, 2.
Also, the sorts of resolutions that the
Walter Hamm
quest for consensus will yield cannot be
foreseen. The result is a high degree of
discouraging uncertainty for investors.
This is not the way to steer a clear and Conflicting aims in economic
reliable political course. Finally, parlia- policy
ment becomes disempowered as it is
now expected to take decisions that Economic policy aims can interrelate in
have been pre-determined by alliances. different ways. It follows that two aims
The Concerted Action in the which are pursued at the same time can
Health Service did not fulfil it expecta- be mutually inclusive and in tune with
tions. It was not possible to balance the each other. In that case, the aims are in
conflicting interests of those involved harmony. In the pursuit of the one, the
through negotiations. More and more other aim is promoted at the same time.
government spending cuts have been But, in economic policy, different aims
the result. are frequently in conflict. In such a
The Alliance for Employment died case, the one aim can be achieved only
a quiet death despite the continued rise if the other one is either sacrificed or
in unemployment. Something which achieved only to a limited extent.
had been commended as a milestone of Conflicting aims can almost be seen
red-green policy has now proved to be as the essence of any economic process.
a failure. This makes it even more Since we have only a limited amount of
important to combat the causes of mass goods, every individual continually has
unemployment with suitable measures, to decide which goods he/she can do
including a moderate wage policy, without in order to be able to enjoy the
opening up blanket collective agree- benefits of other goods. People who are
ments (allowing individual agreements economically active will try to take
on wages and working hours), social these decisions rationally, and in this
reforms and the removal of the numer- way will solve conflicting aims on a
ous legal regulations and superfluous continual basis. In a →market economy, it
job market layering. is largely up to individuals, households
and →enterprises to make economic
REFERENCES: decisions themselves in order to solve
ENGELHARD, P./FEHL, GEUE, H. these conflicting aims. This is the best
(1998), Konzertierte Aktionen, Runde way of taking account of personal
Tische, Aktionsbündnisse: Macht- desires and preferences.
beteiligung und Machtkontrolle organisiert- In a market economy, however,
er Interessen durch korporatistische
some decisions which concern the
Politikbeteiligung?, in: Cassel, D. (ed), 50
community have to be made on behalf
Jahre Soziale Marktwirtschaft, Stuttgart, pp.
741-768; KÜLP, B. et al (1984), Sektorale of society as a whole. Whether, for
Wirtschaftspolitik, Berlin et al, pp. 118-130; instance, a motorway or an airport
HAMM, W. (2000), Fallstricke konsensualer should be built, or whether the money
Conflicting aims in economic policy 119

supply should be increased and by how nature finally understood that this atti-
much, must be decided by the various tude was not very helpful. Nowadays,
responsible administrative bodies. we concede that all suppliers and con-
However, because in that case the deci- sumers in the different markets are
sions are not primarily personal ones basically following their own interests,
but concern the community, the num- because we have learnt that the markets
ber of potentially conflicting aims is coordinate these different interests
greater. quite successfully.
There are essentially three reasons Should an economic policy-maker
for this. The first is that there are a great be allowed to act in his/her own interest
variety of different individuals and if he/she is honest about it? If the answer
groups of people, all of whom have very is yes, institutions are necessary which
different tastes and expectations in have a similar effect as the markets on
terms of economic policy. Thus people coordinating the interests of the eco-
who enjoy travelling or who have to nomic policy-makers with those of the
travel for business reasons want to have electorate. And there are such institu-
an airport close by which is well tions, the most important being the
appointed and has all the amenities. democratic system, the constitutional
Those, however, who live in direct state and the freedom of the media.
proximity of the airport without doing These taken together ensure that politi-
so much travelling are likely to be cians who continue to solve conflicting
opposed to such a development. By aims to their own benefit and against the
weighing up the interests of different interests of the population, will not
groups of people against each other, remain in office for long. This forces
economic policy-makers solve conflict- them to include the interests of the elec-
ing aims. torate in the pursuit of their own goals.
A second reason why economic pol- A third source of conflicting aims in
icy decisions are so beset by conflicting economic policy is somewhat more dif-
aims is that politicians also have their ficult to understand and arises from the
own interests. All too often their per- fact that economic decisions are gener-
sonal interests will not be in harmony ally based on expectations of human
with the interests of their constituen- behaviour. The following is a classical
cies. Since it is the former who are tak- example: since inflation is generally
ing the decisions in the end, they are regarded as undesirable, one might
clearly in a more powerful position, expect that governments will always do
which means that they can, if they are their best to keep the inflation rate low.
so inclined, take decisions which are But that is not necessarily the case.
useful to them but detrimental to soci- The reason for this has to do with
ety as a whole. For a long time, eco- the fact that there is often a time delay
nomic policy-makers were simply told before the electorate wake up to the fact
that their decisions must be based on that inflation is going up. When this
the common good and not on their happens, workers might forego higher
own interests. But even those who were wage demands in order to make up for
not completely cynical about human the losses they are incurring as a result
120 Conservatism

of inflationary prices. For business, this In general, the conflicting aims at

means that their profits are going up the economic policy level are more
while their labour costs remain static complex and more problematical than
due to the unchanged wages. Thus they are at the level of individual eco-
labour is becoming more profitable for nomic acting. This is only one of many
business, which means that they can reasons why an →institutional order policy
take on more workers. The result of which takes the desires of the citizens
inflation is therefore a decrease in into account, leaves as many decisions
unemployment! as possible to the citizens themselves.
Precisely this is the essence of what The background for this is nothing less
is possibly the most famous example of than the principle of subsidiarity, which
conflicting aims in economic policy – plays a central role in the concept of the
the one between the fight against infla- →social market economy.
tion on the one hand and →unemploy-
ment on the other. For a long time it was REFERENCES:

widely thought that unemployment BENDER, D./BERG, H./CASSEL, D., et al

could be effectively lowered through a (1999), Vahlens Kompendium der Wirtschafts-
politik, 2, 7th edition, Munich; FREY,
little more inflation.
In actual fact, this cannot work for
Demokratische Wirtschaftspolitik, 3rd edition,
long because the workers will obviously Munich.
soon become aware of the higher infla-
tion rate and will demand higher wages. Thomas Apolte
Then, after only a brief recovery phase,
unemployment will return to its previ-
ous level, while company →profits go
down again. What remains is inflation. Conservatism
Sometimes a government is content if
unemployment just goes down for a Colloquially, conservatism (or conserv-
short time – perhaps until after the next ativism) is defined as the characteristi-
election. Or a government is hoping just cally human attitude of preserving (tra-
to be able to cope with a threatening ditionalism), which sometimes has the
recession. It is for reasons such as these consequence of people stubbornly
that governments may not take the fight holding on to things which have
against inflation as seriously as they become outdated (reactionary think-
should for the sake of the electorate. ing).
Today the central banks in many There is no clear connection
countries are independent of the gov- between this fact and the conservatism
ernment. This is supposed to ensure which is a specific branch of the intel-
that their executives, who are mainly lectual and political history that links
responsible for the fight against infla- →liberalism and →socialism.
tion, are not tempted to buy better The intellectual development of
employment figures with inflation, conservatism starts with the critique of
only to find that the improvement does the Enlightenment and Rationalism to the
not last. Social Conservatism (G. Schmoller and
Conservatism 121

the Society for Social Policy, 1872), the ronmental responsibility, a focus on
‘conservative revolution’ and the cri- public welfare and political morality
tique of the Frankfurt School right up and a ‘constitutional patriotism’ (D.
to today’s cultural and social criticism. Sternberger).
The political line goes back to the This leads on to the ‘spiritual’ claim
debate on the French Revolution, of modern conservatism and its guiding
moves on to the establishment of the force for the future in an era of individ-
first conservative parties (England, ualistic hedonism (a life focused on
1832) and Bismarck’s social legislation personal pleasure), the materialistic
(1883 and after), and leads on to nation- dedication to consumption and the
al conservatism in the Weimar Republic immoderateness and permissiveness of
and the Christian Democratic and the media. In almost every aspect of life
Conservative parties of the German today a frightening lack of direction can
Federal Republic (Christian Democrat- be observed, without churches, schools
ic Union – CDU and Christian Social or political parties being considered as
Union – CSU). sources of meaning because they are
In each phase of its intellectual and themselves searching for guidance and
political development, conservatism has understanding, and have no answers to
emphasised equality and the need to the burning questions of the day. A loss
look ahead. But equality was balanced of authority results, which has a nega-
by liberty, responsibility and authority, tive effect even on politics, parties and
while rationalism was balanced by the the state.
organising forces of reason; evolution The ‘political’ claim results, on the
and tradition were set against revolu- one hand, from the increasingly pro-
tion; values, ethics and morality against gressive conservative outlook: princi-
indifference and arbitrariness; nation ples of responsibility such as provision
and state against anarchy and chaos; for the future (e.g. in the health serv-
confidence in the future and experience ice), sustainability (in ecology), fairness
against →constructivism and →interven- (regarding social reforms and rates of
tionism. Above all, conservatism of every pay) and subsidiarity (e.g. in the federal
shade is connected with a realistic view allocation of authority from the munic-
of people, as opposed to extremist ipalities to the federal states, and coun-
anthropological utopias which arise tries to the European Union) combine
from an exaggerated belief of people in the conserving and the creative strength
themselves and their capabilities. of conservatism.
Modern conservatism as a middle- On the other hand, the global aspect
of-the-road position is therefore no of political and economic relationships
longer conceivable without a Christian today requires a reliable understanding
or humanist anthropology (Doctrine of of the complex conditions of existence
Man; →Thielecke) and as the basis for a by thinking interdependently (mutual
critical awareness of history, a personal dependence; →Eucken), as well as the
ethical commitment to duty and protection of ‘→competition as a mecha-
responsibility, a sense of family and nism of discovery’ without ‘arrogance of
community, a love of nature and envi- knowledge’ (Friedrich August von
122 Constructivism

→Hayek), as an engine of social and eco- bureaucratic system, national planning

nomic development in a global world. and the practice of coercion, in order to
Today, such a programme can only realise policy goals and the endorse-
be mastered by reaching beyond the ment of collective solutions.
borders of political parties. This renew- The critics of constructivism argue
al of democracy and the →social market against this organising principle saying
economy through the spirit of conser- that:
vatism is indispensable in view of the
great challenges of the future. • the human faculties of understanding
are finite, which closely limits
REFERENCES: attempts at social planning;
OTTMANN, H. (1995), Konservatismus,
in: Staatslexikon, 3, pp. 636-640; • important social institutions are not
KALTENBRUNNER, G.-K. (1974), Die
purposefully created but are the
Herausforderung der Konservativen. Absage an
result of unplanned human interac-
Illusionen, Freiburg i. Br.; SCHRENCK-
NOTZING, C v. (ed) (1996), Encyclopaedia
tion and resist further development
of conservatism, Graz, Stuttgart. through intentional planning; and

Klaus Weigelt • attempts to make comprehensive

social planning a reality not only failed
to achieve the goal they had propagat-
ed but also through increasing restric-
Constructivism tions on individual freedom, fre-
quently ended in dictatorship.
The problem: Possibilities and
limitations of political acting in Unlike the constructivist school of
modern societies thought, its critics prefer competition to
The term ‘constructivism’ emerged planning and decentralisation to cen-
from the capitalism–→socialism debate tralisation, and they defend voluntary
of the last two centuries. There, those coordination against central control.
defending a liberal position raised the Among the critics of constructivism
objection against the suggestions of are the early members of the Scottish
mostly socialist authors in support of an school of moral philosophy, starting
engineered society, that societies cannot with Adam Smith (1723–1790) and
be planned, either as a whole or in David Hume (1711–1776), but also the
important parts. newer liberal authors such as Friedrich
The leanings which have been August von →Hayek (1899–1992), the
called constructivist are characterised continental neo-liberals and the con-
by a great deal of confidence in govern- temporary Anglo-Saxon classical liber-
ment behaviour, as for example when als. What they all have in common is
supplying important goods and services that they place a great deal of confi-
or through the solution of complex dence in liberal forms of human co-
social problems. Important tools of the existence and in the spontaneous forces
‘state of welfare provision’ are the of an open society.
Constructivism 123

In fact, the debate around construc- of the communist social ideal. Mao Tse-
tivism is not an ideological question but Tung, Pol Pot and numerous other dic-
a basic problem of the economy and tators later followed this example in the
social sciences. Does human society sense that they justified the elimination
allow itself to be manipulated and con- of entire classes and strata of society
trolled just like the physical world? In with the argument of wanting to create
other words, can the modern, technical a new society (Courtois).
and scientific way of thinking be trans-
ferred to social problems with equal The newer constructivism
success? Can, for example, the ‘visible The newer constructivism goes back to
hand’ of the state steer the economic the aftermath of the First World War
process in such a way that fluctuations (1914–1918) and the consequences of
and crises, the terror of all free market the world economic crisis (1929–1938).
societies, will soon be a thing of the Both events were interpreted as proof
past? that the old liberal order, which had
been ubiquitous throughout the
The older constructivism Western world during the 19th century,
There is a marked disparity of opinion had failed.
on the development of economic doc- The liberal social philosophy was
trine. Adam Smith and his intellectual replaced by the social or welfare state
successors delineate the sphere where and the belief in an all-encompassing,
social engineering is permissible very non-socialist economic order. The idea
closely, despite attributing a number of was to transform the social order of the
important public tasks to the state as time democratically, and on the basis of
political player. Early socialists such as the criteria of social equality and social
Auguste Comte (1798–1857) and Henri justice. This meant, for example, that
de Saint-Simon (1760– 1825), however, education and training policies were to
postulated that all the members of a create equal chances for all, that differ-
social system must pursue a ‘common ent levels of income were to be evened
goal’, which consists of a ‘plan for social out by progressive taxation, that the
progress’. This is, however, not same medical care for all would be
designed by those concerned but by guaranteed through compulsory insur-
scholars credited with the ability to pre- ance schemes, and that the dependence
dict the future development of society of the individual on family support was
accurately (Fehlbaum). to be replaced by governmental securi-
Finally, Karl Marx (1818–1883) was ty and welfare systems.
of the opinion that the historical col-
lapse of capitalism must inevitably lead On the critique of constructivism
to a ‘realm of freedom’ and thus to a The critique of both varieties of con-
new society. The failure of this progno- structivism tends to be based on princi-
sis after the socialist revolution in ples of value. The more radical models
Russia (1917) had the consequence that have been dismissed as utopian. The
the founders of the Soviet Union newer critique of constructivism, how-
decided on the forced implementation ever, takes a different path. It makes use
124 Constructivism

of epistemological and specialised • Political attempts to achieve the total

scientific objections to demonstrate the restructuring of an existing social
limitations of political acting in a free order encounter the difficulty that, in
society. each case, the society in its current
The liberal critique of construc- state was shaped by a long series of
tivism is based on the maxim ‘Where preceding events. They have left their
there is a will there is a way’. Social goals mark in traditional rules, behaviours
which rest on an unrealistic concept of and attitudes, of which the subjects
human nature cannot but fail. Those are either not or only partly conscious
who consider social engineering as the or aware (Hayek). Where rules are
way forward for social relationships are ‘discovered’, they are definitely not
opposed by the critics of constructivism comparable to the inflexible laws of
who see social processes in the light of natural science. This is also made evi-
evolution. This means that the most dent by the fact that until today, in the
important institutions of human civili- social realm, no ‘social laws’ compa-
sation – such as language, law, arts, rable to the laws of nature exist. All
science, ethics, customs, the division of attempts to establish them have
labour or the markets – are not the failed. In other words, the social
result of purposeful human planning sciences are not (or not yet?) in pos-
but grow out of human interactions session of a well-tested body of
with no special intention or plan. empirical knowledge that allows
Adam Smith’s concept of the ‘invis- them to make the sort of progress
ible hand’ and/or the idea of self-con- which modern technical knowledge
trol or self-organisation of social insti- manifests almost daily.
tutions clarify this world view. The
institutions mentioned here can neither • The ‘economy’ and the ‘society’ are
be consciously designed nor can they be extremely complex phenomena that
successfully developed further by con- cannot just be understood from the
scious design. In those areas where – for point of view of control (or at least
instance in art, science or ethics – polit- not sufficiently). The attempt, first in
ical control along the lines of precon- the Soviet Union and in many other
ceived political ideals is attempted, countries thereafter, to replace the
intellectual stagnation and the birth of traditional way of coordinating indi-
social illusions are the consequence. vidualised economic planning with
centrally managed markets, repre-
The evolutionary versus the static view sents a crucial large-scale experiment.
of society The expectation was that the out-
The older conceptualisations of a ‘new come would be a successfully func-
society’ are usually linked with the tioning economy, far superior to the
promise of a permanently valid and alleged ‘chaos of the markets’ in just
eternally fair social order. This gives about every respect. This experiment
them a static quality. However, four failed though, not least because of the
arguments can be derived from the evo- impossibility of even trying to cen-
lutionary view of social processes. trally coordinate the highly complex
Constructivism 125

network of input and output between new possibilities while correcting

enterprises in a satisfactory manner. mistakes along the way), which has
Constant interruptions to the pro- been an important mechanism driv-
duction process ‘due to lack of mate- ing human progress. The total col-
rials’ were a daily occurrence. It is lapse of 1989–1991, which put an end
therefore not surprising that where to these policies in the socialist coun-
central economic planning has been tries, is hardly surprising.
forced to survive to the present day
(Cuba, North Korea), the standard of • The hope that planning leads to suc-
living of large parts of the population cess and that social engineers can
has plummeted to below minimum create a better world is usually linked
subsistence levels. with the concept that there is an
enlightened elite, an avant-garde of
• Large-scale social experiments (such the proletariat, an infallible party or a
as the design of a new society) are leader loved by the people, able to
faced with the problem that control- point out the right way into the
ling the successes leading to the new future. None of the expectations that
society becomes a political issue. the older social planners cherished
Compared with more gradual and was as thoroughly disproved by expe-
limited reforms, which make it possi- rience as these. The more recent his-
ble for open societies to learn from tory of the Eastern and Southern dic-
mistakes (Popper), the plan to estab- tatorships shows unmistakably that
lish a completely new society is a the governing autocrats and their fol-
process which makes it uncommonly lowers generally make personal gain
difficult and even dangerous to point the first purpose of their rule. The
out mistakes or voice criticism. All promise of a higher standard of living
human institutions have shortcom- for the broad population is only rele-
ings. If these manifest themselves in vant if the security of their respective
the form of planning failure or the positions of power is at stake.
typical ‘economy of scarcity’, then one
must ask what the reasons are. Since Interventionism and constructivism
the revolutionary restructuring of In view of the fact that nearly all social-
existing social orders can be politically ist societies have collapsed in the past
justified only with the argument that two decades, the idea of wanting to
it will lead to a better world, system create a completely new society is today
failures have to be blamed on ‘ene- more or less extinct.
mies’ – be they class enemies, It has been widely accepted that one
deviants, dissidents or foreign agents. is dealing with a utopian concept here
If anyone makes the allegation that or – in terms of the present topic – that
the new system has inherent mechan- the necessary knowledge and means for
ical defects, he/she is automatically the implementation of a socialist cen-
suspected of being an enemy of the trally planned economy and society do
state. This eliminates the process of not exist. This is why it is relevant to
trial and error (the method of trying ask the question whether the same
126 Consumer policy

applies to the models of the welfare that, unlike liberal solutions, they either
state that have succeeded socialism. make it much harder or completely
They are characterised by the fact that impossible to try out alternatives, to
regulations are put in place in key areas experiment with new solutions and to
of human life which the individual citi- learn from experience. The only way to
zen can evade only with great difficulty, implement changes is through the slow
if at all. The national monopolies which political channels, with the conse-
have been created for this purpose to quence that the compromises that have
provide for retirement, health care, been achieved through the political
education or access to the job market process are what matters, rather than
are not only a danger to individual lib- the issue at stake. The critics of the con-
erty but, in terms of a critique of con- structivist doctrine therefore want the
structivism, must be seen as solutions state to extricate itself from many of the
that are not viable at the end of the day numerous commitments that it has
and that are not able to cope with the taken on in the course of the past eight
tasks they have been assigned. One decades.
example is the constructivist-collec-
tivist solution in terms of which →old- REFERENCES:

age pensions are organised in most wel- COURTOIS, S. (1998), Das Schwarzbuch des
fare states. This is one way of proving Kommunismus, Munich, Zurich; FEHL-
BAUM, R.-P. (1970), Saint-Simon and the
that, without fail, ‘century laws’ have to
Saint-Simonisten. Vom Laisser-Faire zur
be revised at short intervals.
Wirtschaftsplanung, Basel, Tübingen; HAYEK,
A plausible explanation why the so- F. A. v. (1970), Die Irrtümer des Konstruk-
called reforms have never succeeded is tivismus und die Grundlagen legitimer
the large number of unknown or gesellschaftlicher Gebilde, Munich, Salzburg; —
unforeseeable variables, which quickly (1971), Die Verfassung der Freiheit, Tübingen;
render every previous forecast obsolete. POPPER, K. R. (1992), Die offene Gesellschaft
The situation is similar for the health und ihre Feinde, 2 vols, 7th edition, Tübingen;
service, or the government unemploy- WATRIN, C (1979), Vom Wirtschaftsdenken
ment agencies, or the attempts to large- der Klassiker zu den neoliberalen
ly eliminate crises and fluctuations of Ordnungsvorstellungen, in: Linder, W./
the economy by following Keynes’s Heibling, H./Bütler, H., Liberalismus – nach
wie vor, Buchverlag der Neuen Zürcher
prescriptions. Even the public educa-
Zeitung, pp. 81-102; YERGIN, D/STANIS-
tion system – which is much more
LAW, J. (1999), Staat oder Markt. Die
transparent and which despite certain Schlüsselfrage unseres Jahrhunderts, Frankfurt/M.
moves towards liberalisation remains
subject to government dictates – does Christian Watrin
not come close to achieving the results
which elsewhere, in less regulated edu-
cation systems more exposed to compe-
tition, are the norm. Consumer policy
In terms of the critique of construc-
tivism, however, the main defect of Competition connects production and
constructivist solutions lies in the fact service with consumer interests. Three
Consumer policy 127

key arguments have long been held ply serve as an excuse for the govern-
against the theory of the sovereignty of ment to engage in interventions that are
the consumer. not in synch with the market. In the case
As well as in the past, these argu- of services pertaining to infrastructure,
ments are nowadays also frequently we need to examine which task the gov-
used to justify government interven- ernment should actually perform. It
tions today, above all, by the European may entail securing the supply, the
Commission: funding or, as the example of →education
funding demonstrates most clearly, the
• One has to be thoroughly informed about distribution.
the products on offer. Thanks to the The legal aspect of →supply and
internet, this condition is fulfilled. demand is the contract. The government
has the duty to guarantee the prerequi-
• Marketing, and in particular advertising, site ‘freedom of contract’. This also
manipulates the consumer. This thesis means that the consumer must be
has been disproved by social psychol- assured through a warranty that the
ogy. The theory of in-built obsoles- acquired products actually have the
cence is equally disprovable. promised characteristics. Sales contracts
have to be exclusively based on free dec-
• Markets only partly take consumer interests larations of intention. This applies to
into account and are not suited to the pro- hawkers just as much as for telesales.
vision of public utilities. The opening of Through product requirements, the
government-controlled markets like government has to protect the public
telecommunications to →competition against health risks of which they can-
shows that markets are better able to not be aware. This applies to materials
satisfy consumer interests than gov- in food which are harmful to health and
ernment control. to unsafe technical gadgets. This cannot
apply if health hazards are obvious, as
Nevertheless, governmental compe- they are for smoking. Product prohibi-
tition policies are not enough for con- tions or large compensation claims for
sumer interests to have the desired general risks that are commonsense are
effect. There are goods that we require opposed to consumer sovereignty. To
but that are not marketable. Here, the give consumers the chance to choose,
exclusion principle does not apply or they must be informed about the ingre-
only to a limited extent. The exclusion dients of foodstuffs and luxuries, the
principle means that when we use a material composition of goods, as well
commodity alone, we can exclude oth- as the resource consumption of techni-
ers from its use. It applies to cars and cal aggregates.
furniture but not to, for example, inter- Product information should
nal and external defence and flood pro- become a compulsory requirement for
tection. These goods are called ‘infra- suppliers. General consumer informa-
structure’. This term is more precise tion, quality information through com-
than the fuzzy term of ‘provision for parative goods testing and consumer
one’s daily existence’, which might sim- counselling, however, are useful and
128 Council of Experts

valuable services for the consumer – charge of economic policy, but also for
services that can be, and are, requested the general public, to form an opinion.
and offered in the markets. There is no The council produces annual and
reason for government intervention. special reports. The annual reports
If, despite a functional competitive examine different ways of fulfilling eco-
policy and sufficient consumer protec- nomic goals within the framework of a
tion laws, consumers are still unhappy market economy.
with their market position, they are From the point of view of the gen-
entitled to form an organisation. The eral economy, these goals are →price
consumer protection movement in the level stability, a high level of →employment
United States and the reactions of con- and a →balance of payments equilibrium
sumers in Germany to information combined with appropriate →growth.
about enterprises’ environmentally Besides that, the Council of Experts is
damaging or exploitative practices show supposed to identify erroneous trends
that consumers can be a force to be and to indicate ways of preventing or
reckoned with. eliminating them without, however,
Apart from the legal entitlement to recommending specific measures (rec-
information and protection which has ommendation prohibition).
already been mentioned, the most The council is exclusively bound by
effective consumer policy is an under- its contractual appointment. In its activ-
standing of economics. Consumers ities, it is independent of government
who understand how a market econo- directives. In this respect, it differs sig-
my works, automatically also know nificantly from advisory committees in
how they can exert pressure and how other countries (the Council of
they can enforce consumer interests. Economic Advisors in the United
States does its government’s ground-
REFERENCES: work). If the Council of Experts identi-
KUHLMANN, E. (1990), Verbraucherpolitik, fies erroneous trends in individual areas
Munich; HANSEN, U./ STAUSS, or if it is appointed by the federal gov-
B./RIEMER, M. (eds) (1982), Marketing und
ernment to do so, it may or it may be
Verbraucherpolitik, Stuttgart.
required to provide an additional report
Wolfgang Reeder
(special report).
During the early years of the coun-
cil’s existence, issues related to eco-
nomic stability were the priority. The
Council of Experts influence of →Keynesianism put special
emphasis on the question of how
The Council of Experts for the assess- macroeconomic goals could best be
ment of the economy was created by achieved. But when it became clear that
legislation in 1963. Its task is to draw up this was not the right political approach
regular reports on the state of the econ- for the solution of urgent macroeco-
omy and on developments in Germany nomic problems such as high →unem-
for the foreseeable future. This is meant ployment, questions of →institutional
to make it easier for the authorities in order policy became key. Thus in its 1996
Currency system and exchange rate regimes 129

annual report, the Council of Experts REFERENCES:

presented a comprehensive analysis, HOLZHEU, F. (1989), Grundsatzprobleme

pointing out weaknesses in crucial areas wirtschaftspolitischer Beratung am Beispiel 25
Jahre Sachverständigenrat zur Begutachtung der
of the social security system (the public
gesamtwirtschaftlichen Entwicklung, Wirtschafts-
→health insurance, →pension and unem-
wissenschaftliches Studium (WiSt), 5, pp. 230-
ployment insurance) and indicating possi- 237; (WiSt), SCHLECHT, O./ SUNTUM,
ble approaches to reform. This was a U. van (eds) (1995), 30 Jahre Sachverständigen-
stimulus for the political debate in these rat zur Begutachtung der gesamtwirtschaftlichen
areas. In its 2000 annual report, the cur- Entwicklung, Krefeld; SCHNEIDER, H. K.
rent reforms in the sphere of old-age (1994), Der Sachverständigenrat zur
provision underwent a critical analysis, Begutachtung der gesamtwirtschaftlichen
while reform strategies were suggested Entwicklung 1982-1992, in: Hasse, R.
before the background of imminent H./Molsberger, J./Watrin, C (ed), Ordnung in
reforms in the health system. In its Freiheit, Stuttgart, Jena, New York, pp. 169-
2003 annual report, the Council of 181; Internet: http://www.sachverstaendigenrat.
org (current affairs, report, service, organisa-
Experts supported the transition from
tion, legal code).
the synthetic to the dual income tax sys-
tem and a lowering of the tax rate. Martin Wolburg
Demands for reforms of the labour
market, however, are the central theme
of the reports.
The Council of Experts consists of Currency system and exchange
five members (‘five wise men’), who rate regimes
are appointed for five years by the
Federal President after nomination by In theory, exchange rate regimes can be
the federal government. Every year, the divided into two extremes: systems
term of office of one of the council with completely flexible exchange rates
members runs out, but reappointments and systems with completely fixed
are permissible. In order to preserve the exchange rates.
impartiality of the council, its members Complete flexibility means that
may not be part of the government, a there is no direct intervention from the
trade association or a workers’ or central banks in the price formation
employers’ organisation. process on the foreign exchange mar-
Each time a vacancy has to be filled, kets through buying and selling curren-
however, the trade unions and the cies. Then the exchange rates can form
employers can make use of their infor- freely according to →supply and demand
mal right to suggest a candidate, usually (‘floating’).
to guarantee the acceptance of the Completely fixed exchange rates
annual report by the interest groups. If result if the central banks keep the
the council does not succeed in agree- exchange rates constant at a certain level
ing on a certain question, individual through potentially unlimited buying
members are entitled to express their and selling of currencies, or if the rates
differing opinions in the report (minor- have been irrevocably fixed by political
ity votes). authorities.
130 Currency system and exchange rate regimes

Between these two extremes, there world monetary system since the
are systems with more or less flexible Second World War – the Bretton Woods
exchange rates: managed floating, fixed system, conceived in 1944 before col-
exchange rates with range and exchange lapsing in 1973 – was handled as an
rates with or without range with graded exchange rate system with graded flexi-
flexibility. Managed floating means that bility. The same basically applied to the
central banks influence flexible European Monetary System which was
exchange rates through interventions at in force from 1979 until the introduc-
their current level. tion of the European Monetary Union
In the case of fixed exchange rates on 1 January 1999. Otherwise, a global
with range, a parity level between two system of managed floating has been in
currencies is fixed, but the exchange existence since 1973.
rate can fluctuate around parity within a Nevertheless, a number of different
certain range either upward or down countries link their currency to an
(e.g. around ±2.25%). If the exchange anchor currency or a currency basket
rate reaches either the upper or lower with a fixed exchange rate. The strictest
limit of the range, the central bank is link is the currency board, where the
forced to intervene, but alternatively it central bank of the linked country will
can intervene – intra-marginally – arrange the national money supply
before a limit has been reached. exclusively on the basis of the stock of
An exchange rate system with grad- its anchor currency.
ed flexibility has a fixed parity level – A country that has several curren-
with or without range, but occasionally, cies co-existing, officially or unofficial-
due to new foreign exchange market ly, as legal tender with exchange rates
conditions, this is adjusted to a new that are flexible has a competitive mon-
level (revaluation or devaluation). etary system. A special development is
Closely related to this is the crawl- the parallel currency system, where
ing peg, where a country increases or there is only one competing currency.
decreases the exchange rate in instal- The currency of a country is called
ments – usually with warning: e.g. fully convertible when it is not subject
around 1% per month, taking into to any capital movement restrictions,
account the inflation gap between the i.e. if the currency can be imported and
two countries. Block floating is a com- exported without any restrictions by
bination of fixed and flexible exchange residents and foreigners.
rates, where several countries adopt a
fixed exchange rate while jointly prac- REFERENCES:

tising exchange rate flexibility in rela- BORCHERT, M. (1997), Außen-

tion to third currencies (‘currency wirtschaftslehre, 5th edition, Wiesbaden;
SCHÄFER, W. (1981), Währungen und
snake’). The flexibility of the block
Wechselkurse, Würzburg; MAENNIG, W./
exchange rate can also be limited to a
WILFLING, B. (1998), Außenwirtschaft.
certain range (‘snake in the tunnel’). Theorie und Politik, Munich.
While the gold standard (used most-
ly before the First World War) was real- Wolf Schäfer
ly a system of fixed exchange rates, the
Demographic development 131

Demographic development there are about 82 million people in

Germany today, there might be fewer
Facts than 80 million in about 2025 and only
The 20th century will be recorded as 70 to 75 million by 2050, depending on
the century with the largest population the estimated number of immigrants
increase in the history of mankind. If (→international migrations).
the world population around 1900
totalled just over 1.5 billion people, by Causes
1950 it had grown to 2.5 billion. By the Only two independent variables have a
end of the century, our planet was pop- direct impact on population develop-
ulated by more than 6 billion people. ment: birth rate (fertility) and number
What used to take several thousand of deaths (mortality). For the national
years in terms of the multiplication of population sizes the (international)
the population, took just a few decades migration balance has to be added as a
in the 20th century. third, unknown quantity.

Growing world population ... Many births and decreasing mortality outside
The population increase will continue Europe ...
in this century, too, but at a slower rate. The dynamic growth of the world pop-
According to United Nations (UN) ulation in the 20th century can basical-
estimates, there could be in excess of 8 ly be attributed to an utterly simple
billion people in 2030, and this could equation: the number of births far
have increased to approximately 9 bil- exceeded the number of deaths. The
lion by 2050. This figure is a far cry question that remains is: what led to
from the prophesies of doom which this gap between fertility and mortality?
had predicted a population explosion. Here, the first thing to consider is
But it nevertheless represents an enor- demographic transformation. Thus the
mous challenge, because 3 billion more mortality decrease is mainly seen as a
people will demand more water, food, consequence of improved medical care,
energy and raw materials. And yet, hygiene and economic living conditions
decreasing natural resources and in Africa, Asia and Latin America, fol-
increasing ecological problems are less lowed only much later by a slowing
the result of the global population birth rate. This caused the relatively
growth than the consequence of indi- great differences between births and
vidual production and consumer deaths.
behaviour. The high birth rates of the recent
past in Africa, Asia and Latin America
... shrinking population in Europe have led to an age distribution with a
In Germany and the other Organisation relatively large proportion of young
for Economic Cooperation and women in their reproductive years or
Development countries in Europe and growing into them. Even if from today
North America, population growth has onwards, hypothetically and for what-
ceased to be an issue. On the contrary, a ever reasons, fertility were to shrink sig-
population decrease is imminent. If nificantly (e.g. to two children per fam-
132 Demographic development

ily), the populations of these regions average giving birth to 133 children –
would still keep on growing for a very one half of the number one generation
long time. These dynamics inherent in earlier.
population trends will continue to gen- The net reproduction rate (NRR)
erate a strongly positive growth rate of measures the number of girls born
the population for several decades to alive, to whom 100 women of the same
come. generation have given birth. A NRR of
100 means that the status of a popula-
... strong decline of the birth-rate and growing tion remains constant, because a gener-
life expectancy in Europe ation of women has just been ‘replaced’
Since the mid-1960s, the birth rate in by the daughters to whom they gave
the industrialised states has been birth. A NRR <100 (>100) means that
declining. Germany is no exception. a population shrinks (rises). A NRR of
Since the peak of the baby boom in the 70, for example, means that within one
middle of the 1960s, fertility has generation, a population has shrunk by
declined markedly. about 30%.
In 1965, in the course of their lives, For Germany, in 1960, the NRR
100 women living in Germany gave was 110; in 1975 it was 68; in 1990 70;
birth to an average of about 250 chil- in 1998 it was about 66; and in 2005 it
dren. Within a decade (i.e. by 1975) the was 64, which means that within the
birth rate went down to fewer than 150 next generation the German population
children. Since that time, this number will shrink by approximately one third.
has continued to decrease – rather dra- The reasons for the declining birth
matically after the German →reunifica- rate are not found in any singular key
tion because, particularly in the new event. This means that the thesis of the
German states, the desire to have chil- ‘pill kink’ is untenable. While contra-
dren went into a notable decline. In ception does lead to a decrease in
1998 in Germany, 100 women were on unwanted births, its availability repre-

Average life expectancy in Germany, 1871–2005

Demographic development 133

sents only an option and not the cause Europe is generating enormous prob-
of the declining birth rate. It is not the lems which result from the changed age
availability of contraception which is configuration of the population.
crucial, but the intention of using it. Children are decreasing in number,
More relevant for the explanation of while the number of elderly and old
a declining birth rate might be the Germans, and other Europeans, is ris-
change of function of the family, the ing. The result is an ageing German and
new way women see their role (eman- European population.
cipation) or the individualisation of If today still more than half of the
society. German population are less than 40
Today, the desire to have children is years old, by 2050 this median age will
more strongly linked to the individual have risen by about 10 years. By the
interests of both partners. The fact that middle of the century, half of all people
children are ‘expensive’, reinforces the living in Germany will be older than 50.
trend towards small and micro-families. The ageing of a society can be clear-
And here the problem is not only direct ly illustrated with the so-called age quo-
expenditure, but also indirect (time) tient. The age quotient (AQ) gives the
expenditure, which means that children proportion of pensioners at the age of
stand in the way of professional (career) 65 or older to the employable popula-
opportunities being realised. tion between 15 and 64.
In Germany, the 20th century gave An AQ of 0.5 means that there are
rise to a marked increase in life two employable people per pensioner,
expectancy (see figure). In 1871, at birth, or twice as many working people as
life expectancy was 36 years for boys pensioners. A rising AQ shows that for
and 38 years for girls. By 1910, it had each pensioner, there are fewer and
climbed to 45 years for boys and 48 fewer employable people.
years for girls. Someone who was born With an AQ of one, there are as
in 1998 can expect to reach the age of 74 many pensioners as employed people.
for men or over 80 for women, and in For Germany the AQ has the following
2005 life expectancy was 76.7 for boys values: 1991: 0.22; 2000: 0.23; 2020:
and 82 for girls. Mortality, particularly 0.32; 2040: 0.48. This means that
during the first year of life and between instead of the four working Germans
the ages of 60 and 80, has decreased per retired citizen, in 40 years there will
considerably. According to present-day only be two.
medical knowledge, a further mortality
decrease this century will proceed at a Macroeconomic consequences of the
much slower pace. The formula for demographic ageing of Europe
eternal life has still not been found, Hardly any sphere of the modern serv-
which means that even in the 20th cen- ice society will be spared the conse-
tury the maximum life span could only quences of ageing. In the first place,
be extended slightly. there will be a change in the supply of
labour. A dwindling number of young
Consequences workers will be available to replace the
The contraction of the population in senior workers preparing to leave the
134 Demographic development

production process. Today’s problem of pension pay-outs for those who are no
→unemployment is partly palliated by longer working. In simplified form, the
demographic processes. It cannot be following pension formula applies: the
excluded that even a lack of younger, sum of the contributions (= number of
efficient workers might arise, which payments x by the average rate of con-
could then be remedied in different tribution x by the average income)
ways, for example: must correspond to the sum of the dis-
bursements (= number of pensioners x
• making use of resources which are by the average pension category, x by
lying dormant today (above all the average last earned income).
women and individuals in early Pay-as-you-go based systems are
retirement); rather susceptible to changes in the age
structure of a population. The German
• making retirement age flexible, also population is living to an older age,
upwards (e.g. later retirement in line which in terms of the pension formula
with a higher life expectancy which means that while the number of con-
continues to rise); tributors is declining, there is also a
growing number of people entitled to a
• higher levels of immigration (particu- pension. Therefore, either the average
larly of younger qualified workers); rates of contribution must be increased
and or the average pension disbursements
will have to be reduced (a third solution
• accelerated (labour-saving) progress would be the uneven distribution of
of productivity. future productivity advances).
It seems to be becoming increasing-
In short, particularly the demo- ly unavoidable to supplement the long-
graphic development will make it nec- standing pension insurance scheme
essary for more women and more peo- with an additional second column
ple over retiring age to be included as a (legal, national, mandatory) based on
resource of labour and know-how. individual provisions (e.g. private sav-
How safe are retirement pensions? Immigration represents another
In the medium term the ageing potential solution whose effect, howev-
(German) society will be confronted er, tends to be overrated. Depending on
with problems regarding →pensions. In the forecast, annual immigration ratios
Germany, as in almost all other of several hundreds of thousands of
European countries, pension systems people would be necessary in order to
are largely based on a national system of be able to keep the AQ at today’s level.
statutory insurance contributions, Furthermore, the immigration effects
organised on a pay-as-you-go basis are only temporary, since the immi-
(current disbursement). grants too will sooner or later have
In a distribution system, the regular claims against the pension system
contributions made by the active work- which they have helped to finance
force to a retirement fund cover the (→old age pensions).
Deregulation 135

REFERENCES: result is economic sclerosis and ineffi-

BUNDESINSTITUT FÜR BEVÖLK- ciencies, which are detrimental to pros-
ERUNGSFORSCHUNG (BiB) beim sta- perity, growth and unemployment.
tistischen Bundesamt in Wiesbaden,
Until the 1990s, half of the German
Materialien zur Bevölkerungswissenschaft, (cur-
economy, particularly in the service
SAMT, Statistisches Jahrbuch für Deutschland
industries, was more or less strictly reg-
(annually), Wiesbaden; WORLD BANK, ulated. This also applies to the job mar-
Weltentwicklungsbericht, (annually). ket even today (collective blanket wage
agreements, excessive worker protec-
Thomas Straubhaar tion laws, far-reaching worker →co-
determination regulations in companies)
with correspondingly severe disrup-
tions and high levels of long-term
Deregulation unemployment as a consequence.
In recent years, however, regula-
Deregulation is about the politics of tions have been phased out, usually in
opening markets. It is instrumental in connection with the completion of the
the removal of regulations, which the European domestic market. The
state or, with its agreement, federations telecommunications, air transport and
and professional organisations have electric power industries are the most
introduced in favour of certain group- prominent examples.
ings of workers – for example, limita- Deregulation is not always about
tions on market entry and exit (→open doing away with existing regulations
markets), price and quantity regulations entirely; at times it is sufficient to soft-
and compelling contract designs. In en or modify them. But regulations
addition, there are specifically targeted which have become superfluous or
exemptions from the general trust pro- always were superfluous must be abol-
hibition and special privileges for ished. This also applies in cases where
→public enterprises. the purpose of a regulation clearly does
This sort of targeted interference not justify its cost to the economy as a
with the freedom of trade is only eco- whole, especially if allocation distor-
nomically justified in a case of market tions have been the result.
or competition failure. This can, among In macroeconomic terms, deregula-
other things, happen in the case of tion promises five lasting advantages:
external effects of production and in
consumption, in natural monopolies • As the popular saying goes, competi-
and in cases of information asymme- tion promotes business. A producer
tries (unequal status of information) who wants to make profits will have
between contracting parties. In these to try hard to boost the productivity
cases the situation would, without of business while keeping costs and
adjustment, get out of hand. prices low, as well as bringing attrac-
In reality, market anomalies of this tive goods and services to the market.
kind tend to be rare and a surplus of
regulations is more of a problem. The • More room for profitable economic
136 Deregulation

activity leads to higher productivity, The more stable the foundations on

and more productivity results in a which they are built, the more lasting
greater demand for labour. the positive effects of the policy of
deregulation will be. Obviously, there
• Flexible markets facilitate the adjust- will also be negative effects here and
ment process for both industry and there. Basically, there will be disadvan-
the workforce to the age of →globali- tages for those who were hitherto pro-
sation and the internet, and to the pro- tected against →competition by special
found structural economic changes it regulations. But owing to the intensi-
brings. A brisk structural change pro- fied macroeconomic dynamics which a
motes growth and favours employ- comprehensive deregulation liberates,
ment. these disadvantages will mostly be tem-
• The positive employment effects are For maximum effectiveness, dereg-
reinforced by measures which ulation requires safeguards in three
increase the flexibility of the goods areas:
markets, if there is a liberalisation of
the labour market too. This means • A safeguard is needed in respect of
that the parties to a wage agreement the simplification and acceleration of
not only have to pay more attention legal and administrative authorisation
to the remuneration agreement itself, procedures which are relevant for
but also to the other conditions of investments and business start-ups.
employment. Wage levels need to be
in line with market conditions and • It should always be checked whether
they must also be sufficiently differ- an existing law, a legal requirement or
entiated in terms of regional differ- an administrative regulation should
ences and different levels of qualifica- either remain in force or be phased
tion. This creates an environment out. An over-abundance of regula-
where obstacles to employment for tions is extremely counterproductive
job-seekers are reduced and where it for an economy and tempts people to
becomes less rewarding for them to break the law.
resort to the →shadow economy.
• Deregulation must be based on the
• It means that the internationally consistent application of the competi-
mobile factors of production can tion protection laws in order to pre-
count on more attractive returns, vent both cartel agreements among
with the result that the entire country those who were previously regulated,
becomes more desirable as a location and the abuse of power by the suppli-
for both investment and industry. er to the detriment of the consumer.
Capital equipment and skilled labour This is why, for example, in the case
flow into the country instead of leav- of the telecommunications deregula-
ing it, boosting its economy as a tion it became necessary to regulate
whole and expanding its productive the former monopoly in an asymmet-
capacity. rical fashion in its various different
Development aid, development policy 137

areas of application (tariffs for fixed- nition primarily refers to the aspect of
line telephone calls; becoming a satisfaction of needs.
Telekom subscriber), in order first to The standard of living, i.e. the
kick-start and then step up competi- opportunities people have for satisfying
tion through additional service their needs, are very much smaller in
providers. These regulations can be developing countries than in industri-
phased out as soon as there is enough alised countries. The per capita income
competition in the end-consumer level is usually selected as an indicator
markets, something which should be of the standard of living.
determined by an impartial authority Many people in developing coun-
such as the →Federal Cartel Office in tries live in abject poverty and are not
Germany. able, with their available per capita
income, to satisfy their basic needs.
Constitutive regulations are not part Basic needs are things like sufficient
of deregulation. These apply to every- nutrition, shelter and clothing, as well
one and safeguard – particularly in the as access to education and public health
context of civil law – the functionality services, drinking water and public
of the →social market economy. transport.
The most important development
REFERENCES: policy goal is to increase the
DEREGULIERUNGSKOMMISSION standard of living in developing coun-
(1991), Marktöffnung und Wettbewerb: Berichte tries, particularly for the poor popula-
1990 und 1991, Stuttgart; BOSS, A./LAAS- tion groups. In addition, development
ER, C.-F./ SCHATZ, K.-W. et al. (1996),
policy measures have economic, politi-
Deregulierung in Deutschland: Eine empirische
cal and social aims.
Analyse, Tübingen; DONGES, J. B. (1997),
Die Wirtschaftspolitik im Spannungsfeld
From an economic perspective,
von Regulierung und Deregulierung, in: development policies are focused on
Ordo-Jahrbuch für die Ordnung von Wirtschaft three targets: the most basic prerequi-
und Gesellschaft, Vol. 48, pp. 201-217 site for a better standard of living is an
improved supply of goods thanks to
Juergen B. Donges economic →growth (growth target).
Second, improved goods distribution in
order to ensure the maximum satisfac-
Development aid, development tion of needs for the population. This
policy requires the reduction of abject poverty
and a diminished income concentration
The term ‘development policy’ covers in nearly all developing countries (dis-
all measures that are implemented to tribution target). Third, a permanently
improve the level of development of improved standard of living presuppos-
underdeveloped nations. If the level of es that the environmental effects of
development of a country is regarded as human activities are taken into account.
being intolerably far behind that of the This means that the development poli-
industrialised nations, it is generally cy agenda must include an →environ-
called a developing country. This defi- mental target.
138 Development aid, development policy

For the implementation of the tar- takes the form of soft loans. Personal
gets listed here, a stable political, social cooperation offers →vocational training
and economic framework is indispensa- and further education to produce highly
ble. In many developing countries, the skilled staff in leading positions who are
absence of such a framework is the expected to bring about a higher educa-
greatest obstacle to development. Apart tional standard in developing countries.
from the establishment of stable basic Technical cooperation offers tech-
conditions, the main focal points of nologies as well as organisational and
economic development policy are the economic know-how and skills to
promotion of real capital formation, developing countries. All three forms of
better education and health conditions cooperation complement one another.
of the entire population, the develop- Often, development cooperation
ment of the infrastructure, as well as the also makes a difference between pro-
establishment of important institutions gramme and project aid. While project
(among other things, financial institu- aid is directly aimed at certain activities
tions and social security systems). (e.g. the construction of roads), pro-
While development policy refers to gramme aid is intended for the support
the full range of measures which fur- of specific areas and macroeconomic
ther the development of a country, the reform programmes. How the means
term development assistance implies are used is up to the target country in
measures that a foreign country takes to this case, but their disbursement is nor-
support the development process of mally tied to certain conditions (usually
underdeveloped countries and which the implementation of reforms) (condi-
would not be thinkable in their specific tionality).
form without the concept of aid (e.g. The best-known form of pro-
interest-free credit). gramme assistance comes in the form
Nowadays, development aid tends of the structural adjustment pro-
to be called development cooperation, grammes of the IMF and the World
and it is divided in various ways. Bank. Here, a country, in agreement
Depending on the nature and origin of with the respective donor institution,
the aid, a distinction is made between decides on a free market reform pro-
bilateral and multilateral cooperation. gramme whose implementation is sup-
In bilateral cooperation, aid comes from ported by structural adjustment loans.
an individual donor country. In multi-
lateral cooperation, it comes from a REFERENCES:

group of donor countries or →interna- BMZ (2000), Medienhandbuch Entwicklungs-

tional organisations (the World Bank, politik; HEMMER, H.-R. (1988),
Wirtschaftsprobleme der Entwicklungsländer;
International Monetary Fund – IMF).
WORLD BANK, Weltentwicklungsbericht; see
At an operational level, one differ-
also: http://www.worldbank.org.
entiates between financial, personal and
technical cooperation. Regarding finan- Hans-Rimbert Hemmer
cial cooperation, capital is put at the dis-
posal of developing countries under
special conditions. This capital usually
Distribution 139

Distribution distribution’. It implies that differences

in service quality justify unequal income
The distribution of →income among levels among people.
people always brings up the question of The remuneration, which is left to
what is ‘fair’ distribution. What exactly the market forces, also liberates per-
constitutes fair distribution cannot be formance incentives which drive eco-
precisely determined either through nomic →growth and technical progress.
science or politics. Criteria and objec- If a significant proportion of the profit
tives are required. Where they come that can be made in the free market is
from and how they can be explained obviated through government interven-
depends on the basic political structure tion or the income-earner is subse-
of the society concerned. In Germany, a quently deprived of it through taxes, the
crucial part of the design is the →social personal desire to perform is weakened.
market economy. The consequences are misdirected capi-
In the →market economy, the rela- tal, for example, to a foreign country or
tionship between →supply and demand into illicit work, causing lost productiv-
determines the price of labour and the ity and weakening economic growth.
employment of capital, and thus the The adherence to the efficiency princi-
personal distribution of work and capi- ple requires that all market participants
tal income. This is why the →achieve- are assured of equal opportunities.
ment principle is the most important Every human being has to be given the
yardstick for income distribution. chance to develop the talents which
This principle states that the total secure him/her an →income in the job
income of the economy has to be divid- market, through appropriate training.
ed among the economic agents in pro- Besides, a reciprocal effect results from
portion to the personal performance the fair distribution of capital assets.
which they have contributed by However, even if these standards are
employing capital and work. Everyone laid down by the national →institutional
is to be remunerated in accordance with order policy, there will always be people
their achievement. This is the ‘justice of who are not able to earn a satisfactory

Average gross private household income in Germany in 2003 (s
earned by assets, employment and public transfer payments
140 Distribution

living through their own individual is supposed to make a certain degree of

achievements. A person’s earning participation in a social life possible.
power may be limited by an inability to Opinions regarding the monetary value
work or by illness or incapacity, or it of the subsistence level differ substan-
may not be able to be realised due to tially. The efficiency principle requires
undeserved →unemployment. There is that the guaranteed minimum income
therefore political consensus on the must not undermine the desire to per-
need for everyone to be guaranteed a form in the sense that it is no longer
minimum income. worthwhile to offer one’s earning
The principle of performance is capacity on the labour market.
thus complemented by the right to a The right to a subsistence level is
living wage. This right is an expression extended by the ‘principle of need’,
of the equality principle, which postu- which means that the distribution of
lates that all human beings are equal. income must suit the unequal needs of
However, a rigorous application of this the economic agents. It is impossible to
principle in the form of an absolutely reach a universal agreement on this
equal income distribution would elimi- issue. An assessment is possible only
nate the principle of efficiency and through dealing with the concrete
would lower the welfare of all econom- problems which approach subsistence
ic subjects drastically. level. A case in point is increased need
In trying to determine the subsis- due to family members. What propor-
tence level, a distinction is made tion of this has to be borne by society is
between the physical and the cultural a very controversial matter.
component. The physical subsistence The principle of need interpreted in
level covers all material goods which are this way, and the right to a subsistence
necessary for survival (food, clothes, level, require an income distribution
shelter). The cultural subsistence level policy which takes effect via income tax

Average net income of the household’s main income recipient for

several job positions in Germany in 2003
Economic ethics 141

and income transfers. These govern- sions and benefits from a minority – be
ment distribution procedures turn the they individuals or →enterprises – can
primary distribution which results from seriously prejudice their competitive
the achievement principle into a sec- market positions, even to the point
ondary distribution. This is an expres- where the actors concerned are forced
sion of the solidarity aspect of the social out of the market and profits dwindle
market economy. for as long as the increased costs are not
When assessing its redistribution offset by benefits which redress the bal-
policies, the →social market economy ance. Under competitive conditions, it
should give preference to the achieve- therefore frequently seems as though
ment principle for the sake of long- morals and self-interest are mutually
term prosperity. exclusive.
Seen in this light, it seems justified
REFERENCES: to postulate that untamed self-interest
GAHLEN, B. et al (ed) (1998), Verteilungs- should be placed under moral restraint.
probleme der Gegenwart, Tübingen; KÜLP, B. This line of argument basically means
(1994), Verteilung. Theorie und Politik, that diagnosis and treatment are both
focused on the goodwill of the eco-
Jürgen Siebke
nomic actors: the cause of this predica-
ment is seen to be moral decay, egoism
and greed, while the suggested solution
Economic ethics is a change of heart and a moral about-
turn. The key problem here – and the
Economic ethics are concerned with one which seemingly requires correc-
the question of where moral standards tion – relates to human preferences.
and ideals should have their place under An alternative possible approach
contemporary conditions in an increas- would be to direct one’s attention not
ingly global competitive market econo- so much to the goodwill, but more to
my. the ability of the actors. The issue
It is obvious that the problems that would then no longer be the actors’
economic ethics primarily deal with, preferences but the restrictions to their
such as environmental pollution, cor- acting, i.e. competitive incentives which
ruption, unemployment or poverty, prevent moral behaviour despite one’s
cannot be solved without going beyond better knowledge.
the economic sector. Therefore, more This alternative view of the problem
recent concepts have expanded the goes back a long way. Reference can be
term, interpreting economic ethics as made to Adam Smith, who was a moral
economic moral theory, and thereby philosopher and also the founder of
presupposing a methodical understand- economics as a scientific discipline. His
ing of economics as the general (ration- most significant insight concerns the
al choice) analysis of social interactions uncoupling of the motivation for our
and institutions. actions from their results under com-
The basic problem of economic petitive conditions. This has been classi-
ethics is that morally motivated conces- cally formulated as follows: ‘It is not the
142 Economic ethics

goodwill of the butcher, the brewer or antee of the right to conclude contracts,
the baker which provides us with the institutions which assist in the imple-
food we need, but the fact that they look mentation of contracts, laws against
after their own interests.’ In other restrictive trade, regulations for liabili-
words: the prosperity of all does not ties, etc. Since morally undesirable situ-
depend on the goodwill of individuals. ations are not blamed on moral defects
From this perspective, the motiva- of the participants but on functional
tion for a specific action – i.e. the degree deficits of the system, necessary
of the actors’ self-interest – is less sig- changes have to start with a reform of
nificant than the social compatibility of the system, its incentives and their
the practical expression of this self- effects. Seen in this light, economic
interest or, in other words, to what ethics can also be defined as institution-
extent it benefits society. If a distinction al ethics or as motivational ethics.
is made between the institutional This concept of economic ethics
framework within which our actions takes into account the changes which
take place and the actions themselves – have taken place in the course of the
or, in sportsman’s language, the rules of evolutionary process and which com-
the game and the actual moves – this prise the functional differentiation of
becomes instantly plausible. society into social subsystems. What
In an economy where the actors used to be ‘housekeeping’ turned into a
make profit the aim of their competitive modern national economy and today
moves, it depends on the rules whether even into a world economy. It is charac-
the pursuit of self-interest is to the detri- terised by a high degree of division of
ment of others or to their advantage. labour, by anonymous commercial
The fundamental thesis of economic transactions, by lengthy production
ethics is, therefore: under today’s com- processes under the participation of a
petitive conditions, the institutional large number of actors, increasing
framework has been accorded the posi- interdependence and high complexity.
tion of moral principles. Therefore, the success of a modern
The pronounced emphasis on rules economy does not depend on any indi-
which apply in equal measure to all vidual, any single enterprise or any
competitors is due to the fact that, from country in isolation, which means that
the point of view of competition, the no one (in particular) can be (made)
consequences of moral concessions responsible for it.
must be at least neutral, i.e. they must The resulting major socio-econom-
not create a competitive disadvantage. ic problem of today is the question of
Only in this way can the moral behav- how actions can be socially controlled.
iour of a few be protected from In everyday life, and applied to small,
exploitation by competitors. These manageable groups, informal control
rules or institutions – which are indis- through praise and criticism is possible
pensable if everybody is to be given the and often also sufficient to give moral
chance to benefit from the advantages standards validity.
of competition – include, for example, In large anonymous groups, such as
the right to private property, the guar- today’s global society, it has become
Economic orders: Theory and implementation 143

almost impossible and/or very expensive are currently only at a formative stage.
to monitor the behaviour of single indi- But enterprises such as ‘corporate citi-
viduals. This is why the method of con- zens’, just like citizens’ self-help organ-
trol – which is basically indispensable – isations, are increasingly able to influ-
has to be modified: in principle, control ence the basic regulatory conditions of
in a modern society has to take the form institutions, both at national and inter-
of self-control that does not run count- national levels. This means that alterna-
er to the personal interests which, tive models of economic ethics will
through institutionalised incentives, have to prove that they can make a
have been made socially compatible. meaningful contribution by initiating
This transformation of social con- constructive dialogue as well as process-
trol has great potential for individual es of learning between the actors. At the
autonomy and emancipation, but also end of the day, even at the global level
for social productivity and civilisation. we have to make a joint decision on the
It follows from these considerations rules according to which we want to
that economic ethics also give an indi- play.
cation to what extent alternative regula-
tory rules might be suitable in the set- REFERENCES:

ting of moral standards and ideals under HOMANN, K. (1994/2002), Ethik und
competitive conditions. In this regard, Ökonomik: Zur Theoriestrategie der
voluntary individual and collective Wirtschaftsethik, in: Homann, K./Lütge, C.
(ed), Vorteile und Anreise, Tübingen, pp. 45-
commitments have a special place
66; — (2001/2002), Ökonomik: Fortsetzung
because they produce the sorts of reli-
der Ethik mit anderen Mitteln, in:
able expectations of mutual behaviour Homann, K./Lütge, C. (Ed.), Vorteile und
that are needed in a productive cooper- Anreise, Tübingen, pp. 243-266; —
ation. Such rules gain universal validity /SUCHANEK, A. (2000), Ökonomik: Eine
only if the individual can be (sufficient- Einführung, Tübingen; SMITH, A.
ly) sure that the others will equally (1776/1994), An Inquiry into the Nature and
observe these rules. Yet this can be Causes of the Wealth of Nations, edited, with an
expected only if, when everybody obeys introduction, notes, summary, and expand-
the rules, the benefit for each individual ed index by E. Cannan, New York, Toronto;
is greater than a breach (violation of the SUCHANEK, A. (2001), Ökonomische
rules), and if as a result everybody Ethik, Tübingen.
agrees to the enforcement of the rules:
Ingo Pies
rules either have to be, or they have to
Alexandra von Winning
be made, self-enforcing.
Due to the increasing complexity of
modern societies, and particularly in
the case of transnational problems, the Economic orders: Theory
process of the establishment of rules and implementation
can no longer be left to the individual
countries alone. However, political The terms, types and functions of eco-
structures that make the participation of nomic orders are most easily under-
non-governmental agencies possible stood as analogous to a game. All games,
144 Economic orders: Theory and implementation

such as the common ball or card games, Beyond that, there is system-specif-
are based on rules which have a crucial ic interdependence between the differ-
effect on the game itself and indirectly ent sub-orders, i.e. between the coordi-
on the result of the game. In the econ- nating, property, business, financial and
omy, the set of game rules finds its social orders. These mutual dependen-
counterpart in the order. Accordingly, cies can be understood only with the
the economic order covers the whole of necessary knowledge of economic
the officially determined rules as well as orders and how they work. Economic
those which have been spontaneously management was, and is always, in need
agreed to by the market participants. of and dependent on an order (set of
The officially determined rules con- rules and institutions).
sist mainly of regulations from public Of course, there are different ways
or private law that are relevant to the of shaping an economic order, which
economy. Examples are the fundamen- raises the issue of their diverse forms.
tal constitutional laws such as adminis- In this respect, it is important to con-
trative, financial and tax laws, as well as sider the basic problem of economic
social law with its different subdivi- management whereby the scarcity of
sions. In the case of private law (i.e. goods is ever present.
property, contract, business, labour, One of the basic economic princi-
patent or copyright law), the economic ples is that division of labour and spe-
aspect is even more pronounced. cialisation are indispensable for eco-
Finally, the officially determined nomic growth. But as the division and
rules also include the binding agree- specialisation of work becomes ever
ments and statutes that associations and more sophisticated, economic processes
private organisations adopt. These are becoming more confusing and
binding rules, in their entirety, consti- more intertwined. It also becomes
tute the economic constitution as the more difficult to calculate, control and
underlying foundation of the economic distribute goods – bearing in mind
order. The economic constitution is an scarcity and need.
illustration of the interdependence of So far, economists know only two
the economic order with the political ways of tackling the problem of eco-
and legal orders. nomic control and allocation: the
Besides that, economic behaviour, →market economy and a centrally planned
and consequently economic processes, economy (→socialism/planned economy).
are also determined by moral and ethi- In a market economy, the economic
cal rules (usually unwritten), which processes are independently planned by
have developed over time. In modern individuals or economic units, while
terminology, these rules are also called being coordinated via markets and
informal institutions. They illustrate prices. The market economy therefore
the interdependence between the eco- represents a system of decentralised
nomic order and the respective culture. planning and coordination of the eco-
Although not usually recognised, each nomic processes where the degree of
economic order, therefore, is also cul- scarcity of goods is expressed in market
ture specific. prices.
Economic orders: Theory and implementation 145

In a centrally planned economy, state, which accepts private property

however, the economic processes are and a market economy, but at the same
planned by one central government time also demands comprehensive gov-
authority and coordinated through a ernment responsibilities regarding the
national plan, whereby the degree of regulation and correction of the market
scarcity is determined by means of a process in favour of social justice and
centrally imposed accounting system. security.
The socialist economies of the The concept of the →social market
recent past are clear proof that a central- economy lies between these positions,
ly planned economy is always coupled which is why some of its intellectual
with a state-planned economy. There- fathers started to refer to it as the →third
fore, individual economic freedom is way. The aim of the social market econ-
not an element of this system. omy is an appropriate synthesis
Socialism failed because of economic between the liberty of the market and
deficits and the lack of freedom in the →social balancing based on government
order, while the market economy has interventions. This means that a bal-
proved its superiority in the economic ance must be found between a liberal
orders’ competition. and a productive – as well as a socially
At the beginning of the 21th centu- fair – economic order.
ry, focus is on the global competition The market and private initiative are
between different market systems. It is seen as indispensable guarantors for
true that all market economies are basi- economic prosperity and the individual
cally barter economies at a more sophis- right to liberty.
ticated level, but it is also true that there Decentralised planning with private
are different concepts which corre- accountability and a market-related bal-
spond with different actual economic ance between supply and demand, pro-
models (→types of market economy, →sys- tect the freedom to consume, free com-
tems competition). This is due to the fact petition and the freedom of occupation,
that basic socio-political objectives such trade, property, contract and associa-
as individual liberty and →social justice tion.
are not always accorded the same value, In a market economy, competition
and this is in turn connected to the is seen as the most effective means of
institutional order policy question of keeping economic power in check. This
what the relationship should be is why the governmental competition
between private responsibility and gov- policy is given priority within the insti-
ernment intervention. tutional order policy instruments. The
On the one side is the liberal con- desired social balancing is aimed at the
cept, which postulates the values of →labour market order and the →social sys-
individual liberty and direct responsi- tem, as well as using a number of socio-
bility, private property, free enterprise political measures. The social market
and →competition, together with legal economy generates a positive result in
protection, performance and a minimal Germany while its adjustment to the
welfare state. The other side is repre- ongoing challenges remains a constant
sented by the concept of the welfare task.
146 Education and research policy

REFERENCES: pupils and students, and to mould, edu-

LEIPOLD, H./PIES, I. (ed) (2000), cate and train the latter in such a way
Ordnungstheorie und Ordnungspolitik. that they are able to use their natural
Konzeptionen und Entwicklungsperspektiven,
talents to their best advantage, both for
themselves and for society as a whole.
Helmut Leipold
The educational and scientific institu-
tions are supposed to fulfil this task as
economically as possible, i.e. by allocat-
ing a minimum of resources (function
Education and research policy of allocation).
If an education and science system
At the beginning of the 21st century, are to accomplish this, it must be
education and research policy holds a equipped and organised accordingly. In
key position within economic policy. contrast to the national administration,
This is more than ever because the eco- which is intent on implementing laws
nomic survival and success of the indi- fairly and treating the individual citi-
vidual, and of the economy as a whole, zens as equals before the law, here it is
depend on education and research. The essential to recognise and take into
knowledge and qualifications (skills) account people’s different talents. On
acquired today may become obsolete in the other hand, the various require-
the job market in the near future. This ments of the economy, the state and
applies to skilled workers as well as to society have to be correctly assessed and
engineers and all college graduates. converted into educational goals and
While in the past a solid training contents (curricula) that will shape peo-
tended to be sufficient for the entire ple according to their needs.
duration of a person’s active (working) Since the acquisition of information
life, this ceased to be the case a number about the gifts of individual people and
of years ago because of the rapid techni- the future requirements of the econo-
cal progress and the structural changes my and society is not easy, and since the
of the economy. Today, the efficiency of newly acquired information is
education and science matters more inevitably uncertain, what schools and
than the degree of knowledge and edu- faculties (the education departments of
cation both the individual and the soci- universities) have to accomplish is a
ety as a whole can muster. The main genuinely entrepreneurial task: namely,
task of the education system and its ele- having to act at the risk of making the
ments (schools, universities and other wrong decision. This task differs only
tertiary institutions, and enterprises in terms of content from what the com-
offering basic and further training) is to mercial →entrepreneur has to do in the
communicate the values, attitudes, market at his/her own risk, and which
knowledge, skills and competencies the school and faculty has so far been
which society needs for its communal able to transfer to the pupils and/or stu-
existence, and which the economy and dents.
administration need, as well as to inves- From an organisational perspective,
tigate the talents and inclinations of the it is obvious that a school or faculty
Education and research policy 147

belonging to an administration cannot (school autonomy) granted to them. It

succeed, it has been designed to carry has been recognised that schools have
out orders from above uniformly and to take more responsibility for the task
equally. The educational policy of the ascribed to them and, accordingly, also
Federal Republic of Germany takes this to act more independently.
into consideration, but at times inter- The crucial point, however, is that
prets it in a manner that is outdated. those schools that are funded to a large
Each individual is guaranteed the extent by the cities and municipalities
inviolability of person, free develop- and/or municipality federations, are
ment of the personality, free choice of economically not independent but part
school and free choice of place of train- of the municipal budget. This affects
ing (in the case of minors, indirectly the school buildings, equipment, learn-
through their parental authority). ing materials and non-educational per-
Furthermore, German education policy sonnel (caretakers, secretaries). The
guarantees private school liberty, thus teachers are government employees.
the right to establish private schools, For the universities and other tertiary
and it grants university professors the institutions, the situation is similar: as
liberty to conduct research and to teach. government institutions, they fall under
Teachers and schools have liberty and the state budget.
thus decision-making power only in the The consequence is that schools and
context of legally prescribed curricula universities do not have to take any
and other standards. However, for the financial risks, and they are not eco-
past several years they have had more nomically liable for their educational,
educational liberty and self-sufficiency technical and scientific achievements.

Germany’s education system – key data

Number of pupils (2005/2006) 9,505,241

Number of teachers (2005) 667,711
Number of apprentices (2005) 1,553,437
Number of students (2006/2007) 1,974,932
Approximate expenditures per pupil (2004) in s
– at primary school 4,000
– at senior school 5,400
– at secondary school 4,400
– at grammar school 5,400
– at vocational school 3,300
Average annual total expenditure per apprentice (2000)
– average gross expenditures 16,435
– average net expenditures 8,705
Approximate annual expenditure per student (2000)
– at technical college 6,000
– at university 6,300
Expenditure for Education and Science (2005) 195,2 billion
(8.7% of GNP)

Source: Federal Statistical Office, Federal Institute for Vocational Education and Training
148 Education funding

In recent years, the state has given an equal footing with private (national-
schools, and above all universities, cer- ly recognised) educational institutions,
tain economic decision-making powers and the state would no longer be direct-
through less detailed directives on ing its attention to the production of
where funds are to be spent (increased education – seeing itself as a producer –
budgetary flexibility, unspecified alloca- but rather protecting and promoting
tions), but they do not carry a crucial the educational interests of its citizens.
financial risk. Conflicts arising from the state’s
Finally, teachers and professors are responsibility for what happens at
civil servants and have so far hardly schools and universities and its parallel
been paid a performance-related salary supervisory role (supervision of schools
for their educational and training activ- and universities) would thereby be
ities. It must be added that in Germany, avoided. The state would then be able
the state considers itself as the econom- to focus its attention on the education
ic producer of education and science of its citizens, no matter where they
and behaves accordingly. receive schooling and other tuition,
The consequence is that schools and training and further education, whether
universities are subjected to a large it is in their own federal state or anoth-
number of rules and regulations, and er, or whether at home or abroad. The
they are more inclined to follow gov- state would want to promote the best
ernment directives than to act in the schools, universities and other academ-
interest of the educational, training and ic institutions in its own territory.
further education needs of their pupils
and students. This means that schools REFERENCES:

and universities produce graduates, but Internet: www. rhein-ruhr-institut.de; on

without either being truly interested in SCHULFÖRDERVEREIN, see:
their vocational progress or drawing
conclusions from it for their own work,
Ulrich van Lith
in the way profit-orientated enterprises
with a presence in the market do as a
matter of course and with sophisticated
methods. Education funding
Discussions on potential reforms
are therefore now under way, focused Education (school and university edu-
on the question of whether or not the cation, vocational training and further
state ought to accord universities and education) is a solid investment in one’s
schools more autonomy, while limiting own abilities and talents, as well as an
its own influence to the basic condi- investment in national wealth. The lat-
tions (minimum standards, market and ter consists of human capital (human
achievement transparency, compulsory capital reserves) and the real wealth of a
schooling), which form the background country.
for their →competition for pupils and The cost of this investment – in the
students. Under these conditions, pub- form of ‘learning costs’ (personal com-
lic schools and universities would be on mitment while forgoing other activities
Education funding 149

such as recreation or volunteering, costs and at least 4.5 years of tertiary educa-
of material such as school books, per- tion). At the same time, the education
sonal computer, etc.) – has to be cov- costs are due for payment, while the
ered by the pupils, students, trainees future rewards are uncertain.
and individuals in further education It also has to be remembered that
themselves. For the supplier of educa- most pupils are minors who are not
tion (school, tertiary institution, enter- legally competent or able to judge the
prise), they take the form of ‘tuition value of education at all. However, as a
costs’. Unlike the costs of this invest- rule, it should be possible to rely on the
ment, the proceeds usually follow only parents or guardians – who, in the con-
years after the school, the course of text of their maintenance obligations
study or the professional training has have to provide education and training
been completed. Only then will the (including school education) to carry its
individual and the economy as a whole costs and, if necessary, to pay in advance.
reap the rewards from the newly The logical consequence of this
acquired knowledge and skills (higher would be that later, when education
financial income, non-material advan- investments have started to generate
tages such as social status, etc.) which, rewards, parents could claim repayment
without the investment in education or support during their retirement years
and/or training, would not have been – as is the case in numerous cultures
obtained. where the family and the different gen-
An investment is profitable when erations of a family still exhibit a high
the total rewards exceed the total costs, degree of cohesion and form an eco-
in this case the learning and tuition nomic unit (e.g. in Asian countries).
costs. If the tuition costs are carried by In Germany, the state has in the past
the state, personal education becomes taken on the costs of school and univer-
profitable as soon as the personal sity education in their totality (zero tar-
rewards exceed the learning costs. iff), but in 2007 some university fees
The gap between the accumulation were introduced. This represents con-
of the costs (price) for education and its siderable savings for the family, and the
rewards creates the problem of educa- mandatory long-standing →pension
tion financing: money has to be spent insurance supports the view that the edu-
on teaching (cost of instruction and/or cation of children has to be regarded as
of a place at school, university or at an a substantial part of the retirement pro-
institution of training or further educa- vision. Beyond that, and independently
tion) and on learning (living expenses; of the family income, the state con-
personal commitment is a subjective tributes to learning costs through main-
sacrifice, but does not entail any expen- tenance payments in the context of the
diture or payment). family burden compensation (e.g. con-
The problem of education funding tinued payment of child benefits after
is exacerbated by the fact that the fund- the age of 18 and up to the age of 26,
ing of school and university education while children in training) and the
involves long time periods (e.g. in Federal Law on Education and Training
Germany 10 or 12–13 years of school Promotion.
150 Education funding

The funding of educational invest- (financial income) only if an income

ments (investments in human capital) results after the completion of the train-
becomes a problem and requires the ing. But here, too, access may be limit-
state to take on a subsidiary function for ed insofar as it is non-attachable. Above
individuals or their families who do not all, the credit-giver does not know
have the means. Contrary to invest- whether years later, for example, after
ments in capital equipment, which completion of a programme of study,
enable the investor to borrow the nec- the borrower will be prepared to begin
essary funds on the capital market, this working (starting a family, maternity) or
is not possible with investments in become unemployed or unintentional-
human capital. This is because the ly avoid repayment (change of address,
credit-giver requires collateral in order move abroad, false income data).
to reduce the risk of non-repayment. If For these reasons, banks are only
real wealth is accumulated, this could prepared to advance the finance for
be assigned as security. In the case of school attendance or a course of study if
human capital, however, that is not pos- they obtain other collateral (material
sible, since fundamental liberties (in- property, parental surety, etc.). It there-
violability of the person, inalienability, fore improves efficiency if the state
prohibition of hard labour) make it undertakes the pre-financing in all cases
impossible to seize human capital. in which a pre-financing (loan financ-
Therefore the credit-giver can ing) of profitable educational invest-
resort to seizing the monetary proceeds ments would otherwise not take place.

Private education funding in Germany

Funding for instruction costs Funding for learning costs

(The costs of a place at school, university or (Transport costs, learning materials such as
training college ) school books, software, notebooks, living
• through prices and fees (beneficiary
pays) school and university fees, previ- • through own resources (savings), parental
ously also apprenticeship fees for voca- means
tional training (for government institutions: • through bursaries, etc., private contribu-
school and university fees ) tions from third parties
• through voluntary contributions (direct • through gainful employment, additional
donations or via school or university occupations (self-employed or employed)
• cash donations (indirectly also material
donations and voluntary work by parents,
pupils, students and others), endowments
• through additional contributions
– sponsoring, advertising, selling promo-
tional items such as T-shirts etc., letting
premises, the sale of services such as
computer training, etc.
Education funding 151

If this is not done, a loss for the indi- has its limits. It is successful only when
vidual as well as for the society as a companies and enterprises are ready to
whole will result. For practical reasons, offer training places. In the past,
the state usually covers tuition costs in trainees had to pay an apprenticeship
total for the duration of compulsory premium in order to make the compa-
schooling, and in Germany even nies more eager to offer training. Today,
beyond that, i.e. senior high school and once again, the state takes over by giv-
higher education. In 2007 university ing the companies handouts or tax
fees were introduced. In addition, child incentives in these cases, which is basi-
benefits, the Federal Law on Education cally the same as partial pre-financing.
and Training Promotion and tax advan- If we differentiate education fund-
tages represent government contribu- ing according to the criterion of who
tions to the cost of living. receives direct payments, then in prin-
While these financing difficulties ciple two methods of education fund-
apply to school and university education ing can be distinguished: ‘supply fund-
and are a challenge for the government, ing’ and ‘demand funding’.
in the vocational part of education In supply funding, places at schools,
(training and further education) the sit- tertiary institutions or training institu-
uation is different: on the one hand, in tions are directly funded by govern-
vocational training the gap between ment. The respective institution
costs and proceeds is significantly nar- receives the funds according to certain
rower. Besides, in many professions the criteria (ratio of pupils, students, gradu-
yields (productive contributions by the ates, capacity regulation). The supply
trainees to the operational result of the funding has to clearly distinguish who
enterprise) already cover the training the carriers are of the schools, universi-
costs during the period of training. ties and training facilities and who is
On the other hand, the training responsible for the education and/or the
companies and →enterprises, unlike training (education production). This
banks and other financial institutions, does not always have to be the state, but
are prepared to pre-finance the costs of it can be private schools or independent
the training. They do this because they public schools. In demand funding, the
have selected the trainees themselves, pupil (parents) and/or the student
knowing which qualifications the com- receives the financial means for the
pany will require in the future, and in financing of a place at a school, univer-
the sure knowledge that they will be sity, institution of training or further
employing some of their own trainees education of choice. This can take the
in a regular employer–employee rela- form of tied assignments, education
tionship after the completion of their coupons or loans with different payback
training. To provisionally meet training conditions (see box, next page).
costs by pre-financing them is more This sort of education funding
convenient for them than having to makes clear that national education
recruit new skilled labour in the market production and national education
place at higher wages. However, this funding are two different issues.
method of financing vocational training Logically, the latter would also open up
152 Education funding

Government education funding in Germany

Supply-orientated funding Demand-orientated funding

(funds go directly to the school or the univer- for instruction and learning costs, whether
sity) intended for a specific purpose or not

• Institutional funding, structured budget • independent of the family income

(detailed itemised instructions for means – fixed amount per capita/ year and/or term
allocation, not directly related to the serv- covering all or part of the costs
ice rendered) – per unit (e.g. teaching unit, lecture), as a
subsidy covering all or part of the costs
Deficit financing of the unit
e.g. for officially recognised private schools
• income-linked, per capita and graded as
• flexible budget (limited transferability of educational subsidy, in voucher form or in
budget positions in terms of time and the form of tax concessions deductible in
material) retrospect from the payable income tax in
absolute amounts up to a maximum
• total budget: according to key data and amount (civil tax, negative income tax,
discretionary (performance-related) when the deductible amount exceeds the
payable income tax: net payment)
• according to key data, e.g. number of
pupils, school-leavers; per capita alloca- • tax-deductible from the taxable income up
tions, flat-rate e.g. as a flat-rate allocation to a certain amount, e.g. as contingent
per pupil at private schools in certain fed- expenses
eral states (Baden-Württemberg, Lower
Saxony and others) • in the form of a loan with fixed or income-
linked repayments with or without sub-
sidised interest, government bond with
special provision for repayment dispensa-
tion such as pregnancy, unemployment,
disability, death, etc.

• as a combination of grant and loan: e.g.

the Federal Law on Education and
Training Promotion and the master crafts-
men training scheme

• other concessions (subsidies) for health

and pension insurance (credited assimilat-
ed periods), rental, subsidised entrance
fees to public amenities such as muse-
ums, theatres, etc.
Employment 153

the possibility of funding schooling or a Economists are concerned with

study course abroad. One prerequisite unemployment in order to determine
will generally be that the educational its causes and to give politicians recom-
institutions should either be govern- mendations on economic policy. In
ment schools or universities; or that principle, the level of employment
they should otherwise be officially results from the interaction between
accredited (approved schools, chartered the supply of and the demand for
universities). labour. The excess supply on the labour
For the development of a European market is usually calculated only against
education market, this form of funding the level of unemployment, although
carries special importance. It demon- an additional number of potential sup-
strates that the state has to support its pliers of labour may have ‘quietly’ with-
citizens with the funding of their edu- drawn without being entered into the
cation and training, and that citizens unemployment register.
have to be allowed to decide freely,
within reason, at which school or uni- Components of unemployment
versity they would like to acquire their Despite the multiple forms of unem-
knowledge – state or privately run, at ployment, it is useful to divide the
home or abroad. number of unemployed into a friction-
al-structural component and into a sur-
REFERENCES: plus of supply.
LITH, U. van (1985), Der Markt als
Ordnungsprinzip des Bildungsbereichs, Frictional-structural component
Verfügungsrechte, Ökonomische Effizienz und die
Frictional and/or structural unemploy-
Finanzierung schulischer und akademischer
ment is attributed to placement obsta-
Bildung, Munich; — (1998), Bildungsuntern-
ehmertum, seine institutionellen Bedingungen,
cles between →supply and demand on
Finanzierung, Kosten und Nutzen der Bildung, the job market. This is because both
Mülheim a. d. R.; — (1999), Fortentwicklung labour supply and labour demand are
der einzelbetrieblichen Finanzierung der subject to different requirements
Berufsbildung, in: Handbuch der Aus- und regarding regional availability, qualifica-
Weiterbildung, Ergänzungslieferung 118, June tions, etc. This causes difficulties in
1999, Cologne. matching job-seekers to job vacancies –
a situation reflected in the coexistence
Ulrich van Lith of unemployed persons and vacancies.
In any market economy, a certain
amount of unemployment is inevitable
Employment in spite of the full range of economic
policy measures. Above all, this fric-
The problem of →unemployment has tional and/or structural unemployment
immediate and lasting consequences is also indicative of the continuing
(reduced standard of living, psycholog- structural transformation that can be
ical problems). Economic policy there- expected in economically normal times,
fore gives priority to job creation and and which continually causes long-
the fight against unemployment. standing jobs to be disposed of and new
154 Employment

ones to be created. The fact that this There are two ways to attempt an
transformation cannot occur complete- explanation: The ‘long-term unem-
ly without friction (thus without diffi- ployment theory’ states that while they
culties and/or temporary delay), leads to are jobless, unemployed individuals
the permanent phenomenon of an lose qualifications and that, in this way,
unemployment ratio. the number of long-term unemployed
This natural unemployment ratio rises.
(natural rate of unemployment: NRU) The ‘insider outsider theory’ stress-
describes the average level of unem- es the power of those in jobs, who can
ployment around which the statistically prevent necessary wage reductions and
measured unemployment varies in thus keep outsiders (unemployed per-
terms of duration. It is actually anything sons) away from the labour process.
but natural and is determined by the
ratio of those employer–employee rela- Surplus supply
tionships which have been dissolved Surplus supply – the second compo-
and those which have been newly nent of unemployment – is the differ-
formed (more exactly: probabilities of ence between the total labour supply
dismissal and of reinstatement). These and the number of workers required by
two regulating factors are especially →enterprises. For the analysis of the sur-
affected by welfare transfers, minimum plus supply, two models are available:
wage legislation, protection against while the neo-classical school always
unfair dismissal regulations as well as attributes a surplus supply in the job
protection against structural change, market to inflated wages in real terms,
created as a social cushioning against and the responsibility for the level of
unemployment. employment to the parties to a collec-
A high and permanently granted tive agreement, the Keynesian opposite
wage compensation (unemployment standpoint claims that imbalances in
pay), for example, reduces the labour the labour market reflect a true lack of
supply since it lowers the incentive for real demand for the products of the
workers to take up new positions. economy.
Those who are employed approve of In an unemployment situation,
this, since their competition by unem- therefore, a wage reduction in real
ployed persons is reduced. terms and/or the stimulation of the
A new explanation by the NRU demand for goods appear indicated if
offers the ‘hysteresis theory’: generally, unemployment is supposed to decrease.
the term hysteresis describes the long- The crucial variables combined – espe-
term influence of past historical or eco- cially price level, consumer demand for
nomic events on the natural ratio. For goods, employment and wages in real
the NRU, this particularly means that terms – represent a ‘simultaneous sys-
the NRU will rise during the current tem connection’, which cannot be so
period if the actual unemployment ratio easily manipulated by the economic
of the preceding period exceeded the policy-makers.
NRU of the preliminary period (time- It has been shown that the relation-
path dependence). ship of consumer demand for goods
Employment 155

and nominal wages is relevant to the law (unemployment goes down when
determination of the employment level. the economic growth rate rises). How-
Monetary, fiscal and tariff policies can ever, no quantity or quality of →growth
have an impact on this relationship. leads directly to a lower unemployment
rate. The unemployment ratio remains
Beveridge curve unchanged if the actual growth of GDP
The Beveridge curve was named after corresponds to ‘natural’ growth of the
Lord Beveridge, scientist and English GDP. This ‘normal’ growth is based on
employment minister after the Second population increase, the accumulation
World War. It makes it possible to divide of capital and technical progress. If,
the unemployment ratio into the com- however, actual economic growth
ponents specified above, and describes exceeds normal growth, then the
the negative convex connection unemployment ratio goes down. Due
between the unemployment ratio and to this feature, the natural GDP growth
the ratio of vacancies. An increase of is also called the ‘occupation threshold’.
open places thus leads to a lowering of In the United States, during the
the unemployment ratio and vice versa. 1960–1998 period, the occupation
The extent of the frictional-structur- threshold was about 3%.
al component of unemployment can be
expressed through the spatial layout of Price level stability
the Beveridge curve. On the other hand, During the 1960s and 1970s, a negative
the supply and demand constellation in relationship between inflation rate and
the labour market determines where on average unemployment ratio (low
a given Beveridge curve we are. unemployment plus higher inflation
rate and vice versa) was discussed as the
Magic square Phillips Curve. It was assumed that
Economic policy, besides aiming at a economic policy could choose (trade
high level of employment, subscribes to off) between the two goals: an unem-
three further macroeconomic goals (the ployment ratio which is pleasing to the
Law for Stability and Growth of 8 June government can be ‘bought’ by an
1967). However, since some of these appropriate inflation rate. This relation-
cannot be realised simultaneously ship could be observed only in the short
(→conflicting goals in economic policy), it is term and under certain conditions. In
called the ‘magic square’ of economic the long term, however, one cannot
policy. choose between unemployment and
the inflation rate since during the wage-
Appropriate and ongoing economic growth fixing process, the parties to a wage
Economic growth is defined as the dif- agreement anticipate the government’s
ferential when comparing the current readiness to produce inflation and their
gross domestic product (GDP) to that wage demands are based on this antici-
of the same period of the previous year. pation. In the long term, therefore,
The negative relationship between prices and wages rise at the same rate,
unemployment and GDP which can be and real wages (wages divided by the
observed in reality is called the Okun’s price level) continue to be the most
156 Employment

important assessment ratio for employ- sis’) have increased. Through these
ment. This also explains the phenome- endogenous effects of the monetary
non of stagflation: despite higher union, conflicting aims can be avoided.
unemployment, price levels continue to Flexible exchange rates mean that con-
rise. Thanks to steady and predictable flicts between domestic economic sta-
monetary policy measures by the cen- bility goals and the balance of payments
tral bank, →price level stability thus forms equilibrium are largely avoided or
the indispensable foundation for an solved through exchange rate adjust-
adequate employment increase. ments. A condition for this is, however,
that the exchange rate adjusts in a sys-
Balance of payments tematic and foreseeable way to changes
Especially in the Federal Republic of of fundamental economic data (prices,
Germany, turning points in the econo- →income).
my were repeatedly initiated through Conflicts between the goal of a high
changes in the level of the foreign con- level of employment and the three other
tribution. To that extent, there is no goals of the ‘magic square’ are generally
empirically justified contradiction not an issue when prices, rates of pay
between the goal of a →balance of pay- and interest rates are allowed to find
ments equilibrium and the goal of full their levels as freely as possible, when
employment. However, an increase in →competition is reinforced and when a
exports does not necessarily lead to an steady monetary policy is practiced. To
improvement of the labour market sit- get rid of unemployment, the sup-
uation. Rigidities in labour markets, porters of the hysteresis theory there-
such as high recruitment and dismissal fore suggest complementing expansive
costs or immobility of the workers, may demand policies (lower interest rates,
slow down the incentive for additional expansive fiscal policy) with supply
employment. measures that are aimed at greater flexi-
The type of exchange rate system bility (incentives for investment, wage
that is implemented also plays a role restraint) (a two-handed approach).
(→currency system and exchange rate
regimes). If in the interest of one’s major REFERENCES:

trading partners one opts for the elimi- BELKE, A. (2001), Wechselkursschwankungen,
nation of the risk of monetary fluctua- Außenhandel und Beschäftigung, Berlin et al;
FRANZ, W. (1999), Arbeitsmarktökonomik,
tions by fixing the exchange rate irrevo-
4th edition., Berlin et al; LANDMANN,
cably in, for example, a monetary
O./JERGER, J. (1999), Beschäftigungstheorie,
union, the negative effects of hyper- Berlin et al; INSTITUT FÜR ARBEITS-
inflated wage agreements on the labour MARKT- UND BERUFSFORSCHUNG
market can no longer be balanced by a (IAB) der Bundesanstalt für Arbeit: http://
devaluation of the domestic currency. www.iab.de/iab/publikationen/themen.htm.
This may mean that the competition
between country-specific job regula- Ansgar Belke
tions rises (→system competition). Frank Baumgärtner
Incentives for structural reforms on
sclerotic labour markets (‘euro-sclero-
Employment policy 157

Employment policy demand side of the labour market. In

practice, the emphasis of employment
Areas of employment policy policy strategies lies in the measures
In the economic policy debate, employ- geared at the demand side.
ment policy is frequently equated with
concepts which concern only their sub- Strategies geared at the supply side of the
divisions (e.g. labour market policy). labour market
The term ‘employment policy’ refers to Decreased labour volume is brought
all economic policy activities that deal about by the reduction of the number
with labour as a factor of production and of potential wage-earners (demograph-
have an impact on the employment sit- ic component, decreasing desire to be
uation. In this regard, it is basically those gainfully employed, migration trends)
individuals in gainful and dependant or by a reduction of working hours
employment who are at stake. (→collective agreements, e.g. the standard-
‘Labour market policy’, however, is isation of a shorter work week or longer
a name for measures that try to affect vacations or individual regulations).
supply and demand on the job market
and the way they relate directly. This Strategies geared at the demand side of the
means that employment policy covers a labour market
larger field than labour policy only. Here, the target is an increased demand
Beyond that, employment policy entails for labour since the job market is
employment-promoting measures derived from the goods market and the
which, strictly speaking, belong to the demand for work depends on planned
sectors of economic policy, growth and goods production. Strategies having an
structural policy. impact on employment must therefore
The largest part of wage policy as be geared at the production volume:
well as →Concerted Action/Alliance for
Employment can also be subsumed • Business cycle policy actions
under employment policy. Above and (increasing total demand through
beyond the (sub-)divisions mentioned expansive monetary and fiscal policy
here, employment policy as a generic →business cycle policy).
term is closely related to other political
fields, e.g. to →social policy. The quanti- • Structural policy measures (promo-
tative goal of employment policy lies in tion of structural change →structural
reaching a high level of employment. policy).

Strategies of employment policy • Growth policy measures (in times of

Strategies and instruments of employ- continually poor growth). How many
ment policy are supposed to redress the additional jobs this yields, though,
imbalance between labour supply and crucially depends on the develop-
labour demand and thus to reduce ment of economic growth and overall
→unemployment. In principle there are economic productivity, i.e. starting
two different ways of tackling this: from which growth rate total
either from the supply side or from the employment figures rise (‘employ-
158 Employment policy

ment’, e.g. West Germany 1987-1993 es (→collective agreements). The attempt

0.7%). to maximise the wage ratio (proportion
of earnings of the national revenue
Wage policy and labour market derived from employment-based jobs)
On the German labour market, wage- through higher wage demands is use-
fixing is not consequent upon the free less in that it simply substitutes the
play of →supply and demand. Rather, it is labour factor with the capital factor
the result of nominal wage negotiations (rationalisation).
between trade unions and employers’
associations in the context of bargaining Wage levels and employment
autonomy (Article 9(3) of the Basic In the current debate on the high
Law). unemployment ratio and its causes, the
Through the labour market regula- argument that wage levels in real terms
tions, the parties to a collective agree- are too high, as well as the consequent
ment have been given considerable recommendation to slow down wage
responsibility in the field of employ- level development in order to increase
ment policy (employment policy employment, plays an important role.
assignment). The demand for work decreases
Therefore, tariff policy must con- proportionally to the increase of pro-
tribute to the preservation of existing duction costs. Not only is the increas-
and the creation of new jobs and, by ingly expensive factor ‘labour’ replaced
leaving sufficient scope for regional and by the relatively less expensive factor
industry-related differences, as well as ‘capital’, shrinking profits lead to fewer
for differences of qualification and the investments. Thus the neo-classical
special situation of individual enterpris- labour theory sees the cause for unem-

Fluctuations in the German job market, 1996 and 2005 (in 1,000)

West Germany East Germany

1996 2005 1996 2005

Outgoing (leaving) unemployed 4,684 4,609 2,101 2,256

Incoming (entering) unemployed 4,967 4,823 2,175 2,163

Of these:
– currently employed (not gainful) 2,511 2,082 1,287 1,035
– apprenticeship 129 238 50 105
– previously unemployed 2,388 2,503 838 1,023

Incoming job vacancies 2,388 2,021 890 710

Successful job procurement 2,553 2,601 811 917
(year 2000) (year 2000)
Average duration of
unemployment (in weeks) 29.3 36.3 27.9 46.3

Source: Federal Employment Agency: Labour Market 2005

Enterprise, plant 159

ployment primarily in the wage • redistributive wage policy (+ redistri-

monopoly of the workers’ and the bution surcharge in accordance with
employers’ associations. The tariff purchasing power argument)
wages negotiated by them usually have
the effect of a minimum price (mini- Alliance for Employment
mum wage), which is fixed above equi- At a summit on 7 December 1998, the
librium level (→labour market order). federal government as well as represen-
tatives of the trade associations and the
Pay structure and employment trade unions agreed to work together in
Additionally, a faulty pay ‘structure’ has an alliance towards a reduction of
been made jointly responsible for the unemployment and, in addition, to
employment problems. In terms of make the economy stronger and more
industry, qualifications and region, competitive in the long term.
wages do not correspond to the specific It was felt that for a positive devel-
conditions of supply and demand (mis- opment in the labour and professional
match). This leads to misguided poli- training markets, a ‘durable cooperation
cies regarding production and employ- and understanding between the state,
ment structures, and to a decrease of the trade unions and the economy’ is
the potential employment volume. required.
Yet the Keynesian opponents of this The parties involved in the Alliance
position interpret wages as income for Employment, Education and
creating demand, and conclude that if Competitive Ability are, among other
because of rising wages demand grows, things, aiming at a further sustainable
production and employment are reduction of the legal marginal wage
expanded (purchasing power argu- costs, as well as a structural reform of
ment) →Keynesianism. the social security system.

Wage fixing in the context of bargaining REFERENCES:

autonomy Sources for the representation and evalua-

Four concepts of wage policy can be tion of employment policy measures avail-
able at www.iab.de/iab/publikationen/publika-
tionen.htm; www.zew.de; www.ilo. org.

• productivity-based wage policy Ansgar Belke

(nominal wage increase = rate of
growth of the overall economic pro-
ductivity) Enterprise, plant

• cost level neutral wage policy (wage The main competence of an enterprise
increase = growth rate of productivity or business is its ability to establish
+/- change of non-wage related costs) products and services through →compe-
tition in the national and international
• cost level neutral wage policy (as markets. To succeed in this requires
above + increase for prospective competitive advantages, which may be
unavoidable price level increase) located in such different areas as:
160 Enterprise, plant

• the product, manufacturing tech- strategic alliances are developing. Here,

nique, production costs as well as it is basically no longer possible to
service quality; assume an economic or legal entity.
Markets are becoming more interna-
• the sales network, brand name and tional (→globalisation), and enterprises
product image; and have to follow this trend in order to
remain competitive.
• the ability to stay at the cutting edge In their desire to service the interna-
of technology through high quality tional markets, enterprises are concen-
innovations. trating on location factors. Despite
numerous location advantages in
While private enterprises usually Germany, such as the dual education
want to make a profit, with the share- system and the good infrastructure,
holders bearing the risks and responsi- international investors react with cau-
bilities of running a business, public tion regarding over-regulation especial-
enterprises are focused on providing a ly of the →labour market, as well as the
service at government request (→public singularly high level of →co-determina-
enterprises). The federal government, tion. This explains the small percentage
federal states or municipalities – and of foreign direct investment in
thus at the end of the day the taxpayer – Germany compared with other OECD
carry the risks and liabilities. countries.
In normal everyday usage, the terms In recent years, the topic of corpo-
‘enterprise’ and ‘plant’ or ‘factory’ tend rate governance has gained in signifi-
to be used as synonyms. From the busi- cance. Legally and formally, the control
ness management point of view, the of a company and its executive commit-
term enterprise/business puts more tees lies with the supervisory board, the
emphasis on the financial and legal actual controlling body of a company.
entity (external view). The term plant The supervisory board is usually elect-
or factory, on the other hand, describes ed by the shareholders at annual gener-
a local or technical and organisational al meetings.
economic unit (internal view). As the international financial mar-
Since the emergence of the internet kets are opening up, however, the
economy and the →new economy, these supervision of companies is largely per-
old-fashioned definitions have become formed through the submission of
increasingly fluid: thus today, ‘virtual financial statements and transparent
enterprises’ are networks of independ- reporting in the capital markets.
ent companies that come together only Regarding the possible legal forms, a
for a short time – for example, to com- distinction has to be made particularly
bine core competences or for the pro- between sole traders, non-incorporated
duction of certain products or services. firms and corporations: according to
For higher visibility in the interna- sales tax statistics, most of the business-
tional markets, new organisational es in Germany are run as sole traders
forms such as joint ventures (several (more than 2 million in 2001). The spe-
enterprises start a joint enterprise) or cial features of the sole trader are the
Entrepreneur, manager 161

exclusive decision-making powers and Medium-sized businesses employ

the sole right of disposal, while liability more than two-thirds of the entire
for the commitments of the company workforce in the private sector in
extends to all personal assets (business Germany and are responsible for 48.8%
and private assets). But →property also of the gross annual product. But the
holds a social obligation. Business deci- large-scale enterprises with more than
sions are not arbitrary. The practical 500 employees, which make up less
side of running a company demands the than a quarter of 1%, are responsible for
inclusion of the staff on issues that con- more than 50% of the entire sales vol-
cern the business. ume.
Non-incorporated firms require at The 25 largest enterprises in
least two associates. Here, too, capital Germany were already large by 1960. In
and management are usually located in the United States, however, one-third
the same persons. With the exception of of the top 25 companies are newcomers
the limited partners in a limited part- which were started only in recent years
nership (their liability is limited to the – especially in the field of information
level of the deposit) partners are also technology.
liable to the extent of their total assets.
The most common legal forms are the REFERENCES:

general partnership (more than a quar- JESKE, J./BARBIER, H. D (2000),

ter of a million enterprises in 2001) and Handbuch Wirtschaft: So nutzt man den
Wirtschaftsteil einer Tageszeitung, a
the limited partnership (more than
100,000 enterprises in 2001).
UM der Betriebswirtschaftslehre 1 (1984/1998),
In corporations, liability is limited Munich; WOLTER, H.-J./WOLFF, K./
to the capital of the company as a legal FREUND, W. (1998), Das virtuelle
entity. Investors and management are Unternehmen: Eine Organisationsform für den
frequently separate. The most common Mittelstand, Wiesbaden.
corporate legal form is the limited lia-
bility company or Ltd (nearly half a Kurt J. Lauk
million enterprises in 2001). Only Rainer Gerding
6,856 companies (in 2001) were regis-
tered as legal corporations (public lim-
ited company). Entrepreneur, manager
It is certainly striking that in Originally, the term entrepreneur used
Germany, medium-sized companies to refer mainly to the owner or pro-
predominate: 89.9% of businesses have prietor of a business, running an
a staff complement of less than 20 and →enterprise independently and at his or
99.8% have fewer than 500 employees. her own risk, by being liable with the
In terms of staff numbers, this means capital of the business or with his or her
that only 0.2% of businesses can be clas- total personal assets. The source of cap-
sified as large enterprises. The result is ital and the entrepreneur were one and
similar – depending upon the industry the same. The first listed companies
– in the ranking order based on sales during the 19th century brought with
volumes. them the new phenomenon of the
162 Entrepreneur, manager

employee-entrepreneur or manager. By way of markets and →competition,

He also has far-reaching entrepreneur- a dynamic that starts off as commercial
ial decision-making powers, but he is self-interest ends with optimum fulfil-
acting on behalf of and at the risk of ment of consumer desires (potential
others. Through share options (salary sales) and an increase in the general
payment in the form of an option level of prosperity. But economic
between money or shares in the busi- renewal and structural change do not
ness) the manager, too, can become a make the temporary loss of unprof-
joint owner or shareholder in the enter- itable jobs a thing of the past.
prise. Supervision of the company’s Entrepreneurial →competition and mar-
executive committee is incumbent ket selection are the best way of return-
upon the supervisory board. Changes ing to full employment and remaining
among the managerial staff are normal. competitive through innovations,
More than 94% of the 3.1 million regained competitive ability and eco-
enterprises in Germany are owner- nomic →growth.
managed, while just under 5% are cor- The economic and socio-political
porations and as such run by managers joint responsibility of the entrepreneur
who are company employees. Entrep- develops in the age of →globalisation and
reneurs are flexible: they can decide internet economy in a new field of ten-
when what is produced, where and sion. New international production
how. This makes location factors so processes and business models, and
important, including legal, tax, financial international competition for the pre-
and social systems, as well as the quali- dominantly regionally active suppliers
ty of education, the proximity of uni- contribute to a drastic aggravation of
versities and the transport and service the international location competition.
infrastructure (→system competition). Accelerated decision-making must be
The greatest challenge for entrepre- supported by flatter enterprise hierar-
neurs is their role as innovators who, chies.
within the framework of the →market The exaggerated focus on share-
economy, have to use personal initiative holder value, to which entrepreneurs
to make profits while being prepared to and managers have been subjected, is
perform, to take risks, and to improve wrong. Lasting entrepreneurial success
company results. can be achieved only with the coopera-
The practical application of inven- tion of the workforce, especially under
tions, the continual renewal of products most difficult competitive conditions.
and production processes, as well as the The interests of the business owners
opening up of new markets are all gen- and the workers are therefore only
uine entrepreneurial tasks, and it is in seemingly opposed to each other.
this spirit that the Austrian economist Germany needs to adopt a new
Joseph Alois Schumpeter coined the entrepreneurial mentality: international
term ‘creative entrepreneur’ or ‘pioneer investigations prove that regions with
entrepreneur’. Drive, creativity and the highest growth rate of new busi-
organisational and people skills are all nesses, for example, the United States,
essential core competences in business. Canada, Spain and Ireland, also have
Environmental impact 163

relatively higher economic and employ- venture capital markets and a competi-
ment growth. tion-orientated transformation of the
It is true that the number of new education system.
businesses which were established in Creativity, →individual responsibility,
Germany since the end of the 1990s being prepared to take risks and leader-
had increased to 761,000 a year. A sur- ship skills must become priorities in
vey of bank accounts shows, however, basic and further training. But it is
that since the beginning of the 1960s equally important that within the popu-
the proportion of people who are self- lation there is a growing awareness of
employed has decreased in relation to the crucial role of the entrepreneur for
the total number of people in gainful the efficiency of the entire national
employment from just under 17% to economy.
just more than 10%. These values place
Germany far below the European REFERENCES:

Union average of 15%. HAMER, E. (2001), Was ist ein Unternehmer?:

The new reality of company estab- Was verdanken ihm Betrieb und Gesellschaft?,
Munich; RODENSTOCK, R. (2001),
lishments requires a stronger integra-
Chancen für Alle: Die Neue Soziale
tion of the international capital markets.
Marktwirtschaft, Cologne; SCHUMPETER,
While the German financial system is J. A. (1942), Capitalism, Socialism and
frequently based on long-term personal Democracy, New York; SINN, H.-W. (1999),
relationships between enterprises and Die Rolle des Unternehmers in der
financial establishments that are not Marktwirtschaft, in: Eliten und Demokratie,
very transparent, the Anglo-Saxon sys- Berlin, pp. 111-124.
tem must rather be described as
reserved, short-term and largely trans- Kurt J. Lauk
parent. The differences between the Rainer Gerding
two cultures are becoming more and
more apparent. Against this background
it is interesting to observe that in recent Environmental impact
years, particularly in the new technolo-
gies in the United States, innovation Environmental impact studies distin-
and growth have been far stronger than guish between global and regional envi-
in the economic systems of Europe, ronmental problems. The former are
which are less willing to undergo on the increase. Here, local activities
reforms and are held back by rigid (the running of factories, the mining of
social systems and the lack of venture resources or the dumping of materials)
capital. have global effects and demand con-
The readiness to engage in private certed action by as many countries as
business activities is crucially to be sup- possible, and possibly by all. Regional
ported by the removal of government environmental problems, however,
regulations in almost every economic usually result when local uses of the
sector, lower taxes and contributions, environment for the purposes of pro-
continued fearless →privatisation poli- duction or consumption have an impact
cies, →deregulation, the promotion of only on the immediate environment.
164 Environmental impact

As far as regional impact phenome- deterioration of the fresh water supply,

na within the borders of a country are the decreasing diversity of species (bio-
concerned, the national environmental diversity), the reduction and qualitative
policy is faced with a challenge. deterioration of the soil (desertifica-
Globally, it is above all the saturation of tion), and the over-use of the world’s
the earth’s atmosphere with green- oceans (through over-fishing and
house gases and the shrinking ozone excessive inflow of pollutants), which
layer, the quantitative and qualitative play an important role.

Air pollution in Germany, 1990–2004

Environmental policy: Actors 165

Carbon dioxide (CO2) is the most Environmental policy: Actors

abundant greenhouse gas. Up to the
industrial revolution, the CO2-concen- The relevant authorities (or actors) in
tration in the terrestrial atmosphere was environmental policy are mainly the
slightly more than 280 parts per million public regional government authorities
by volume (ppmv). Since then, this (→EU, →Federal Republic, federal states,
value has been rising continuously. In municipalities) which are directly respon-
1958 it was 315 ppmv, and at present it sible for the adoption and implementa-
stands at some 370 ppmv. Extensive tion of environmental policy objectives
investigations by climatologists, partic- and measures, but also certain groups in
ularly by the Intergovernmental Panel the society who exert an indirect influ-
on Climate Change, point to the con- ence on environmental policy.
clusion that this increase, and the asso-
ciated rise of the earth’s average surface Federal Republic of Germany
temperature of between 0.4°C and Competences in the field of environ-
0.8°C, have been primarily caused by mental policy are defined in such a way
humans. that the Federal Republic is mainly
Simulations have shown that if the responsible for the adoption of the
present trend of fossil fuel use contin- appropriate laws (the legislative author-
ues (especially of hard and brown coal ity of the federal government). As a
and mineral oil), by 2100 CO2-emis- result, the legal framework that speci-
sions will have pushed up the atmos- fies maximum output values of pollu-
pheric concentration to over 700 ppmv, tants at the individual source in the
making a further increase of the earth’s form of concentration values has gener-
average surface temperature of between al validity. But the fact that the environ-
1.4°C and 5.8°C likely. This could have ment presents different problems and
serious implications for the global dis- conditions (regarding the difficulties
tribution of the vegetation zones, make associated with clean-up operations and
turbulent weather conditions more fre- existing environmental damage), is
quent, cause sea levels to rise and be usually not taken into account.
generally harmful for large geographic Administrative issues tend to be the
systems (by causing the gulf stream or responsibility of the German federal
North Atlantic currents to change states, from where some of the tasks are
course). again transferred to the district adminis-
trations (special administrative units of
REFERENCES: the states); the states have administrative
ENDRES, A. (2000), Umweltökonomie, 2nd or implementation authority. This
edition, Stuttgart; FEESS, E. (1998), means that environmental policy ad-
Umweltökonomie und Umweltpolitik, 2nd edi-
heres to competence allocation, as it is
tion Munich; SIEBERT, H. (ed) (1996),
customary in Germany on the basis of
Elemente einer rationalen Umweltpolitik.
Expertisen zur umweltpolitischen Neuorientie-
the Basic Law. However, the delimita-
rung, Tübingen. tion of environmental policy compe-
tences within the European Union (EU)
Paul Klemmer has been particularly problematical.
166 Environmental policy: Actors

Over the past years, the influence of lems, such as climate protection, have
the EU in environmental policy has special status where the individual
been growing all the time. Through nation states are the actors.
guidelines and regulations, the EU tries Within national borders it can usu-
to become involved in the environmen- ally be expected that besides politicians
tal policies of the different countries. A and the public institutions, business
well-known example is the new gener- representatives on the one hand, and
al guidelines for water management environmental activists on the other,
issued by the EU, which prescribe uni- are two important groupings which
form water management regulations. have a major impact on the determina-
But the regulations and guidelines tion of environmental policy objectives.
of the EU are frequently in conflict Both interest groups have different
with the subsidiarity principle in goals: while the business representa-
Germany, which prescribes that public tives are keen to set environmental pro-
tasks should be executed at the lowest tection standards at the lowest possible
possible level. Only if that level is not level in order to limit their costs and to
up to the task can it be transferred to the stay abreast of the international location
next higher level (→fiscal federalism). competition (→system competition), the
If an environmental problem is lim- environmental activists want to achieve
ited to a regional dimension because, the most far-reaching protection of the
for example, the environmental impact environment they can get.
is geographically limited, it should Important environmental associa-
preferably be dealt with at a regional or tions in Germany are the German Fed-
national level, as opposed to the eration for Environment and Nature
European level. Protection, the German Society for
Nature Conservation and Greenpeace.
The actors In recent years, however, the debate
The actors who exert their influence on around the definition of environmental
environmental policy decisions differ goals has become less heated than it
depending upon environmental sector used to be. From the point of view of
and the type of problem encountered. the →enterprise, there seems to be a
The actors in charge of waste disposal, growing understanding that environ-
for example, are not the same as those mental protection is an important
who are responsible for the classifica- image factor, while the environmental-
tion of a nature conservation area. The ists are increasingly prepared to take
general level of problem perception economic necessities into account.
among the public can mean that a spe-
cific issue may barely be paid any atten- REFERENCES:

tion at a specific point in time due to JÄNICKE, M. (1995), Akteure der

the fact that public awareness is low, Umweltpolitik, in: Junkernheinrich, M./
while at other times when the public is Klemmer, P./Wagner, G. R. (ed), Handbuch
zur Umweltökonomie, Berlin, pp. 11-15.
highly sensitised there will be active
involvement. Apart from that, interna-
Bernd Hansjürgens
tional and global environmental prob-
Environmental policy: Conflicting aims 167

Environmental policy: Conflicting Empirical investigations show that

aims the benefits of environmental protec-
tion measures clearly exceed their costs.
Like all the other useful profitable activ- This applies above all (but not only) to
ities, environmental protection meas- developing countries, where contami-
ures also require expense, i.e. resources nated drinking water and other envi-
have to be spent on them. This creates ronmental problems lead to disease and
competition with other potential uses, considerable losses of productivity.
for resources are always limited. One At the macroeconomic level, the
example of this is a revenue neutral question arises whether a relatively
ecological tax reform. strict environmental policy, as practised
Revenue neutrality means that in Germany, may lead to an internation-
→enterprises receive a rebate to balance al competitive disadvantage due to
their overall tax bill, for example, increased production costs. This con-
through a reduction of the costs of cern may be justified in specific indus-
fringe benefits. This does not, however, tries but, overall, it has neither been
mean that an ecological tax reform is theoretically nor empirically proven.
free – the enterprises concerned put On the contrary, investigations show
environmental protection measures in that the strict environmental policies in
place in order to decrease their tax bur- Germany led to a strong position on the
den, and these measures represent a world market in the field of environ-
consumption of resources: they cost mental protection technology, because
money. German enterprises invested promptly
An analogous situation can be in research and development and have
observed if the public sector imple- therefore become technology leaders
ments environmental protection meas- (→globalisation).
ures, although the same resources
could be spent on upgrading the health REFERENCES:

service or the education system. ENDRES, A. (1994), Umweltökonomie,

But environmental protection Darmstadt; FEESS, E. (1998), Umwel-
tökonomie und Umweltpolitik, 2nd edition,
measures not only cost money, they also
create benefits. Some of these benefits
are of a purely financial nature, when Eberhard Feess
for instance building renovation costs
are saved, environmental disasters are
prevented or diseases due to environ-
mental factors decrease. There are also Environmental policy: Instruments
benefits which are more difficult to
measure: e.g. the benefit from the pre- Before becoming involved in environ-
vention of a disease includes not only mental policies and objectives, it is
the financial savings resulting from important to consider which instru-
hospitalisation becoming unnecessary, ments are likely to be useful. To the
but also in the simple fact that healthy question: Why should there be any-
people feel better than ill people. thing to consider?, the answer might
168 Environmental policy: Instruments

be: ‘If people don’t want a polluted dure. These and other disadvantages are
environment, then pollution must sim- comparable to someone demanding:
ply be outlawed!’ ‘Because food or computers are of great
However, bearing in mind the say- importance for the population, the gov-
ing that ‘everybody is a polluter’, and ernment ought to determine in what
adopting this rigid attitude would of numbers and quality they must be pro-
course mean that mankind, as a whole, duced.’ Such a claim would be followed
would have to be outlawed. by instant criticism, and rightly so.
In view of certain disadvantages of All aspects of the economy and the
this ‘solution’, a more moderate version environment throw up the question
of the above postulate might say: ‘It whether the state should issue detailed
must be made illegal to put more than a regulations or rely on personal initiative
certain amount of strain on the envi- and market forces. When it comes to
ronment.’ food and computers, society is over-
By and large, environmental poli- whelmingly in favour of market forces.
cies in Germany and elsewhere indeed The environment, though, is a com-
tend to stick to this simple and seem- pletely different issue. This is not easy
ingly reasonable approach. Industrial to understand, however, because the
installations which have an adverse quality of the environment is also an
impact on the environment are subject- important commodity in limited sup-
ed to regulations. Thanks to this envi- ply.
ronmental policy instrument, maxi- Despite the obvious differences
mum emission ratios can be specified between a computer and clean air, there
and the application of certain tech- is a whole catalogue of good ideas on
niques can be prescribed. In Germany, how to make market forces work for
this is based on the Federal Emission the supply of environmental goods.
Control Act, which contains the Emission certificates, emission charges
Technical Instructions on Air Quality and the environmental liability law are
Control, the Large Combustion Plant possible ways of doing this.
Ordinance, the Act on Water Resource Certificates enable companies to
Management and many other laws and trade the right to certain emission
regulations. The government has the quantities freely among themselves.
task of making sure that these laws and The environmental policy objective is
regulations are observed and that met because the number of emission
infringements are penalised. rights issued is limited to what is social-
This method does have serious ly tolerable. This is preferable to regula-
drawbacks, however. When a maxi- tions because businesses which can
mum emission value is stipulated, decrease their emissions cheaply, can
nobody thinks very hard about how a sell their rights to companies whose
lower value might be achieved. cost of preventing environmental dam-
Moreover, the techniques which are age is higher. This is extremely good
prescribed by the government may be news not only for industrialists but for
economically (and even ecologically) the national economy as a whole: after
less appropriate than another proce- all, environmental protection is more
Environmental protection objectives 169

successful and costs less when the asso- of free market instruments in environ-
ciated charges are intelligently distrib- mental policy is concerned, caution is
uted among companies with different recommended. Politicians are in the
cost structures than when rules and habit of labelling laws and other direc-
regulations are imposed. In the →EU, tives as market-friendly, when in actual
a system of ‘emission exchange’ came fact they are predominantly antagonis-
into force in January 2005. It is hoped tic to the market. The German Waste
that this will achieve the climatic policy Water Charges Act, for example, has
goals of the European Union as eco- been formulated in such a way that the
nomically as possible. This system environmental protection stimulus is
incorporates numerous elements of the almost entirely lost. The same criticism
concept behind the emission certifi- is levelled at the Law Concerning the
cates and puts them into practice. Liability Regarding the Environment.
Emission charges are equally prefer- Much, therefore, especially in the area
able to regulations. If a business has to of the environmental policy instru-
pay emission charges, it means that ments, remains to be done. There is
emissions have been given a price. It is still a long way to go before an ecologi-
true that the charges are not market- cally sensitive →market economy has
related prices but are dictated by the been perfected.
government, but still the desire for
profit stimulates entrepreneurial cre- REFERENCES:

ativity with the result that the costly BINDER, K. G. (1999), Grundzüge der
emission factor is rationalised away. Umweltökonomie, Munich; ENDRES, A.
(2000), Umweltökonomie, Stuttgart;
This brings a kind of business energy
ENDRES, A. (2000), Moderne Mikro-
into environmental protection, which
ökonomik, Munich.
one can only dream of when regulation
policies are used. Alfred Endres
Meanwhile, many industrialised
countries have adopted taxation systems
with ecological components. In a simi-
lar way, the liability law makes the Environmental protection
entrepreneurial self-interest serve envi- objectives
ronmental protection. The best way to
avoid being sued for damages is using The first, and to this day the most
good environmental protection tech- important, environmental policy objec-
nology. If the entrepreneur is insured, tive is the reduction of air, water and
the insurance company will diligently soil pollution (→environmental impact). It
monitor the state of the environmental has to be taken into account that envi-
technology used by the insured party. ronmental protection does not only
The Law Concerning the Liability bring benefits (e.g. in the form of clean
Regarding the Environment (Umwelt- air), but also costs (e.g. the costs of
haftungsgesetz) of 1991 puts certain installing filtering units). Thus the goal
aspects of this idea into practice. of environmental policy cannot be the
As far as the successful application total avoidance of any environmental
170 Environmental protection objectives

impact; this would be associated with tant economic task within the field of
extremely high costs and would there- environmental policy.
fore be uneconomical. During the past few years, and hav-
It is rather about weighing up the ing been extremely successful in bring-
benefits and costs of environmental ing down environmental pollution,
protection against each other, and mak- environmental policy has increasingly
ing the optimal quality of the environ- turned its attention to new tasks: apart
ment a reality. For example, the sulphur from improving the quality of the air,
dioxide levels in the air should not be water and soil, the more economical
brought down to zero, but only to the use of natural resources is next on the
point where the costs of the avoidance agenda. Here, a distinction is made
of an additional ton of sulphur dioxide between non-renewable resources
corresponds to the benefits which (such as oil and gas supplies) and
would result from this additional emis- renewable resources (such as animals
sion reduction. and plants). In this regard, the goal of
In reality, it is very difficult to make sustainable development plays an
environmental policies so optimal (or important role. This generally refers to
efficient). It is especially true that the an economic development, which gives
benefits of environmental protection equal consideration to the needs of the
cannot be accurately measured and present and of future generations.
translated into monetary units (some- Sustainability therefore requires
thing that is indispensable for the so- both a clean environment (or at least
called cost:benefit ratio). This is why one that is not too polluted) and the
environmental policy can usually only preservation of natural resources for
pursue the more modest goal of min- posterity. Environmental policy must
imising costs. This entails giving up the therefore guarantee that these resources
goal of an optimal-quality environment are handled responsibly and that the
in favour of a certain degree of environ- predatory exploitation of raw materials,
mental quality as a political require- the extermination of species and the
ment that has to be realised at mini- destruction of ecological systems are
mum cost. prevented (→resource protection).
In the case of the sulphur dioxide It is true that in Germany, environ-
emissions, the first step is for the gov- mental protection is highly regarded; it
ernment to set a maximum emission has been incorporated into the Basic
level (which will not be optimal), then Law (Article 20a) as a national objective.
it has to decide which instruments (e.g. But so far there is no environmental
regulations, charges or certificates) will policy that is truly focused on sustain-
bring about the necessary reduction of ability, that takes the connections
the sulphur dioxide emissions in the between the different environmental
most economical way. policy areas into account and that is
The selection of instruments based on concrete, verifiable objectives.
(→environmental policy: instruments), as Instead, nature conservation, soil,
opposed to the definition of the objec- water and climate protection, air pollu-
tives, has to be seen as the most impor- tion control and health protection are
Environment-oriented management 171

being implemented more or less inde- only important to observe numerous

pendently of one another, and the for- environmental laws while maintaining
mulation of the objectives – with a few profitability, but that a way had to be
exceptions (such as the marginal emis- found for enterprises to marry environ-
sion limits for air pollutants in the mental protection with successful com-
Technical Instructions – Air) – remains pany management at their own initia-
vague (such as when the Federal Soil tive.
Protection Act calls for ‘the lasting pro- To this end, business science degree
tection of the functions of the soil’). courses soon introduced ‘environmen-
For as long as a concrete, logical tar- tal management’ as an additional aca-
get system is lacking in environmental demic subject. The core concept
policy, it will not be possible to imple- emerging from the research was that in
ment an environmental policy that is order to have the desired effect, envi-
both ecologically effective and econom- ronmental protection had to be inte-
ically efficient. grated with the other objectives,
processes and functions of business
REFERENCES: management.
BARTMANN, H. (1996), Umweltökonomie In a market economy, environmen-
– ökologische Ökonomie, Stuttgart, in particu- tal protection can never be the domi-
lar pp. 80-112; RAT VON SACHVER- nant goal of an enterprise. But an
→enterprise can, for its own good, set
(2000), Umweltgutachten 2000, Berlin, 10.
itself economically acceptable environ-
März 2000; SÖLLNER, F. (2000),
Umweltökonomie und Umweltpolitik, in:
mental targets in order to increasingly
Festel, G./Söllner, F./Bamelis, P. (eds) lighten the ‘ecological footprints’ of its
(2000), Ökonomie und chemische Industrie – products and production processes.
eine praxisorientierte Einführung in die Volks- Economically, this will be driven by
wirtschaftslehre, Berlin, pp. 816-892. potential savings (savings on waste dis-
posal and energy) or ecological product
Fritz Söllner characteristics (for instance, food items
free of pesticide residues). Without
measurable targets, environmental pro-
Environment-oriented tection remains noncommittal as a
management management task (in keeping with the
old adage ‘what’s measured gets man-
Between the early and the mid-1980s, aged’; →business accountancy).
the business community – first in To reach their goals, enterprises (as
northern Europe and later in the always) need strategies, information,
United States and southern Europe – management systems and instruments.
began to recognise that environmental The strategy is often formulated as an
protection had become a strategic task ‘environmental strategy’ because, both
which involved far more than the internally and externally, this is easier to
installation of filtering equipment communicate. Apart from objectives,
downstream. The practical side of run- such a strategy requires planned meas-
ning a business showed that it was not ures (e.g. investments for the setting of
172 European Central Bank, German Federal Bank

environmental standards for industrial which serve to ensure that environ-

plants, product innovations) and the mental protection is managed as profes-
allocation of resources. sionally as other areas.
Although the concept of communi- Apart from the unpredictability of
cating the issue plays a role, the envi- economic trends and developments,
ronmental strategy – if it is to be really and the resulting short-term thinking
effective – has to be applied to the which predominates in business, the
‘ordinary’ business procedures (for hedonistic nature of modern consumer
example, the product development behaviour (i.e. pleasure-seeking and
process). Whether or not environmen- therefore often environmentally harm-
tal objectives can be achieved (e.g. the ful) and the strict, confusing and often
disposal costs, or the energy efficiency anti-progressive government regula-
of the product), depends on their inte- tions are the main reasons why business
gration in these processes. Therefore, is not more committed to environmen-
the environmental objectives have to be tal management.
broken down into these functions (i.e.
described in detail), so that they can be REFERENCES:

incorporated into the processes (e.g. the STEGER, U. (ed) (1997), Handbuch des inte-
objective ‘waste reduction from pro- grierten Umweltmanagements, Munich, Vienna.
duction process z by x%’ is written into
Ulrich Steger
the business plan in this concrete form
and is listed there together with the
necessary measures and resources).
This procedure is helped by shared European Central Bank, German
background information (environmen- Federal Bank
tal database) where the relevant emis-
sions and environmental effects are The banking and monetary policies are
captured, and which show where exact- vested in the central banks. They are at
ly the strategic priorities ought to be the top of the hierarchy of the banking
positioned. system and regulate the money supply
Environmental management sys- of their economies. For the first 50
tems (such as the ISO 14000 or the years of the existence of the Federal
European directive on voluntary partic- Republic of Germany, the German
ipation in the Environmental Manage- Federal Bank, with its headquarters in
ment and Auditing System, EMAS) Frankfurt, was responsible for the
help to define areas of responsibility German banking and monetary policy.
and describe informational and organi- In early 1999, the currency sovereignty
sational processes which are necessary if shifted to the European System of the
a responsible implementation of the Central Banks (ESCB). In the
agreed environmental protection objec- European Monetary Union (EMU),
tives and strategies is to be ensured. the national issuing banks of the mem-
To this end, special instruments ber countries became an integral part of
have been developed (e.g. environmen- the euro system, headed by the
tal controlling, the ecological balance) European Central Bank (ECB), like-
European Central Bank, German Federal Bank 173

wise with its headquarters in Frankfurt and the deposit facility (the banks have
(→European monetary policy). surplus liquidity and can invest it at a
The prime objective of the ECB – as lower interest rate with the ECB). The
before that of the German Federal Bank interest rates for these two instruments
– is to ensure →price level stability in its form a passage within which the
currency area. By safeguarding pur- overnight rates for day-to-day money
chasing power, the ECB makes its con- fluctuate.
tribution to a lasting and satisfactory The minimum reserve serves as a
economic growth as well as a high level buffer for the daily fluctuations which
of employment. In the long run, com- the business banks have to keep at the
petition can function only if price levels ECB and which they have to attain as a
remain stable. Inflation and deflation monthly average. The minimum
are equally responsible for distortions reserve is calculated as a certain portion
in the production, consumption and of the short-term client deposits with
distribution of the economic product banks, and can be varied by the ECB in
and are thus detrimental to prosperity order to achieve monetary policy goals.
(→conflicting aims in economic policy). The decisions on the deployment of
In order to achieve its ultimate the monetary political instruments are
objective of price stability, the ECB has made centrally by the ECB Governing
monetary policy instruments at its dis- Council and they are implemented in a
posal (→European monetary policy: instru- decentralised manner by the participat-
ments). These were developed in line ing national central banks. The ECB
with the practical monetary policy Governing Council is made up of the
experience of the issuing banks in the six members of the board of directors of
euro system. Market-orientated instru- the ECB and of the presidents of the
ments are paramount, since they are national central banks of the euro area.
mostly in harmony with the existing In order to avoid conflicting aims,
competition system in the world of particularly between the governments
finance. Through so-called main refi- and the ECB, whose primary commit-
nancing business, the banks can once a ment is price level stability, the ECB
week, and for a period of one week, get Governing Council is independent in
the liquid funds they need (central bank its resolutions. Its members are not
money) by approaching the ECB with authorised either to ask for, or to accept,
bids. Besides, the ECB – also through instructions from a third party.
bidding – offers long-term refinancing Furthermore, all political institutions
for three months. are obliged not to exert pressure on the
For special, short-term liquidity ECB (Article 108, ECC). As an addi-
requirements or for the investment of tional protection against political lobby-
surplus liquidity, the business banks can ing, the ECB and the national issuing
fall back on two permanent facilities: banks are not allowed to grant credits to
the marginal lending facility (the banks EU institutions or to national govern-
need liquidity and can obtain it from ments.
the ECB at a higher interest rate than Tasks, objectives, instruments and
through the main refinancing business) competences of the ESCB correspond –
174 European Economic and Monetary Union

as at the Federal Bank before – to the second option, which has more pro-
requirements of a →social market econo- found political and psychological con-
my. The priority of the monetary policy sequences, and represents a more defin-
demanded by Walter →Eucken is guar- itive form of integration. In both forms
anteed through the creation of an effi- of monetary union, national finance
cient institutional framework. policies have to be replaced by a cen-
tralised finance policy.
REFERENCES: In the case of the EMU a European
EUROPÄISCHE ZENTRALBANK Central Bank (ECB) was established
(2000), Die Einheitliche Geldpolitik in Stufe 3 – with the →German Federal Bank being
Allgemeine Regelungen für die geldpolitischen
just one of the national central banks
Instrumente und Verfahren des eurosystems,
with voting rights. Beyond this, the
Frankfurt/M. (www.ecb.int); ISSING,
German government has given up its
TANI, O. (2001), Monetary Policy into the right to alter the exchange rate for good.
Euro Area – Strategy and Decision Making at the The euro exchange rate is determined
European Central Bank, Cambridge; ISSING, by a European Community policy
O. (1996), Einführung in die Geldpolitik, 6th committee.
revised edition, Munich. It has become customary to refer to
the European Economic and Monetary
Reiner König Union (EEMU) as something akin to
Siamese twins. This is not the case –
widely differing sectors of the economy
European Economic and are regulated without a mutual causal
Monetary Union relationship. While an economic union
without a monetary union is quite fea-
The European Monetary Union sible, a monetary union without an eco-
(EMU) has been in existence since 1 nomic union will never work. This
January 1999. The issuing of coins and means that the economic union should
banknotes on 1 January 2002 concluded come first and the monetary union sec-
a process of integration which had ond.
become official policy as long ago as An economic union has been
December 1969 (→integration). achieved when conditions between the
In terms of integration, a monetary member countries in the integrated area
union is a considerably more far-reach- resemble those of a domestic market.
ing objective than a free trade zone or a This means that of the five constitu-
customs union, affecting as it does the tional liberties of an economic and
very core of the financial and monetary monetary union, four have to be grant-
sovereignty of the nations concerned. ed by the framework of the economic
A monetary union can take either of union and one by the framework of the
two forms: either it will have irre- monetary union.
versibly fixed exchange rates between Economic union freedoms are free-
the participating countries or it will dom of trade, freedom of the service
adopt a uniform currency. The industry, free movement of labour and
European Union (EU) decided on the the freedom to establish companies.
European Economic and Monetary Union 175

The monetary union freedom is free- Earlier attempts to establish an

dom of financial and monetary transac- EMU failed because the economic,
tions. monetary and political consequences of
In the areas of the national this process of integration had not
economies to be liberalised, the follow- found acceptance. In addition, there
ing integration requirements have to be were insurmountable differences con-
fulfilled: cerning the details of financial and
monetary policy: monetary stability as
• The creation of a domestic market for (sole) objective; (in-)dependence for a
goods and services. European central bank; convertibility at
the beginning/the end? This is why the
• Companies’ choice of locality. Den Haag initiative ended in failure
(1–2 December 1969) as long ago as
• A flexible labour market. 1971–1972 (Willgerodt et al., 1972).
The introduction of the European
• Ability to adapt to the growing com- Monetary System (EMS) in March
petition in the abovementioned mar- 1979 did not target the European eco-
kets. nomic union directly, but it still failed
to pave the way for progression from
On the monetary side, a communi- the first to the second institutional level
ty financial market has to be created of integration. The successes of the
that allows for the easy conversion of EMS were due to a reversal of the rules
the common currency into other cur- and to the positive anchoring role of the
rencies. Deutschmark and the German Federal
A common financial and monetary Bank.
policy demands the coordination of the The third attempt, officially initiat-
economic policies of the member ed in 1988, led to the government con-
countries, assuming that they – as regu- ferences about the European Monetary
lated in the EU contract – essentially Union and the political union. They
remain under national determination were brought to a conclusion at
and are regarded ‘as an issue of com- Maastricht in December 1991, resulting
mon interest’. Otherwise, financial and in far-reaching amendments to the
monetary policy is disrupted or impos- European Community contract and in
sible (see figure, next page). the creation of the European Union
These requirements of an EMU Treaty. The monetary union and its
demonstrate the depth of integration policies were ratified and implemented
aimed at as well as the considerable there and then.
political consequences to which an Why was it that this most recent
EMU gives rise. This fact justifies the attempt ended in the successful
question whether a political union (pre- creation of the EU?
viously established or created simulta-
neously with the EMU) is necessary in • The most important – and frequently
order to invest the EMU with lasting omitted – prerequisite for the exis-
stability. tence of an economic union was
176 European Economic and Monetary Union

European Economic and Monetary Union (EEMU)

Sub-sector: European Monetary Union

Markets Politics
common Convergence of monetary policy

Financial markets Currency market Decentralised Centralised

Functioning – Common – coordination Common

– Money markets exchange rate of the money administration of:
– Capital markets system and – the currency
– Market – Common exchange – the monetary
competition exchange rate rate policy policy (status of
policy the European
– Free payment Central Bank)
transactions and – the exchange
circulation of rate system
capital for all – exchange rate
(convertibility) policy

European Economic and Monetary Union (EEMU)

Sub-sector: European Economic Union

Markets Politics
Common domestic market Convergence of economic policy

Goods and Labour Centralised

services market market
Political union with leg-
– Free exchange – Freedom of islative powers over insti-
of goods and movement tutional framework and
service for workers process policy (economic Decentralised
– right of domicile – Flexibility of constitution of the Union)
– common compe- national
tition policy and labour
control of gov- markets Legally binding, par- Coordination of
ernment subsi- tially common admin- the economic and
dies istration of economic labour market poli-
policy and effective cies = de facto
regulatory policy for partially common
the labour markets administration due
through agreements/ to criteria and pro-
contracts (e.g. stabili- cedures focused
ty and growth pact on convergence
European Economic and Monetary Union 177

already in place, having been started which is binding for all members and
and made a reality in 1987 with the also for the monetary union.
programme Domestic Market ’92.
• The economic orientation was clari-
• The German →reunification, coupled fied as well. As a result, price stability
with the determination of the federal remains a priority, but not only
government to demonstrate its loyal- regarding financial policy. It is equal-
ty to the West, led to the offer to ly relevant for exchange rate policy
relinquish the anchor currency and economic policy. The Maastricht
Deutschmark in the context of an accord emphasises repeatedly that
EEMU in favour of a common cur- economic policy has to be in harmo-
rency. This suited other EC states and ny ‘with the principle of an open
their political ambitions. Among →market economy with free →competi-
other reasons, they aspired to an tion’ (Articles 4, 98, 105).
EEMU as a way of ending the domi-
nance of both the Deutschmark and What is still lacking? Many details have
the German Federal Bank. been found wanting, but specifically
two areas (might) cause problems:
• The process of integration started on
1 July 1990 with the transition to cur- • Attempts to make definitive progress
rency convertibility. on the road towards a political union
failed, not only in Maastricht but at
• The ECB was solely responsible for the government conferences at
the codification of the creation and Amsterdam (1997) and Nice (2000).
maintenance of price stability and The next government conference on
succeeded in doing so. Furthermore, the political union has already been
the ECB and all national central planned but the massive EU enlarge-
banks became independent and ment has increased, rather than
therefore no longer subject to decreased, the problems.
instructions from political institu-
tions (→European monetary policy). • The conceptualisation of the eco-
nomic union was too narrow from
• The coordination of the economies the start. Politically, the economic
was greatly improved. In order to interdependence between the com-
qualify for the monetary union, each mercial sector (trade and service
country has to fulfil criteria of con- industry, freedom to establish a busi-
vergence (stable prices, stable ness) and the labour market was
exchange rates, stable interest rates, overlooked. The national labour
solidity of public finances – budget markets were not included in the
deficit, indebtedness). Particularly reorganisation and integration of the
sensitive and politically important market economy and might turn into
criteria related to public finance were a stumbling block.
clarified and tightened in a growth
and stability agreement in 1997, There are many reasons for the
178 European monetary policy: Actors

sceptical attitude towards the EEMU – European System of Central Banks

some justified and others imaginary. (ESCB), which includes the national
There is consensus that this is a politi- central banks of those EU member
cal undertaking which will require states that have not yet adopted the euro.
enormous political courage and the will The eurosystem is managed by the
to adjust, if besides the economic objec- ECB Governing Council and the ECB
tives the political aim – the stabilisation Executive Board. The ECB Governing
of the European peacetime order – is to Council comprises the members of the
be achieved. Executive Board and the presidents of
all the NCBs which belong to the
REFERENCES: eurosystem. It determines the Com-
WILLGERODT, H./DOMSCH, A./ munity monetary policy according to
HASSE, R. H./MERX, V. in collaboration Article 12 of the ESCB Statutes, includ-
with KELLENBENZ, P. (1972), Wege und
ing decisions relating to intermediate
Irrwege zur Europäischen Währungsunion,
objectives, key interest rates, and central
Freiburg i.B.; UNGERER, H. (1997), A
Concise History of European Monetary
bank money supply. The ECB Gover-
Integration. I, Westport-London; BRUSSELS ning Council takes decisions based on
INITIATIVE (1998), Convergence-Coherence- majority vote; the president’s vote
Adjustment. The need for the convergence in the decides in the case of a tie.
area of economic policy coherence in terms of men- The Executive Board comprises the
talities of EU member states with a view to future president and vice-president of the
co-operation and adjustment in the EMU, ECB and four other members appoint-
Brussels. The Brussels Initiative is a group ed after hearings of the ECB Governing
of European economics scholars who Council and European Parliament by
analyse and report on economic and curren- state leaders of the member states that
cy policy. Available at Konrad Adenauer
have adopted the euro. The Executive
Foundation, Ave. De l’Yser 11, B-1040
Board implements the decisions of the
Governing Council, and it gives the
Rolf H. Hasse necessary instructions to the NCBs.
The ESCB is governed by the ECB
Governing Council, the Executive
Board and the General Council
European monetary policy: (extended Governing Council), which
Actors comprises the president and vice-presi-
dent of the ECB as well as the
The eurosystem is responsible for mon- presidents of the NCBs of all the EU
etary policy in the member states of the member states. The General Council
European Union (EU) that have intro- coordinates the monetary policy of the
duced the euro. It comprises the eurosystem with the NCBs of the
European Central Bank (ECB) in member states that have not yet adopt-
Frankfurt and the national central banks ed the euro.
(NCBs) of the EU member states that Article 7 of the ESCB statute
have adopted the euro as a common guarantees the independence of the
currency. The eurosystem is part of the decision-making bodies. Thus ‘when
European monetary policy: Aims and duties 179

exercising the powers and carrying out REFERENCES:

the tasks and duties conferred upon DIETRICH, D./ VOLLMER, U. (1999),
them … neither the ECB, nor a nation- Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems, in:
al central bank, nor any member of
Wirtschaftswissenschaftliches Studium (WiSt),
their decision-making bodies shall seek
11, pp. 595-598; GÖRGENS, E./ RUCK-
or take instructions from Community RIEGEL, K./ SEITZ, F. (2001), Europäische
institutions or bodies, from any govern- Geldpolitik: Theorie, Empirie, Praxis, 2nd
ment of a member state or from any completely revised edition, Düsseldorf;
other body’. EUROPEAN CENTRAL BANK (2001),
In particular, this independence The Monetary Policy of the ECB, Frankfurt/ M.
refers to the pursuit of monetary policy
objectives and the decision-making Diemo Dietrich
regarding economic →...strategies as well
as the implementation of economic
→...instruments and personal independ- European monetary policy:
ence. Aims and duties
The last point is to be guaranteed
through long terms of office for the According to Article 2 of the European
governors (eight years) and the presi- System of Central Banks (ESCB)
dents of the NCBs (minimum five statutes (→…actors), the prime objective
years). In addition, members of the of the euro system is ‘price stability pro-
Executive Board cannot be re-appoint- tection’. This is to assist the euro system
ed. With the desire for an independent in ensuring the stability of the purchas-
monetary policy, the indications from ing power of the common currency and
research that the objective of →price sta- to prevent inflation.
bility is more likely to be achieved The European Central Bank (ECB)
through an independent monetary pol- considers this objective as met as long
icy can also be respected. as the average annual increase of con-
In order to guarantee price stability, sumer prices does not exceed the value
eurosystem policy aims to regulate the of 2% in the medium term. The reason
available liquidity of all the monetary behind this projection is the stabilisa-
financial institutions in the euro area; tion of the expectations of households
consequently the other monetary finan- and →businesses. However, the ECB
cial institutions are considered, in the does not feel obliged to correct imme-
broad sense, to be economic players. In diately short-term deviations from this
particular, this includes local financial objective.
institutions. Article 2 of the ESCB statutes con-
These are enterprises whose activi- tinues: ‘Insofar as this is possible with-
ties involve accepting funds or other out restricting the objective of price sta-
repayable moneys as well as administer- bility, the ESCB supports the general
ing loans, for example banks. economic policy in the Community, in
order to contribute to the realisation of
the … jointly agreed objectives of the
180 European monetary policy: Instruments

Among these are balanced econom- Besides the formulation and imple-
ic development as well as a high level of mentation of monetary policy in the
employment. However, science and the Community, according to Article 3 of
ECB agree that in the medium and long the ESCB statutes, foreign currency
term these complementary objectives transactions, the administration of the
are best met through price stability pro- official currency reserves of the mem-
tection (→price level stability). This ber states and the promotion of a
improves the pricing system trans- smoothly operating money market
parency on the one hand, and thus the count among the euro system’s respon-
efficiency of the distribution of sibilities. Moreover, the ECB, accord-
resources to the place of highest return ing to Article 4 of the ESCB statutes,
in each case (efficiency of allocation). also occupies an advisory function and
Small inflation risks lead to a lowering has to be consulted on all legislative
of the interest levels in the long term proposals of the Community. It is enti-
and have a stimulating effect on invest- tled to voice its opinion in disputes with
ment and →employment. Furthermore, organs and institutions of the Com-
price stability means that household munity as well as national authorities,
and company assets are not deployed as whenever its area of responsibility is
a hedge against inflation, but are involved.
utilised productively. Finally, it also pre-
vents an arbitrary redistribution of REFERENCES:

assets and →income, strengthening the DIETRICH, D./VOLLMER, U. (1999),

Community’s internal social cohesion. Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems in:
Thus, the price stability objective is
Wirtschaftswissenschaftliches Studium (WiSt),
considered as being compatible with
11, pp. 595-598; GÖRGENS, E./RUCK-
economic stability and a boost to the RIEGEL, K./SETZ, F. (2001), Europäische
labour market. The ECB considers it Geldpolitik: Theorie, Empirie, Praxis, 2nd
pointless to attempt to lower →unem- revised edition , Düsseldorf; EUROPEAN
ployment in the short term by means of CENTRAL BANK (2001), The Monetary
financial policies that go against the Policy of the ECB, Frankfurt/M.
price stability objective, since such poli-
cies endanger the conditions for stable Diemo Dietrich
economic and employment growth, at
least in the medium term (→conflicting
aims in economic policy). The prospects of European monetary policy:
lowering unemployment and of stabil- Instruments
ising the →economy through monetary
policies are very limited, even in the According to Articles 18 and 19 of the
short term, since the monitoring of European System of Central Banks
business cycles is never absolutely cor- (ESCB) statutes, the instruments at the
rect and is always subject to a time lag, disposal of the ESCB (→European mon-
and since financial policy does not have etary policy: actors) consist of open market
a perfectly predictable delayed effect on operations, standing facilities and mini-
employment and the economy. mum reserves. The principal instru-
European monetary policy: Instruments 181

ment comprises the following four In addition, the euro system carries
open market operations through which out foreign currency swap operations,
the euro system grants loans to financial where euros are bought (or sold) in
institutions: by means of its main refi- exchange for a foreign currency, under
nancing operations, the euro system the concurrent agreement to sell (or
covers the bulk of the financial sector’s buy) euros at a later, fixed point in time,
liquidity requirements; at the same in exchange for foreign currency. In
time its terms (interest rate, quantity of order to absorb market liquidity, the
allocation) are meant to signal the euro system is able to issue its own
course that monetary policy is intended debenture bonds as well as to accept
to take. fixed-term interest-bearing deposits
Longer-term refinancing operations from financial institutions.
ensure the provision of long-term All open market operations with
liquidity without a signal effect; fine- financial institutions are executed in the
tuning operations are used by the euro form of bidding processes (tenders),
system to balance unexpected liquidity either as fixed-rate tenders or as vari-
fluctuations and to stabilise interest able-rate tenders.
rates, while liquidity distribution with- For fixed-rate tenders, the financial
in the financial sector is regulated by institutions have to indicate the amount
structural operations. of Central Bank money they require in
In order to ensure the liquidity of the form of a bid, which has to be sub-
the financial sector through open mar- mitted at the interest rate set by the
ket operations, the euro system and the euro system. If the sum of all the bids
financial institutions usually arrange submitted by the financial institutions
restricted transactions such as repur- exceeds the amount of Central Bank
chase operations or pledged securities money the euro system is prepared to
operations. For repurchase operations, lend, the final allocation to the financial
the euro system will buy securities from institutions will be based on a quota
financial institutions while at the same system. If, for example, all the bids
time concluding a repurchasing agree- received add up to s800 billion and the
ment with them, obliging the financial euro system does not wish to lend more
institutions to repurchase the securities than s80 billion, each financial institu-
at a later time and to refund the Central tion will receive one-tenth of its origi-
Bank money. nal bid.
Where pledged securities operations For variable-rate tenders, however,
are concerned, the euro system will the financial institutions are not only
lend against securities owned by finan- obliged to indicate the size of their bids,
cial institutions without any property but also the level of interest at which
transfer taking place. The euro system they are prepared to maintain them.
also concludes definitive transactions, The final allocation then depends on
where securities are bought or sold out- the interest rates submitted together
right and where time limits do not with the bids. If, for example, the allo-
apply (outright open market opera- cated amount is once again s80 billion,
tions). and Bank A has submitted a bid of s30
182 European monetary policy: Strategies

billion at 5%, Bank B a bid of s50 bil- such as deposits, debentures and issued
lion at 4% and Bank C a bid of s40 bil- money market papers, with the excep-
lion at 3%, Bank A receives s30 billion tion of liabilities towards other financial
in Central Bank money and Bank B institutions bound by the minimum
s50 billion – their bids being the high- reserve legislation.
est – while Bank C receives nothing.
When the allocation is made at a REFERENCES:

uniform interest rate, it is referred to as DIETRICH, D. /VOLLMER, U. (1999),

the Dutch system; if, however, financial Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems, in:
institutions receive Central Bank
Wirtschaftswissenschaftliches Studium (WiSt),
money at their own, individually sub-
11, pp. 595-598; GÖRGENS, E./RUCK-
mitted interest rates, the allocation is RIEGEL, K./SEITZ, F. (2001), Europäische
made according to the American sys- Geldpolitik: Theorie, Empirie, Praxis, 2nd
tem. completely revised edition, Düsseldorf;
Besides open market operations, the EUROPEAN CENTRAL BANK (2001),
euro system also offers so-called stand- The Monetary Policy of the ECB, Frankfurt/
ing facilities which financial institutions Main.
can use if they wish. These provide
extremely short-term liquidity as well Diemo Dietrich
as liquidity absorption. This liquidity is
offered by a marginal lending facility,
which gives financial institutions access European monetary policy:
to unrestricted amounts of Central Strategies
Bank money at a fixed euro system
interest rate for the coverage of short- A monetary policy strategy describes
term liquidity requirements. Liquidity the long-term decision-making process
absorption is provided by a deposit regarding the deployment of monetary
facility, which allows financial institu- policy →…instruments aimed at the
tions to invest surplus liquidity with the achievement of monetary policy objec-
national central banks at a prescribed tives.
euro system interest rate. In this respect, the monetary policy
In conclusion, the euro system has a strategy has to fulfil two principal tasks:
minimum reserve instrument which
compels the financial institutions locat- • Lending structure to the decision-
ed in the euro currency area to deposit making process on monetary policy
interest-paying minimum reserves to and providing the ECB Governing
the amount of (currently) 2% of their Council (→…actors) with the infor-
liabilities, with the national central mation it requires for this decision-
banks. This instrument is intended to making process.
aid the stabilisation of Central Bank
interest rates as well as to increase the • Strategy that serves as a means of
demand for Central Bank money. The communication and contact with the
minimum reserve requirement applies public and thus renders financial pol-
for the financial institutions’ liabilities icy more plausible.
EU: Agricultural policy and enlargement east 183

Through its monetary policy, the this reason, the European Central Bank
euro system is pursuing a stability-ori- (ECB) has declared its intention to
ented strategy which is, above all, sup- steer the intermediary objective of
posed to fulfil various criteria. The money supply in such a way that the
main criterion is effectiveness, meaning ultimate objective, which in financial
that only the strategy will be applied terms is ‘price level stability’ (→…aims
that is best able to achieve the objective and duties), is most easily reached.
of monetary policy. To this end, the ECB chose as inter-
At the same time, the strategy is mediary objective and as its parameter, a
supposed to signal to the public a realis- comparatively loosely defined money
tic commitment to this objective. This supply comprising not only the circula-
requires clear and comprehensible tion of cash and the usual deposits in
wording as well as transparency and financial institutions, but also money
easy accessibility for the public; more- market bonds and bonds issued by
over, the public must be given the other monetary financial institutions
opportunity to evaluate the implemen- (referred to as money supply M3). The
tation of monetary policy as well as its ECB’s justification for choosing money
positive outcomes, by measuring them supply as its intermediary objective is its
against the monetary policy objective. suitability as an indicator of future price
Essentially, the euro system’s stabil- trends and the fact that it is easily con-
ity-oriented strategy consists of two ele- trollable through the euro system.
ments. The first is the quantitative
determination of the principal objective REFERENCES:

of →price level stability by means of the DIETRICH, D./VOLLMER, U. (1999),

projection of an inflation target of 2%. Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems in:
The other element consists of the two-
Wirtschaftswissenschaftliches Studium (WiSt), 11,
pronged support for the strategy.
pp. 595-598; GÖRGENS, E./RUCK-
The first pillar comprises an eco- RIEGEL, K./SETZ, F. (2001), Europäische
nomic analysis of the recent economic Geldpolitik: Theorie, Empirie, Praxis, 2nd com-
development and its short- and medi- pletely revised, Düsseldorf; EUROPEAN
um-term risks for price level stability. CENTRAL BANK (2001), The Monetary
The second pillar is the monetary Policy of the ECB, Frankfurt/M.
analysis as a basis for the prognosis of
the medium- and long-term inflation- Diemo Dietrich
ary trend. Scientifically, this is based on
the view that inflation is a monetary
phenomenon which results from an EU: Agricultural policy and
excessive money supply increase rela- enlargement east
tive to the actual economic →growth.
By using the monetary analysis the Although in many countries →agricul-
ECB tries to check the short- and medi- tural policy is considered to be a sensitive
um-term inflation prognosis resulting domestic affair, the member countries
from the economic analysis, taking into of the then newly founded European
account a longer-term perspective. For Economic Community decided at the
184 EU: Agricultural policy and enlargement east

very outset of European →integration to many cases had to be put into tempo-
give up their national agricultural poli- rary government storage, was not possi-
cies and replace them with a common ble without high →subsidies, since prices
agricultural policy that included a uni- on the international market were
form agricultural commodities market. markedly lower than the prices fixed by
This was not an obvious develop- the EU agricultural policy. Therefore,
ment by any means, as the individual more and more government money
member countries ran their previous had to be spent on the removal of the
national agricultural policies along increasing surplus of the agricultural
quite different lines. However, free commodities markets in the EU.
agricultural trade between the member By around 1980, the result was that
states in the context of a common poli- about three-quarters of the entire EU
cy was an important goal – especially for budget had to be spent on the common
France, since that country hoped that agricultural policy and the EU was in a
this would compensate for the opening serious financial crisis. At the same
of the French market to the import of time, increasingly harsh commercial
industrial goods from Germany. conflicts arose between the EU and
During the establishment of the other countries (particularly the United
common agricultural policy after 1960, States), which felt that their agricultur-
common agricultural price levels had to al export interests were adversely affect-
be agreed between countries with pre- ed by the EU’s market interference.
viously low agricultural prices such as To prevent these unfavourable con-
France, and high agricultural prices sequences of the common agricultural
such as Germany. After harsh argu- policy, however, initially the symptoms
ments, the decision – particularly due to and not the causes were addressed. In
pressure from Germany – was made in 1984 – because of a sharp increase of the
favour of a relatively high price level for budget expenditure, especially in the
agricultural products. As if that were dairy market – quotas (quantitative
not enough, in the years to come prices restrictions) for milk production were
for agricultural products in the introduced, which prescribed to indi-
European Union (EU) continued to be vidual farmers how much milk they
increased. They thereby departed more were allowed to sell. In an attempt to
and more from the level that would deal with the surplus problem on the
have prevailed in markets with no gov- EU grain market, it was decided to take
ernment interference. agricultural land out of the cultivation
As a consequence, agricultural pro- process. It was hoped that it would be
duction in the EU rose far beyond the possible with measures of this kind to
growing demand. This meant that the keep the expenditure of the common
EU, which at the time of the establish- agricultural policy below an upper limit
ment of the common agricultural which had been fixed in 1988.
policy was still importing agricultural But reforms targeting the roots of
products, started to export all major the problem in the form of hyper-
agricultural products. However, the inflated prices for agricultural products
export of the growing surplus, which in only followed in 1992, after it had
EU: Agricultural policy and enlargement east 185

become clear during the Uruguay regarding the agricultural commodities

Round of the General Agreement on markets, particularly in connection
Tariffs and Trade negotiations that the with the Eastern enlargement, meant
talks could not be concluded until the that further reforms would be neces-
EU had offered to come to an accept- sary. They were required to be under-
able compromise with its negotiating taken in the context of a ‘half-time eval-
partners on agricultural issues. uation’ scheduled for 2002–2003.
Under EU agricultural commis- Commissioner Fischler obviously
sioner MacSharry, support prices for wished to use that opportunity to
grain and beef were brought down sub- advance the EU agricultural policy
stantially. To compensate for the reforms further (→EU: budgeting).
income losses of farmers, direct grants The most difficult agricultural poli-
out of the EU budget were introduced. cy problem one is going to encounter in
With the Agenda 2000 resolutions, connection with the enlargement east
these reforms were taken several steps has definitely not begun to be solved by
further under agricultural commission- Agenda 2000: whether farmers in the
er Fischler in 1999, when the beef and member states should also receive the
grain prices were lowered once more direct grants which were introduced in
and dairy price reductions were the EU in 1992, remains uncertain. So
planned – in each case with more direct far the EU has been of the view that this
grants for farmers (albeit not making up is neither required nor does it make
fully for their losses of income). sense, since these grants were intro-
Through these reforms, the EU has duced by the original EU in order to
managed to reduce its price support for counterbalance price reductions which
grain to such an extent that it might be do not occur in the new member states.
able to export grain without subsidies in The governments of the new mem-
the future. ber states nevertheless stubbornly insist
Like the total package of Agenda that their farmers should also receive
2000, these further reforms of the EU these grants, and they are able to sup-
agricultural policy helped prepare the port their demands with a number of
EU for the Eastern enlargement (→EU: arguments which are hard to reject.
enlargement). This seemed necessary The most plausible of these is the argu-
because the new Central European ment that →competition between the
member countries had a considerable farmers of the original EU and those in
agricultural production potential and the new member states would be
were thus liable to contribute to a pre- severely distorted if the new member
carious aggravation of the surplus prob- states were denied the grants.
lems in EU agricultural commodities A crucial task for the EU agricultur-
markets and thus to a heavy burden on al policy is therefore – specifically, but
the EU budget. not only in connection with the
In this regard, the agricultural enlargement east – a decision about the
reforms of Agenda 2000 might have future of the direct grants.
been quite effective; although a com- Meanwhile, the direct grants have
prehensive solution to the problems become the key element of the EU
186 EU: Budgeting

agricultural policy and already make up sation. Active financial equalisation

half of all the expenditure for this poli- entails the assignment of public rev-
cy, with a rising trend. How the grants enue. Passive financial equalisation, by
will be allocated in future is still contrast, is defined as the assigning and
unclear. It is, however, likely that the distribution of public responsibilities as
grants will become increasingly less well as the manner of their execution.
dependent on production but will be Since political responsibilities are
more in tune with actual market condi- always connected with expenditure,
tions, that they will be gradually both terms (responsibilities, expendi-
reduced as time goes on, and that even- ture) can be used equally. The relation-
tually completely different incentives ship between own revenue and expen-
will take their place. These are sup- diture, which can be independently
posed to reward the sort of social determined, reflects the degree of
achievements that agriculture provides, financial autonomy of a social organisa-
especially for the environment and tion. For the European Union (EU),
regional development. the allocation of responsibilities and
financial means to union level always
REFERENCES: simultaneously represents a piece of
HENRICHSMEYER, W. /WITZKE, H. P. political integration.
(1991), Agrarpolitik. Vol. 1 Agrarökonomische The original integration of sectors
Grundlagen, Stuttgart; HENRICHSMEY-
of the economy was – thanks to the
ER, W. /WITZKE, H. P. (1994), Agrarpolitik
removal of barriers to trade – followed
Vol. 2, Bewertung und Willensbildung,
by the gradual shift of individual mem-
ber states’ policies to the level of the
Stefan Tangermann EU. This means that passive financial
equalisation continued to grow (Article
3 ECC). This includes the right to take
decisions on the way in which the
EU: Budgeting assigned responsibilities are imple-
mented (decision competence), the way
A ‘financial constitution’ comprises all in which tasks are carried out (executive
legal regulations which define the com- competence) and how money is spent
petence of public authorities to handle for this (financing competence).
income and expenditure. The ‘financial In the event of the expenditure
constitution’ of the EU consists of reg- increasing, the revenue has to grow too.
ulations for the acquisition of financial This entails an expansion of the active
means and instructions on how and in financial equalisation. This part of the
which political spheres these should financial constitution requires clarifica-
and/or can be used. tion as to the sources of revenue (deci-
sion competence), the right to impose
EU income and expenditure revenue (tax setting competence) and
responsibilities the right to dispose of the proceeds
A financial constitution can be divided gained (competence to use proceeds).
into active and passive financial equali- Articles 268-280 of the European
EU: Budgeting 187

Community Treaty can be interpreted When the EU expenditure is inter-

as the financial constitution in the nar- preted as an offer of public goods by the
rower sense. The EC merger treaty of EU, another picture emerges. In that
1965 meant that the administrative case, policy spheres and categories of
budgets which had originally been expenditure at Community level are
drawn up separately for the individual one and the same. This is reflected in
sections of the European communities the budgets. The most important items
were replaced by a uniform budget. In are CAP expenditure and the costs of
1970, the research and investment the structural and coherence policies. In
budget of Euratom was included in the the course of the Eastern enlargement,
general budget. Today, there is an EU financial aid in the context of the inte-
budget, a European Community for gration strategy for the membership
Coal and Steel (ECCS) operational candidates must be added to the
budget, the European Development account.
Fund and the plan regarding EU bor- Moreover, the EU allocates funds to
rowing and lending, which comprises the internal (cooperation in the spheres
the European Investment Bank as well of the judiciary and domestic affairs) as
as the New Community Instrument. well as external (joint foreign and secu-
In terms of expenditure, a distinc- rity policies) policy fields. Besides the
tion has to be made between mandato- administrative costs, a mere 5.1% of the
ry and non-mandatory expenditure. total expenditure has to be covered.
Mandatory expenditure arises from Until 1971, the revenue of the
obligations of the EU Treaty, from European Community (EEC/EC) was
derived rights, from agreements and made up of financial contributions
understandings, as well as from interna- from the member countries which
tional treaties and contracts based on were tied to a specific purpose, as well
civil law. The European Council as the as revenue distributions on the produc-
highest organ of the EU is responsible tion of coal and steel.
for their implementation. On the basis of Article 201 of the
Regarding non-mandatory expendi- EEC contract, in 1970, the communi-
ture, the European Parliament has the ties were granted competence for their
decision-making power. The EU own resources and, by 1975 the financ-
Commission is authorised to allocate ing system had gradually been changed
these means to individual projects in over to these sources. Since that time,
the spheres of structural policy, research the key concept has been ‘own
and technology as well as developmen- resources’.
tal aid. In connection with the lack of The means consist of fiscal revenue
democracy within the EU which has at the disposal of the Community for
been discussed, the allocation of expen- the purpose of covering costs. The total
diture for the common agricultural pol- volume of revenue, and thus also
icy (CAP) as a mandatory expense is expenditure, is currently not allowed to
problematical, since it means that 45% exceed 1.27% of the Community gross
of the expenditure has been removed national product (GNP). The Own
from parliamentary control. Resources System includes genuinely
188 EU: Budgeting

own resources and contributions by ber states, the backflow from the CAP
EU members. as well as from the structure and the
coherence funds have led to difficult
Genuinely own resources net positions. Certain economically ad-
• Agricultural levies and agricultural vanced and productive member states
customs duties as well as the sugar such as the United Kingdom, France
and iso-glucose levy (production and and Italy form part of the net recipient
storage levy in the context of the countries.
Common Market regulations for To generate new revenues and as a
sugar). means to strengthen the competence to
use proceeds, an EU tax has been
• The customs duties that are imposed, repeatedly debated. In defending it,
according to the Community cus- both the Commission and the
toms tariff, on imports from non- European Parliament have argued that
member states. it would instil a greater sense of shared
responsibility and make the European
Contributions by the EU member tasks more tangible. Besides an increase
states of national VATs, among other things,
• Value-added tax (VAT) own the emission of carbon dioxide or the
resources, which result from the consumption of certain goods and serv-
application of a uniform rate (2007: ices (tobacco, alcohol, mineral oil,
0.33 percentage points) to a particular telecommunication) have been suggest-
uniform basis of assessment (no ed as tax subjects. The reason why an
more than 50% of GNP). Due to EU tax has so far been rejected might
political pressure, specific regulations be the perceived threat of a ‘tendency to
exist for certain countries (e.g. the an open transfer union’.
United Kingdom, Spain).
Budget and financial prognosis
• GNP revenue, which was introduced Budget creation as a decision-making
in 1998 as an ‘additional’ source of process on EU income and expendi-
income, i.e. as residual funding for ture:
the Community budget. It is calculat- The EU Commission submits a
ed with the help of a rate that is re- preliminary draft budget to the EU
assessed annually during the budget Council. On account of the different
debates and applied to the total of the categories of expenditure (mandatory
GNPs of all member states. and non-mandatory), the European
Council and the European Parliament
The most important sources of jointly make up the Budget Authority.
income for the EU are GNP and VAT Both institutions communicate on a
own resources. regular basis.
Meanwhile, the specific regulations Subsequent to the recommenda-
for individual countries, allowances for tions of the Council, the preliminary
the non-uniform economic structures draft budget becomes the budget pro-
and stages of development in the mem- posal, which goes to Parliament for its
EU: Budgeting 189

first reading. At this point, suggestions the collective resignation of the

for amendments to mandatory and Commission under its president,
non-mandatory expenditure can be Jacques Santer in 1999 due to the
submitted. refusal of release by Parliament after
During the second reading, the irregularities in the use of funds had
Council has authority to finalise the been discovered.
mandatory expenditure. Parliament, in
a concluding second reading, has the Outlook
task of finalising non-mandatory Important steps regarding the EU’s
expenditure. The only way Parliament budgeting are Agenda 2000 (adopted at
can influence the mandatory expendi- the Berlin Summit of the European
ture is by rejecting the budget in its Council in March 1999) as well as the
entirety. approval by the European Council of
After the parliamentary statement the Treaty of Nice (December 2000).
on the budget proposal, the president of It is mandatory that all EU mem-
the European Parliament accepts the bers make their contribution to the
proposal. At this point, the budget is running of the Community. To what
ready for implementation. extent members are entitled to a share
The monitoring of adherence to of the revenue depends on the criterion
proper budgetary procedures falls on of their economic performance. To
internal authorities and on the what extent members have to con-
European Auditor General as the exter- tribute to the expenditure (returns), is
nal inspector. Beyond that, efficiency dependent on how economically devel-
checks are carried out based on the oped they are (structural policy) and on
evaluation of individual projects. The what proportion of their GNP comes
discharge of the Commission by the from the agricultural policy. As a conse-
European Parliament completes the quence, there are different net payer
budgetary cycle. Such a discharge has and net recipient positions.
not, however, been granted for several While the net recipients are more
years. The fact that this right is still a inclined to defend the status quo of the
powerful way of making EU policy financial constitution, the net payers are
more transparent was demonstrated by pressing for reforms. And despite vocif-

EU Budget 2007: Resources by type of revenue

Type of revenue s million %

Agricultural duties and sugar levies 2,019.80 1.7

Customs duties 15,287.90 13.2
VAT based resource 17,827.41 15.4
GNI based resource 79,152.84 68.5
Miscellaneous + surpluses, balances and adjustments 1,209.27 1.0
Total 115,497.22 100

Source : European Commission: Budget 2007

190 EU: Competition policy

erous declarations of such intentions, lungsposition für die Agenda 2000 und ihre
Agenda 2000 has to date not brought Umsetzung, in: Hasse, R. H.,/Kunze, C.
about any essential reforms. All the dis- (ed), Osterweiterung der EU. Reformbedürfnisse
und Anpassungsschritte, Leipzig, pp. 137-149.
cussed reform proposals of the Own
Resources System have failed because
of the resistance of the net recipients. Alexander Schumann
A fundamental reorganisation of the
expenses (amendments to structural
policy, reform of the CAP) did not EU: Competition policy
achieve a majority of votes. The key
boundary remains the specification of An important aim of the economic
the upper limit for expenditure of integration of Europe, according to
1.27% of the GNP of the Community Article 2 of the Treaty establishing the
(prices date back to 1999). Current European Community (EC) is to raise
expenditure is below this upper limit, ‘the standard of living and quality of
which means that there is financial life’ of people. This is the foundation
scope for EU enlargement and its proj- for the creation of the common market,
ects. also known as the internal market.
Regarding the Own Resources The competition policy instruments
System, the European Commission was are intended to guarantee that the
asked to submit proposals on the distri- exchange of goods and services within
bution of liabilities ahead of the next the common market takes place accord-
round of negotiations on the post-2006 ing to the rules of competition (→sup-
financial framework. The expenditure ply and demand). This is not just a polit-
arising from the new EU members ical policy of the Community; rather, it
must also be taken into account. The has its roots in the legally binding regu-
EU enlargement on the agenda for the lations of the European Community
next few years will likely increase the Treaty.
heterogeneity of the member countries. The creation of a common market
This could exacerbate the conflict of defined by →competition in Europe
interests between the net recipients and requires that national markets open up
the net payers. The new majority pro- by abolishing national restrictions typi-
portions could also represent a stum- cal of cross-national trade, and that
bling block for the reform of the EU competition be protected from limita-
financial constitution. tions or manipulation by the market
participants themselves.
The concept of opening up national
markets comes from the explicit defini-
Internet pages of the EU INSTITUTIONS
tion of the internal market in the
can be located through www. europa.eu.int;
Treaty: ‘The internal market shall com-
STEUERN (1999), Der Haushalt der Euro- prise an area without internal frontiers
päischen Union – eine Bestandsaufnahme, IFSt- in which the free movement of goods,
Schrift 372, Bonn; HASSE, R. H./PEN- persons, services and capital is ensured
ZOLD, A. (2000), Die deutsche Verhand- in accordance with the provisions of
EU: Competition policy 191

this Treaty’ (Article 2(2) of the EC as well as the control of mergers or

Treaty). ‘merger regulation’). →Competition is a
The member states must abolish process of the rivalry of offers and bid-
any restrictions that limit cross-border ders that supports the market opposites
economic trade – such as import or regarding the purchase or sale of goods
export bans, duties on imports or or services.
exports, or any other regulations that The instruments (competition
could restrict transnational economic parameters) that are implemented for
trade. In particular, a member state is this purpose are diverse (price, quality,
not allowed to discriminate against peo- quantity, service, innovation, etc.).
ple or economic goods from other Competition in this sense arises when
member states. This is legally guaran- the market participants are free to
teed by the prohibitions aimed at the implement diverse competition param-
member states that make it unlawful to eters and, for example, not be bound by
enforce existing restrictions or to intro- restrictions or obligations. Thus, the
duce new restrictions to the trade of competition regulations of the Com-
economic goods between member munity are against such restrictions or
states. obligations that the enterprises could
The effectiveness of these prohibi- implement for themselves or others.
tions is rooted in the fact that the enter- Enterprises restrict competition by
prise’s, employee’s and consumer’s implementing three strategies:
scope of opportunity is no longer limit-
ed to their respective home country; • Enterprises may coordinate their
rather their scope of opportunity now market behaviour by implementing
extends to the entire Community. The synchronised competition parameters
discrimination and restriction prohibi- (for example: pricing agreements,
tions form the foundation of economic common market division, waiver of
freedom for the economic participants. innovative product development).
The EC Treaty differentiates Article 81 of the EC Treaty strictly
between a series of special freedoms; prohibits coordinated activities such
particularly, the freedom to exchange as these.
goods and services, employee freedom,
the freedom of establishment for • Enterprises that occupy a dominant
→enterprises, the freedom of movement market position because they com-
of capital and the freedom of payment mand a high market share (i.e. when
transactions. These freedoms, taken they are able to meet the demand
together, cover all the economic alone as a supplier) can obstruct other
processes that can be considered enterprises in their ability to compete
transnational. (for example: dumping to obstruct
competitors, the use of non-uniform
The ‘competition rules’ form the foun- sale prices when doing business with
dation for the creation of a competition various commercial enterprises,
system within the common market delivery refusal). Article 82 of the EC
(Articles 81(s) and 82 of the EC Treaty Treaty strictly prohibits such exploita-
192 EU: Education and research policy

tions of the dominant market posi- REFERENCES:


H. (2004), Europäisches Wettbewerbsrecht, 2nd
edition, Munich; BUNTE, H.-J. (2003),
• Enterprises that merge into one eco-
Kartellrecht, Munich; COMMICHAU, G./
nomic unit can secure a dominant
SCHWARTZ, H. (2002), Grundzüge des
market position. This is fundamen- Kartellrechts, 2th edition, Munich;
tally prohibited by the merger regula- EMMERICH, V. (2001), Kartellrecht, 9th edi-
tions of the EC. tion., Munich.
Peter Behrens
As a final point, the EC Treaty
makes reference to the distortion of
competition in the common market
concerning aid granted by states. An EU: Education and research policy
enterprise’s market success should be
dependent on performance and not on Domestic education systems have gen-
who receives the highest →subsidies. A erally remained closed to the outside
subsidy competition would be incom- world. This holds true for Germany,
patible with the common market. too, where it is not easy for European
Accordingly, the Community enforces and other foreign competitors to
strict aid supervision in the member intrude. Only students who can afford
states. Article 87 of the EC Treaty strict- to do so privately or who are studying
ly prohibits state aid. Exceptions may be by way of exchange, are able to go
authorised or allowed under certain cir- abroad.
cumstances. Europeanisation, and even more so
The implementation of economic economic and social →globalisation, rep-
freedoms as well as competition regula- resent enormous challenges for educa-
tions falls primarily on the administra- tion systems, just like for certain sectors
tive bodies and courts of the member of the service and tertiary industries
states. (telecommunication, energy industry)
A special characteristic of the when they were government-run and
Community law is that these rules enjoyed a captive market.
apply to the member states directly, and In the education sector, the impact
that citizens and enterprises can make is even greater because capital markets
claims at their local member state have become globally integrated, and
administrative bodies and courts to because investments and jobs are creat-
ensure that their rights to restriction- ed in places which are economically
free transnational economic trade and profitable and where properly trained
competition can be delivered. The indi- workers are available, both now and in
vidual freedom of economic action, the future. As a result, job markets are
established through Community law, is also becoming more international.
the foundation and goal of competition Beyond that, Europe will gain political
policy. and social stability only if there is mutu-
al understanding between people and if
their co-existence rests on shared val-
EU: Education and research policy 193

ues. The education system in the the standard of basic and further educa-
United States has achieved astonishing tion, and to facilitate skills training.
results in this respect, by moulding The Treaty of Amsterdam added
people of the most disparate back- nothing to this agenda (Articles 149,
grounds into a society. The European 150). Its preamble merely stresses the
system, under different conditions, will determination of the member states to
have to become similarly successful if keep access to education and further
the →European Economic and Monetary education wide open, and to assist their
Union is to endure, the development of peoples in attaining the highest level of
the political union is to continue, and learning possible.
the European economy is to become The European Union (EU) has
more competitive at a global level. addressed its task by launching numer-
But what sort of education policy ous programmes (Erasmus, Socrates,
does Europe need in order to meet Leonardo, etc.), all of which require
these challenges? The Treaty of Rome considerable funding and the necessary
did not invest the European Com- administration.
munity (EC) with autonomous powers In terms of systematic policy
in the field of education and research. creation, these measures have not gen-
All the European Commission could erated many tangible results. Not-
do was to submit proposals to the withstanding the existence of exchange
European Council regarding a com- programmes, the EU is a long way off
mon vocational education policy and to an open education market that ensures
institute directives on the recognition free movement across a country’s geo-
of diplomas and other certificates of graphical, political and administrative
competence. Only with the Maastricht borders. This applies to students as
Treaty did this situation change much as to their teachers, professors
(Articles 126, 127). and other academics who may want to
The EC was given the task of work- study or work in another EU country.
ing towards a high level of educational Pupils may go to school abroad, either
standards by supporting and comple- in or outside Europe, only in the con-
menting cooperation among and the text of a student exchange programme,
activities of the member states, while at except in the case of a private school
the same time strictly monitoring their which charges fees. Public sector
adherence to the contents and structure schools are not motivated to accept
of the education system. pupils from abroad, whether they come
Since then, the Commission has from inside or outside Europe, since
been concentrating its efforts particu- this merely causes extra work without
larly on the languages of the member bringing in extra revenue. In economic
states, the mobility of learners and terms, this is the equivalent of the
teachers, and the cooperation and primitive system of paying in kind. It is
exchange of information and practical inefficient and prevents the formation
experience. In the field of vocational of a uniform European education mar-
training, the priorities were to support ket, which would be sustained and pro-
industrial transformation, to improve moted by pupils or students being able
194 EU: Education and research policy

to choose their school or university the Middle Ages it was normal for a
freely, while at the same time having the university to have a body of teachers
means to pay for their place. made up of many different nationalities.
It has to be remembered that those Today, the proportion of foreign profes-
who are studying abroad are not occu- sors at German universities is not more
pying a place at school or at university than 3.5% (including guest professors
in their own country. This means that who only stay for one or two semesters).
they ease the burden on the schools and By contrast, in the German economy,
universities at home. But above all, this almost 10% of workers are foreigners.
system creates healthy →competition Instead of focusing exclusively on
among the education systems and their legal interventions and the coordination
specific components, which would of the European education policies,
especially benefit the younger genera- there are many arguments in favour of
tion and also the economy and society, dismantling regulations and restructur-
and last but not least the taxpayer. ing the funding system (→education
Educational institutions would become funding) – something that would create
more highly specialised, while educa- a competitive European education mar-
tion and training would become more ket and lay the foundation for a political
productive. This means that the union. It would also mean that the
amount of knowledge communicated Bologna Declaration made by the EU
by a teacher per lesson would increase, in 1999 in which the education minis-
above all in foreign languages which are ters of the member countries and a
learnt faster and more easily in the number of European tertiary institu-
countries where they are spoken and in tions committed themselves to cooper-
which countries the student will simul- ation, could be more forcefully imple-
taneously gain a greater understanding mented.
of the national culture of other coun-
tries. Also, the cost of a place at school REFERENCES:

or university would go down for the LITH, U. van (1999), Falsches Vertrauen in
same reasons. Furthermore, the system den Bildungsprotektionismus, in: Handels-
blatt 5/6, p. 47; VERBAND BILDUNG
would be less regulated, giving teachers
UND ERZIEHUNG (1999), Bildung im
and lecturers more freedom of move-
globalen Dorf – neue Chancen für die Schule,
ment. More efficiency would be gained VBE-Dokumentationen, Bonn; PHILIPP, C.
because German teachers would be (1999), Auf dem Wege zum Europäischen
teaching in the United Kingdom, for Bildungsmarkt, Lohmar-Cologne.
example, and vice versa. Imbalances
(surplus or deficit of teachers or lectur- Ulrich van Lith
ers) and the national salary differences
for teachers, university lecturers and
other academics, which can be consid- EU: Employment policy
erable, would be gradually eliminated.
The degree to which the national Objectives
education industries have divided Among the key principles, objectives
Europe can be seen from the fact that in and activities mentioned in the Treaty
EU: Employment policy 195

of the European Union and the Comprehensive employment policy since

European Community Treaty is the the early-1990s
promotion of a high level of employ- The Essen Summit
ment in the Community. This is to be In the 1980s and the 1990s the
achieved through the development of a European Council adopted a number of
coordinated employment strategy, in resolutions on the job situation; but
particular regarding the promotion of only in 1993 did the EU initiate serious
qualified, trained and flexible workers discussions on how to solve the
for unpredictable job markets, which employment problem at a European
react to economic change. level. The 1993 Commission white
It is true that the Treaty of Amster- paper on ‘growth, competitive ability
dam brought about the introduction of and employment’ (the Delors report),
coordinated measures; but the general which contains constructive sugges-
competence for measures against tions for the improvement of the job
→unemployment continues to be vested situation, has to be seen in this context.
with the member states. In December 1994, based on this
white paper, the foundation for a com-
Results mon European employment strategy
was laid at the Essen conference of the
The first instruments: European Council. This was achieved
through an urgent appeal to the mem-
• The European Social Fund, which ber states to convert the Essen priorities
was established at the beginning of into programmes that run for several
the 1960s, is the Community’s most years and are assessed annually by the
important instrument for fighting heads of state and government in the
unemployment. Council.
The five key areas are:
New initiatives during the 1980s and at
the beginning of the 1990s • greater investment into vocational
• →Employment policies for special target training;
groups: the long-term unemployed,
local employment development and • an increase in the employment inten-
support of small- and medium-sized sity of →growth;
→enterprises (SMEs).
• lowering of the ancillary costs of
• An information network on the wages;
employment policies of the member
states and a joint documentation sys- • increased effectiveness of →labour
tem on employment. market policy; and

• Promotion of free personal move- • improved measures in favour of the

ment and support for workers who groups especially affected by unem-
are searching for employment in ployment (young people, the long-
another member state. term unemployed).
196 EU: Employment policy

The effectiveness of these proce- National Action Plan (NAP) for

dures was limited, however, because in employment, and envisage four head-
contrast to the regulations regarding the ings, namely:
→European Economic and Monetary
Union they had no legal basis in the • greater employability;
Treaty; therefore, the European
Parliament advocated the inclusion of • development of entrepreneurial spir-
an employment chapter in the revised it;
Treaty. This was discussed at the gov-
ernment conference of 1996/97. • increased flexibility of enterprises;
The Amsterdam Treaty
With the agreement on the draft of the • reinforced efforts to guarantee equal
Amsterdam Treaty in June 1997 and the opportunities.
introduction of a new employment
chapter, the EU created a legal instru- The guidelines for 1998 were offi-
ment for the introduction of a coordi- cially adopted on 15 December 1997. At
nated employment strategy. The mem- the end of January 1998, a common
ber states, which retain their exclusive framework for the NAP was agreed on.
competence within this area must nev- In June 1998 the European Council of
ertheless organise their →employment Cardiff stated regarding the NAP that
policies in such a way that they corre- the member states were making consid-
spond to the fundamentals of the eco- erable efforts to strengthen active
nomic policy of the Community, while labour policies. Furthermore, the
job promotion is regarded as a common Luxembourg Summit supported the
goal. The Council draws up annual funding of SMEs and innovative meas-
employment policy guidelines, which ures in the labour market, as well as an
have to be taken into account in the action plan for the European
policies of the separate member states. Investment Bank with the aim of secur-
Furthermore, the European Council of ing new loans for SMEs, new technolo-
Amsterdam also agreed to the immedi- gies and trans-European networks.
ate implementation of certain Articles
of the new employment agreement The Cologne Summit
without waiting for it to come into This 1999 Summit followed the
force. It declared that an extraordinary Amsterdam Treaty. An ‘employment
European Council conference should pact’ was agreed, which consists of
be held in November 1997 on employ- three processes, which have to be coor-
ment issues. This was the ‘employment dinated with one another:
summit’ in Luxembourg.
• Further development and implemen-
The Luxembourg Summit tation of the employment policy
The ministers explained their support guidelines, which were agreed at the
for the guidelines of 1998. The latter 1997 Luxembourg employment sum-
were supposed to be included into the mit (Luxembourg Process).
EU: Enlargement 197

• Institutionalisation of a cooperative EU: Enlargement

‘macroeconomic dialogue’ between
the bargaining parties, the →European The original (1957) European Com-
Central Bank, the European Council munity of the six founder states –
and the EU Commission (Cologne Belgium, Germany, France, Italy,
Process). Luxembourg and the Netherlands –
had by 1995 been extended to 15 mem-
• Reforms to promote innovation and bers as a result of three expansion
improved efficiency of the goods, rounds. The first of the new phases
service and capital markets (Cardiff (1973) saw the United Kingdom,
Process). Denmark and Ireland taking up mem-
bership. The second wave, the so-called
All three elements are supposed to southern expansion, conferred Com-
be mutually supportive. munity membership to Greece in 1981,
and Spain and Portugal in 1986. The
Risks last of these three expansion rounds
Different forms of and developments (1995) added the European Free Trade
regarding unemployment in the coun- Association states – Sweden, Finland
tries of the EU limit the possibilities for and Austria.
a European employment policy, since After the radical changes to the
they also require different methods for international system in 1989/90 and
the eradication of unemployment that after the end of the East–West conflict,
is deeply entrenched. Furthermore, a the 1990s presented the European
coordinated employment policy pre- Union (EU) with its first opportunity
vents organised →competition. Failures to consider Europe as a whole – some-
in the EU labour markets can therefore thing which was reflected in member-
not be excluded. ship applications from 13 countries,
which included 10 Central and Eastern
REFERENCES: European states.
EUROPÄISCHE ZENTRALBANK (2000), There were also membership appli-
Entwicklung und Strukturmerkmale der cations from the Mediterranean islands
Arbeitsmärkte im euro-Währungsgebiet, Cyprus and Malta, as well as Turkey
Monatsbericht Mai, pp. 61-79; INSTITUT
which had submitted its application as
long ago as 1987. Croatia submitted its
FORSCHUNG (1999), Rolle der Europäischen
Union in der Beschäftigungspolitik, IAB –
application in 2003 and Macedonia in
Kurzbericht 13; LESCH, H. (2000), 2004. Switzerland, Liechtenstein and
Brauchen wir eine Europäische Norway, however, have discontinued
Beschäftigungspolitik?, in: Politik und pursuit of their membership applica-
Zeitgeschichte, 14-15, Beilage zur tions.
Wochenzeitung Das Parlament, Bonn, pp. 14; The large number of membership
http://europa.eu.int/austria/links/beschäftigung.htm. applications as well as the hugely differ-
ing structural and economic profiles of
Ansgar Belke the aspiring candidates made the EU
expansion and the debate it sparked
198 EU: Enlargement

about which country should be granted state and government decided that
membership to the Union at which besides Malta, five further Central and
point in time and under what condi- Eastern European states – Bulgaria,
tions, one of the most important politi- Lithuania, Latvia, Romania and
cal questions in Europe. Slovakia – had made significant
When the Central and Eastern progress, and these countries were then
European states became members of allowed to join the Luxembourg Group
the Community, the population of the in February 2000. It was also agreed in
EU increased by more than a quarter to Helsinki to recognise Turkey as a coun-
nearly 500 million EU citizens, while try which was keen on membership,
the gross national product grew by only but without entering into any negotia-
15%. The heterogeneity of the Union, tions at that stage.
too, was markedly increased, consider- The basis of an EU decision on the
ing the Danish per capita income is six admission of new candidates was the
times that of Bulgaria and Romania. so-called Copenhagen (membership)
Closely linked to the expansion criteria which were drawn up by the
process were the hope of a European European Assembly in 1993: politically,
perspective and a ‘new order’ on the a new membership candidate has to
continent, as well as a concern about an have enough institutional stability to be
over-expansion of the Union or that able to guarantee a political system built
new members might not be able to on democratic principles and the rule of
meet their commitments – all of which law, where human rights are observed
could put too much strain on the EU. and minorities are protected. Eco-
In order to support the candidate nomically, the existence of a workable
countries during their preparation for market economy, as well as the ability to
EU membership, in 1994 the EU in the withstand the competitive pressure and
European Council of Essen agreed on the market forces inside the Union, are
an ‘approximation’ strategy. prerequisites.
In July 1997, the European Com- Beyond that, the membership can-
mission submitted its statement on the didates have to be able to take on the
membership applications of the 10 commitments arising from their
Central and Eastern European coun- membership in the form of the acquis
tries. In its report, the Commission rec- communautaire, which comprises all
ommended that membership negotia- valid contracts and legal acts, and to
tions be initiated with six states – besides adopt the aims of the political union
Cyprus also Poland, Hungary, the and of the economic and monetary
Czech Republic, Estonia and Slovenia. union. The legal regulations on the
After the European Assembly had admission of a new member state can
approved of the six countries in be found in Article 49 of the EU Treaty.
Luxembourg in 1998 (they are there- After hearing the Commission and
fore also known as the Luxembourg after the European Parliament has given
Group), it became possible to initiate its approval, the Council makes a unan-
membership negotiations in March imous decision. The actual member-
1998. In December 1999 the heads of ship conditions, the required periods of
EU: Enlargement 199

Member states of the European Union and candidate countries, 2007

transition and the amendments to the existing member states, especially the
Community treaties that new member- border countries Germany and Austria,
ship necessitates, are regulated through benefited from transition periods ex-
an agreement between the existing tending to several years, particularly
member states and the candidate state, where freedom of domicile was con-
and must be ratified by all states which cerned.
are party to the Treaty. In December 2002 the European
In the course of 2002, negotiations Council in Copenhagen was able to
on each of the 31 chapters of the acquis officially conclude membership negoti-
communautaire came to a positive con- ations with these 10 countries – just less
clusion for 10 out of a total of 13 mem- than nine years after the ‘Copenhagen
bership applicants, with only Bulgaria, Membership Criteria’ had been formu-
Romania and Turkey being left out. In lated. After the existing member states,
many cases, special regulations had to the citizens of the new member states
be put in place aimed at facilitating the and the European Parliament had given
transition of new member states not their agreement, the membership
financially able to implement all the EU treaties for the 10 new EU members
regulations immediately. But even were signed in Athens. On 1 May 2004
200 EU: Environmental policy

they joined the EU as new member the EU common market. Thus,

states. While Bulgaria and Romania national environmental protection
joined the EU at the beginning of 2007, subsidies are subject to EU monitor-
no date has been set yet for Turkey. The ing according to Article 87 of the EC
same goes for Albania, Bosnia-Herze- Treaty.
govina, Croatia, Macedonia and Serbia-
Montenegro, countries which have The EU justifies the many guide-
already received signals from the EU lines and regulations with the argument
that they may one day become eligible that similar environmental standards
for membership. for the production of goods should
exist in all member states of the EU.
REFERENCES: These are intended to guarantee that
LIPPERT, B. (2000) (ed), Osterweiterung der supply prices within the common mar-
Europäischen Union – die doppelte Reifeprüfung, ket do not differ based on varying envi-
Bonn; WEIDENFELD, W. (2002) (ed), ronmental costs.
Europa-Handbuch, Gütersloh.
However, why should cost factor
differences be allowed in all other areas
Jürgen Mittag
Wolfgang Wessels
but none in regard to the environmen-
tal factor (→environment-oriented manage-
ment)? Furthermore, the expense costs
can be different between the member
EU: Environmental policy states, while some regions may be more
heavily strained making more stringent
Market competition for goods is an production standards necessary.
important principle of the →social mar- Essentially, environmental protec-
ket economy. In the course of political tion is an input factor that is in varying
→integration in Europe, it follows that demand and is being supplied accord-
the protection of competition does not ing to changing priorities based on
halt at the borders of the European income differences. The advantages of
Union (EU) member states, rather it national production standards are set
applies to the entire EU market: against the danger of environmental
dumping. Accordingly, lax national
• Environmentally relevant product environmental standards would be put
regulations of the member states in place to attract capital and mobile
should not lead to the obstruction of →enterprises to certain locations.
trade, either wanted or unwanted In democracies, location competi-
(protectionism). In practice, har- tion is not solely accomplished at the
monised minimum standards are expense of the environment, which
agreed in advance according to Article means that economic growth and
96 of the EC Treaty. employment are not given preferential
treatment over the protection of the
• Regarding environmental protection, environment. Environmental quality is
member states of the EU could allow the key factor for enterprises in relation
aid that would distort →competition in to environmental infrastructural facili-
EU: Environmental policy 201

ties and the selection of personnel. the air or water, the emitting nation is to
Environmental pollution is a loss of cover the costs of the environmental
welfare for the citizens. Thus, the polit- pollution. At first glance, the emitting
ical process weighs the concrete advan- nation would not appear to have an
tages against the tangible disadvantages. incentive to consider the profit to the
The varying environmental quali- investment in the environment outside
ties of the member states arise from dif- national borders. As the other member
fering preferences, costs, →income, etc. states are in a position to profit from the
As long as the costs and advantages of improved environmental quality with-
environmental policy are concentrated out participating in cost sharing, the
within the member states and follow environmental pollution of the emitting
the democratically created political reg- source is outweighed.
ulations, decisions regarding the man- A framework designed to deal with
ner in which national environmental this dilemma and the national as well as
problems are to be dealt with and extra-territorial advantages (costs) of
enforced can be bestowed on the mem- environmental investment is required.
ber states. These circumstances do not The larger the group of affected mem-
mean that the applicable EU regula- ber states (e.g. large-scale air pollution),
tions regarding national environmental the more meaningful it is to coordinate
policy cannot be enforced; however, activities at the EU level; otherwise, the
they do mean that implementation is affected countries can reach an agree-
tied to the voluntary adoption on the ment on their own. These negotiations
part of the member states. can be executed more effectively and
The polluter-pays principle out- lead to conflict resolution if there is an
lined in the Treaty of the European institutionalised order element like the
Union can be traced back to common polluter-pays principle. Here, again, a
preferences; at the same time, this prin- rule corresponding to the social market
ciple also allows for meaningful solu- economy is the key factor for the pro-
tions to national environmental issues. tection of the environment.
These procedures – from the perspec-
tive of the politics of social market REFERENCES:

economy – are to be actively imple- KARL, H. (1999), Die Europäische Union

mented as they are based on the gener- auf dem Weg zu einer ‘Umweltunion’?, in:
Barz, W./ Hülster, A./ Krämer, K./ Lange, M.
al regulations and the decentralisation
(ed), Umwelt und Europa, (= Vorträge und
of political competences, as well as the
Studien des Zentrums für Umweltfor-
principle of subsidiarity. schung der Westfälischen Wihelms-
This is also valid when transnational Universität Münster, Heft 9), pp. 49-69,
environmental issues arise. Regardless Landsberg; — (1998), Umweltpolitik, in:,
of the degree of the political integration Klemmer, V. P. (ed), Handbuch der
process, a coordinated →environmental Europäischen Wirtschaftspolitik, Munich, pp.
policy is advantageous in a situation such 1001-1151; WELPER, C. (1999), Europäische
as this – by contrast with national envi- Umweltpolitik, Marburg.
ronmental problems. With transnational
pollution, e.g. through emissions into Helmut Karl
202 EU: History

EU: History the experience gained during the close

cooperation in the economic field
The beginnings of the European Union would have a ripple effect on the more
(EU) dates back to 1952 when the sensitive political areas.
European Community for Coal and The speedy implementation of
Steel (ECCS) was founded. The other- important stages of the Treaty of Rome
wise standard contract under interna- (as the EEC and the EAC treaties were
tional law, to which six member states also called) led to a renewed attempt to
were parties, stood out in that common pursue the goal of a European political
institutions were established (High union that would have gone beyond
Authority Commission; Parliamentary mere economic integration (Fouchet
Assembly, later: European Parliament; plans 1960/62). But this time, also, the
Council of Ministers; Court of Justice), attempt to give the steps towards inte-
which were authorised to act on behalf gration a common political denomina-
of the Community. tor failed.
Initially, industries important for Less spectacular progress was made
military purposes had been successfully with the Own Resources System of the
dealt with on a Community basis in the EEC (1971); the European Parliament
context of the ECCS, but the next step and the Council’s joint responsibility
was to create a European defence com- for the EC budget (1975); and the first
munity, complete with a European direct elections of the European
army. This plan failed in 1954, together Parliament (1979). Nonetheless, the
with the attempt to bundle the steps supra-national efforts of the integration
towards →integration which had been were stagnating. During the 1970s,
taken so far, in a European political reform plans were defeated by the
community. The indirect consequence growing weight of the member states
was the expansion of the Brussels Pact inside the EEC and by the diminishing
(1948) on the Western European external pressure on Western integra-
Union, which had come into force in tion, brought about by the policy of
1955. This organisation, which had not détente directed towards Eastern
been part of the common contractual Europe.
agreement, gradually started to be Under these circumstances, the
introduced almost completely into the integration process became more
legal stock of the European Union. focused on political fields outside the
The first comprehensive political confines of the Treaty of Rome, and
attempt at integration did not succeed. harking back to traditional methods of
This prompted the decision among the intergovernmental cooperation: Regular
founder states to continue pursuing the communication on foreign policy from
route of economic integration. After 1970 (European Policy Cooperation
coal and steel (ECCS), further sectors [EPC]; 1972 Currency Snake, 1979
were integrated (1958 European Eco- European Currency System (ECS);
nomic Community [EEC]: agriculture 1974 regular meetings of the heads of
and customs system; EAC: nuclear state and governments of the EEC
energy community). It was hoped that member states (European Council).
EU: Industrial, research and technology policy 203

The first reform of the Treaty of hand, was an attempt to achieve an ade-
Rome by the Uniform European Act quate integration of the institutional
that followed was a step in the right apparatus into the EU that, on the eve of
direction after this ‘intergovernmental the largest round of expansion talks in
phase’ of European integration (1987). its history, counted 15 member states.
Key elements were the ‘second attempt’ During the summit in Nice, the heads
to have completed the establishment of of state and government adopted the
a European domestic market no later Human Rights Charter of the EU
than 31 December 1992, as well as the (including a chapter on ‘Solidarity’).
integration of the EPC and the The statement on the future of the EU,
European Council into the Commu- which was also adopted, formed the
nity treaties. basis for the convention called to work
The 1990s saw one treaty reform out a constitutional EU Treaty making
after another: the Treaty of Maastricht the contents, structures and procedures
(1992) saw the legal incorporation of of the EU more transparent, more dem-
the →European Economic and Monetary ocratic and more efficient.
Union into the EC Treaty and at the
same time the firm establishment, at a REFERENCES:

European level, of important elements GASTEYGER, C. (1997), Europa zwischen

of the →social market economy in the EU, Spaltung und Einigung, Darstellung und
Dokumentation. Bonn, Bundeszentrale für
such as the foundation of an independ-
politische Bildung, Schriftenreihe 348;
ent central bank.
WEIDENFELD, W.(1999), Europa – aber
The contract was given its already wo liegt es?, in: Weidenfeld, W. (ed), Europa-
distinctive temple structure: the ‘Treaty Handbuch, Gütersloh, pp. 19-48.
on the European Union’ is held up by
three columns (European Community Melanie Piepenschneider
– EC; Common Foreign and Security
Policy – CFSP; cooperation in the areas
of Justice and the Interior – CJI), each
of which is important for the process of EU: Industrial, research and
integration in a different way. technology policy
The EEC Treaty gradually grew into
the ‘Treaty on the Foundation of a The Unified European Act (1987) and
European Community’ (EC), which the Treaty of Maastricht (1992) signifi-
was supposed to give expression to the cantly increased the competence of the
increased importance of political issue European Union (EU) in the field of
in the EU. research and technology policy. In
Through the Treaty of Amsterdam Article 130, a group of objectives for
(1998), among other things, a space was industrial policy was agreed for the first
created for security, freedom and the law time at EU level. This was subsequent-
as an (internal) equivalent to the (eco- ly expanded in the Treaty of Amster-
nomic) domestic market and (external) dam. Article 163, section 1, reads:
Common Foreign and Security Policy. ‘The Community aims to strength-
The Treaty of Nice (2000), on the other en the foundation of the EU’s industri-
204 EU: Industrial, research and technology policy

al sector through science and technolo- funding, however, is limited to the

gy while promoting its ability to com- costs of administration.
pete internationally. It aims to lend its
support to all research projects which • Horizontal actions have grown in
other sections of this treaty may deem importance over the past number of
necessary.’ years. These offer opportunities for
In order to enhance its international scientists to meet and exchange their
competitive advantage, the Community research results, while also forming
has to identify key areas in industry. the basis for an efficient spill-over to
This means it is implementing ‘design the other categories of the pro-
policies’ (W. A. Jöhr) in the field of gramme, especially the indirect
industrial economy. In this respect, the actions. In this case, the EU funding
industrial, research and technology pol- can be as high as 100%.
icy of the EU can be interpreted as
→industrial policy, oriented along the The EU’s industrial, research and
lines of technical progress or focused technology policy can be divided into
on economic innovation. four phases of development:
In order to achieve its goals, the EU
promotes cooperation between →enter- • The first phase (1951–1973) was
prises, research centres and universities mainly concerned with the construc-
across the national borders of its mem- tion of Community policies and
ber states. In addition, it supports the research – limited to the sector of
transfer of research outcomes and the nuclear power and related technology.
mobility of scientists.
These measures are implemented in • Expanding competences in the area of
four different ways: industrial, research and technology
policy was the theme of the second
• Indirect actions are the most impor- phase (1974–1980). It was charac-
tant, receiving about 75% of the avail- terised by a greater focus on a more
able funding. In this case, one is deal- active Community role.
ing with research projects that are
carried out by companies and scien- • Characteristics of phase three
tific institutions, with the EU cover- (1981–1987) were the development
ing a maximum of 50% of the costs. of a proactive industrial policy and
the reorientation of the industrial,
• Direct actions are reflected in the research and technology policy.
research carried out by the EU itself
in the Community research institu- • Phase four began in 1987 with the
tions and in the common enterprise theme ‘Europe on the way to becom-
Joint European Torus. ing a technological Community’.

• →Concerted Actions are the attempt by This fourth phase is marked by

the EU to coordinate research and more tangible action and greater
development activities; the financial emphasis on industrial, research and
EU: Industrial, research and technology policy 205

technology policy within each of the framework programmes there is no

framework programmes. The fourth such thing as a joint European industri-
framework programme (1994–1998) al, research and technology policy. Its
was already put together along the lines critique implies that the research poli-
of this new orientation. Its main focal cies of the individual member states and
point was information and industrial as of the EU itself are often running paral-
well as energy technology. lel, meaning that both bodies are active
Eight task teams (work units run by in the same fields. The phenomenon of
experts) were set up with the aim to double research is hereby addressed –
contribute to the construction of a which the Commission sees as a waste
global information society. They serve of resources.
as coordinators and packagers of indus- From the point of view of competi-
trial, research and technology policy tion policy, however, double research is
activities in Europe, and deal with top- not to be absolutely rejected. The more
ics with an impact on the future, such as mature concept will win at the end of
the ‘multi-media learning programme’. the development process. Moreover,
The task teams are supposed to help the the time that a new technology takes to
market maturation of technologies. As be developed is markedly shorter, since
this method is controversial from the the research teams are motivated by the
perspective of institutional order policy, desire to be the first to present their
one wonders how seriously the Com- results.
mission takes the definition of ‘pre- The sixth framework programme
competitive’ research. (2002–2006) marks the start of phase
The fifth framework (1998–2002) five, entitled ‘Research in Europe’. The
introduced a new concept, restricting goals set by the European heads of state
the research effort to those areas which and government at the European
yield tangible benefits for the common Council in Lisbon (March 2000)
person, especially in terms of →employ- included the transformation of the EU
ment, quality of life, and technologies into the world’s most competitive and
that are able to compete internationally. most dynamic knowledge-based econo-
The restriction to a limited number of my, capable of achieving continued
themes, such as ‘quality of life and growth, full employment and more
management of living resources’ or social cohesion by 2010. With this in
‘competition-oriented and sustainable mind, the EU is eager to provide more
growth’ increases the effectiveness of funds for the promotion of scientific
the respective measures. A further excellence, both in the EU member
innovation concerns the criteria that are states themselves and in the rest of
applied in the project selection. Out of Europe. It is planned to step up the pro-
a list of criteria, social needs, economic portional expenditure for research and
development as well as perspectives of technical development from 1.9%
science and technology have been (2000) of GDP to almost 3%, with pri-
selected for their specific relevance. vate sector contributions towards
In January 2000, the EU Commis- research and development expenditure
sion stated that despite the Community expected to rise from 56% to 66%. To
206 EU: Industrial, research and technology policy

make this a reality, the EU provides a represent a departure by the EU from

budget of s16.27 billion. Its involve- the sphere of basic research, since this
ment is focused on those areas of instrument has been conceived specifi-
research which promise the greatest cally with tangible outcomes in mind.
added value for Europe. The EU has These might even include specific
recognised the need to create a critical products or techniques. The integrated
mass of financial and human resources projects are supposed to be implement-
and to pool the complementary skills ed by public-private partnerships.
available in the different countries, The sixth framework programme
thereby making Europe a better place was also conceived for the promotion of
for research. international cooperation and to accel-
The connection between the priori- erate European integration. For this
ties and interests of the EU and the purpose, for example, the funds for the
transnational nature of research is also promotion of the international mobility
important. The simplification and of scientists have been increased.
streamlining of the procedural rules are Whether the industrial, research and
meant to enable small and medium- technology policy will be equal to this
sized enterprises (SMEs) to gain easier task remains, however, to be seen.
access to the available resources of the
EU. The difficult and complex applica- REFERENCES:

tion procedures of the past ensured that EU-KOMMISSION, KOM (2001) 94

SMEs used to be largely excluded. But endg.; Vorschlag für einen Beschluß des
Europäischen Parlaments und des Rates über das
for the new framework programme, the
mehrjährige Rahmenprogrammemem 2002-2006
EU will also change its funding meth-
der Europäischen Gemeinschaft im Bereich der
ods. From now on, the plan is to have Forschung, technologischen Entwicklung und
three main instruments: networks of Demonstration als Beitrag zur Verwirklichung des
excellence; integrated projects; and EU Europäischen Forschungsraums, Brussels, 21
participation in programmes which, on February 2001; STARBATTY, J./VETTER-
the basis of Article 169 of the EC Treaty, LEIN, U. (1998), Forschungs- und Techno-
are carried out in collaboration with logiepolitik, in: Klemmer, P. (ed), Handbuch
other countries. Europäische Wirtschaftspolitik, Munich, pp.
The latter instrument is different 665-733; SZETTELE, D. (2000),
from the other two because the initiative Auswirkungen der Industriepolitik in der EU auf
and the main emphasis come from the die internationale Wettbewerbsfähigkeit der
europäischen Wirtschaft, Freiburg i. Br.
EU. This is expected to encourage more
top-class achievements in the field of
Andreas Schumm
European science and technology. The Joachim Starbatty
continuing concentration of scientific
talent which exists in the various
European regions is supposed to guar-
antee this. The EU gives financial sup- EU: Maxims for action
port to the integration with a wide range
of flexibility within the research net. The economic policy of the European
The integrated projects in particular Union (EU) comprises – as in the case
EU: Maxims for action 207

of the economic policy of the member responsible should the Community

states – the establishment of legal become involved.
norms that govern private and state- This allocation of responsibilities is
owned economic agents (→institutional in principle correct. However, some sit-
order policy) and the state influences on uations are vague and the allocation of
the economic activity (→process policy). responsibilities is at the discretion of
The EU is a multilevel system that the Community. This means that con-
comprises the levels of the European sideration must be given to the uniform
Community (EC), the member states, or harmonised legislation and policies
the countries or provinces, districts and of the European Common Market
municipalities. In the first place, the (decrease in transaction costs for
appropriate level for certain policy areas →enterprises and consumers), the eco-
or objectives needs to be decided on a nomic costs, the second- and third-best
case-by-case basis. Second, the type and solutions arising from a common
intensity of collaboration between the agreement and the advantages of →com-
EU and the member states needs to be petition between the different national
decided. concepts (educational effects).
Regarding the first question, the Some policies are either wholly or
Maastricht Treaty of 1992 anchored the comprehensively ‘communitarised’, i.e.
subsidiarity principle in the EC Treaty. national decision-making powers have
This was in part a reaction on behalf of been withdrawn (e.g. →EU: trade policy,
state and government heads to the pre- →EU: agricultural policy, →European
diction expressed by Commission monetary policy, market access for citi-
President Delors to the European zens of the EU, enterprises, free trade
Parliament (6 July 1988) that in 10 years, of goods and services) and others are
80% of the economic legislation – and subject to common minimum stan-
perhaps also the tax and social legislation dards as well as other limitations (e.g.
– will be of EU origin. According to the valued-added taxes and excise duties,
principle of subsidiarity, the Com- subsidies, technical norms, consumer
munity becomes active in areas that do protection, environmental standards).
not fall within its exclusive competence On the other hand, member states con-
only ‘in so far as the objectives of the tinue to be free to design important
proposed action cannot be sufficiently local conditions (labour market regula-
achieved by the member states and can tions, direct taxes, education system,
therefore, by reason of the scale or infrastructure policy), social systems
effects of the proposed action, be better (→pension insurance, →health insurance,
achieved by the Community’ (Article 5, →unemployment insurance) and the con-
EU Treaty – new). tinual financial policy (amount and
Ideally, regulations and instruments structure of the public revenue and
are to be reached on a decentralised government expenditure).
basis, at the level of the member states Regarding the second question, the
or regions and only in instances where collaboration between the EU and the
a central (European) regulation is con- member states sometimes requires rati-
venient or where the EU is explicitly fication from the national parliaments
208 EU: Maxims for action

of the member states concerning legal the decision-making process, to agree-

frameworks (amendments to the EU ments based on common ground and to
and EC treaties) as well as on matters of the linking of diverse subject areas in
EU membership. The concrete imple- negotiation packages. The Community
mentation of these legal parameters can interests are represented by the
be realised in many different ways. Commission, the European Parliament
With regard to setting medium- and the European Court of Justice.
term binding legal norms, the Council The Commission monopolises pro-
(of Ministers) passes guidelines and posals in that the Council can become
regulations and makes decisions based active only when a proposal from the
on the recommendation of the Commission has been presented.
European Commission, with varying However, the proposal has usually been
involvement of the European Parlia- clarified with national bodies in order
ment. The Council’s decisions must be to increase its chances for success
made unanimously or according to (→EU: organs and institutions).
majority vote. This is also true for the The collaboration between the
realisation of the five fundamental national and European political and
rights (free trade of goods, services and administrative structures, as well as the
capital, personal free domiciliation, functions and competences of econom-
freedom for enterprises to establish ic policy in the EU system, would
businesses), the entire area of the appear to be highly complex and con-
Common Market (product- and mar- fusing; yet at the same time this system
ket-related regulations) as well as the is anything but static and it is defined by
EC budget. dynamic transition.
Individual measures, recommenda-
tions and positions are made by the REFERENCES:

Council (e.g. intervention prices in KLEMMER, P. (ed) (1998), Handbuch

agricultural policy, commercial policy Europäische Wirtschaftspolitik, Munich; WEI-
protection measures, economic stabili-
(1998), Europa von A-Z, Taschenbuch der
sation policy recommendations) or by
europäischen Integration, 7th edition, Bonn; —
the Commission (e.g. competition and (eds), Jahrbuch der Europäischen Integration,
subsidy monitoring, initiation of breach Bonn, current classes.
of treaty proceedings, research subsi-
dies) or, with regard to monetary policy, Hans-Eckart Scharrer
by the European Central Bank.
The Council is both a legislative and
executive body. It shares responsibility
for legislation with the European EU: Organs and institutions
Parliament, and shares the tasks of gov-
erning and administering with the As they are moving towards an ‘increas-
Commission. The function of repre- ingly close-knit union of the peoples of
senting interests of the member states Europe’ (Article 1 European Union
requires a procedure that strives for con- Treaty [EU-T]), the institutions of the
sensus. This leads to lengthy delays in European Union are becoming the ulti-
EU: Organs and institutions 209

Organs of the European Union

European Council

Court of
European Council (of the
Commission European Union) European
Court of
Proposals Decisions Auditors

ESC Central Bank
(Economic and Social
(Council of European Binding
Municipalities and

Member States

mate decision-making powers in a police and judicial cooperation in crim-

growing number of political fields. inal matters.
Notwithstanding the ‘unified insti- In the first column, the key compe-
tutional framework’ (Article 3 EU-T) tences at the European level have been
of the EU, the preparation, creation, distributed among five institutions –
implementation and control of legal the European Commission, European
acts through the European institutions Parliament (EP), Council of the EU,
are still dependent upon their respec- European Court of Justice (EuCJ) and
tive political field, and therefore subject European Council. At the same time,
to varying degrees of political participa- the European Auditor General (EuAG),
tion and involvement in each of the dif- the Council of European Munici-
ferent ‘columns/pillars’. palities and Regions (CEMR) and the
Besides the predominantly supra- Economic and Social Committee
national character of the first column, (ESC) also play a decisive role in the
which is about the European commu- institutional structure. Other important
nities and the EU domestic market, the organs are the European Central Bank
wording of the treaties also embraces (ECB), the European Investment Bank
the second pillar, which is equipped (EIB) and the ombudsman.
with inter-governmental powers relat- The European Commission (Articles
ing to joint external and security poli- 213-219 EC-T) is the executive and
cies, as well as the third pillar with its administrative organ of the EU with its
equally international features for the headquarters in Brussels. The adminis-
210 EU: Organs and institutions

tration consists of about 16,000 civil qualified majority. In the case of quali-
servants in 23 head offices and other fied majority votes, the votes in the
offices. Due to its exclusive right to Council of Ministers are weighed
propose legislation, the Commission – according to the population size of the
which is not subject to national govern- member states.
ment directives but takes decisions as a The European Council, which con-
cooperative organ – plays a key role in sists of the heads of state and govern-
the first column during the phase lead- ment of the member states, as well as
ing up to a vote. As a ‘motor of integra- the president of the European Com-
tion’, it identifies problems, draws up mission – supported by their ministers
agendas and formulates draft proposals of foreign affairs and by other members
for votes. Beyond that, in its capacity as of the European Commission – occu-
‘executive’, it takes, as far as it is autho- pies a special position within the insti-
rised, binding executive decisions, tutional structure of the EU.
guarantees the proper functioning of In its capacity as ‘architect of the
the common market, is in charge of the constitution’, the European Council
Community budget and negotiates has been deeply involved in the practi-
international agreements. In its capacity cal development and organisation of
as ‘guardian of treaties’, the Commis- European treaties since 1974. The
sion supervises and monitors the appli- European Council meets four times a
cation and observation of the year and serves – despite not officially
Community law. being an organ of the EC – as the high-
The Council (of the European est and final decision-making body. As
Union) (also known as the Council of ‘setter of guidelines’, it serves especially
Ministers) (Articles 202-210 EC-T) is in the fields of economic policy and the
the key legislative organ of the EU, joint external and security policies and
which, however, has begun to share its in its capacity as the ‘highest organ of
legislative and budgetary role increasing- appeal’ for controversial issues in the
ly with the European Parliament. It con- common policy areas.
sists of one (expert) minister per mem- The European Parliament (Articles
ber state and convenes – depending on 189-201 EC-T) in Strasbourg is the
the subject under discussion – with vary- only EU organ whose members are
ing contingents of members present, and elected directly by the citizens of the
is chaired by the presidency which member states. The EP has controlling
rotates at six-monthly intervals. rights over both the Commission and
The Council is based in Brussels the Council, is involved in the appoint-
and has its work prepared for it by its ment of the European Commission,
General Secretariat and by the has budgetary rights and participates
Committee of Permanent Represen- (again depending upon the political
tatives (CPR), which meets every week. field) in the legislative process of the
The Council’s internal voting proce- Community. But its greatest potential
dures vary depending on the policy influence relates to the co-decision pro-
field. Basically, there are unanimous cedure, where it occupies the role of a
votes and votes requiring a simple or a second chamber.
EU: Reforms and consolidation – economic aspects 211

The 732 EP parliamentarians budgetary efficiency of the various

(Treaty of Nice) whose appointment organs.
lasts for one five-year legislative period, The Council of European Munici-
and each of whom belongs to an organ- palities and Regions (Articles 263-265
ised political party, reflect the diversity EC-T) and the Economic and Social
of the European political landscape. In Committee (Articles 257-262), which
the sixth electoral period of the EP, two- are made up of 350 representatives of
thirds of all delegates belonged to the the regional and municipal administra-
European Peoples’ Party with its tive authorities, and 350 representatives
Christian Democratic outlook and to of economic or social lobbies respec-
the Party of European Socialists. tively, give the Community two adviso-
The European Court of Justice ry bodies that have to be given compul-
(Articles 220-245 EC-T) in Luxem- sory hearings on specific political sub-
bourg consists of one judge per mem- jects, but whose statements have no
ber state. The judges are unanimously binding consequences for the legislative
appointed by governments of the mem- process.
ber states for a six-year period.
In its capacity as the highest Court REFERENCES:

of Appeal for all legal issues in the EU, WEIDENFELD, W./WESSELS, W. (ed)
the EuCJ, assisted by attorneys general, (2000), Europa von A-Z, Taschenbuch der
deals with law suits instituted by mem- Europäischen Integration, 7th edition, Bonn;
FRITZLER M./UNSER, G. (2001), Die
ber states or EU organs, disputes
Europäische Union, 2nd edition, Bonn; WES-
between governments of member states
SELS, (1999), Das politische System der
and EU institutions, as well as internal Europäischen Union, in: Ismayr, W. (ed),
conflicts in the EU. Die politischen Systeme WestEuropas, 2nd edi-
The courts of the member states tion, Opladen, pp. 713-745.
have to refer cases which concern EU
law to the EuCJ, which then through its Jürgen Mittag
decisions creates precedents for the Wolfgang Wessels
interpretation of European Law, and
which thus guarantees the consistent
interpretation and application of EU: Reforms and consolidation –
Community Law. economic aspects
The European Auditor General
(Articles 246-248 EC-T) with head- Since its establishment in 1958, the
quarters in Luxembourg, is responsible European Economic Community
for the lawful and proper handling of (EEC) has been attracting new mem-
the income and expenditure of the EU. bers (→EU: enlargement). At the same
Its members, which are appointed for time, the member countries have trans-
six years (one representative per mem- ferred more and more tasks to the com-
ber state), draw up the annual report mon European institutions. In this way,
and issue special reports and statements the EEC has grown from six founder
with which they monitor the finances members to a European Union (EU)
of the EU, and which demonstrate the embracing 27 countries with a common
212 EU: Reforms and consolidation – economic aspects

Chronological listing of expansions and of membership applications in the EU,

1961–May 2007

Application Response Start of End of Membership

from the negotiations negotiations

Great Britain 09.09.1961 08.11.1961 29.01.1963

10.05.1967 29.09.1967 30.06.1970 22.01.1972 01.01.1973
Denmark 10.08.1961
11.05.1967 29.09.1967 20.06.1970 22.01.1972 01.01.1973
Ireland 31.07.1961
11.05.1967 29.09.1967 20.06.1970 22.01.1972 01.01.1973
Norway 30.04.1963
21.07.1967 29.09.1967 30.06.1970 22.01.1972 –
Greece 12.06.1975 29.01.1976 27.07.1976 28.05.1979 01.01.1981
Portugal 28.03.1977 19.05.1978 17.10.1978 12.06.1985 01.01.1986
Spain 28.07.1977 29.11.1978 05.02.1979 12.06.1985 01.01.1986
Turkey 14.04.1987 14.12.1989 03.10.2005
Austria 17.07.1989 01.08.1991 01.02.1993 12.04.1994 01.01.1995
Sweden 01.07.1991 31.07.1992 01.02.1993 12.04.1994 01.01.1995
Finland 18.03.1992 01.11.1992 01.02.1993 12.04.1994 01.01.1995
Norway 25.11.1992 24.03.1993 05.04.1993 12.04.1994 –
Switzerland 26.05.1992
Cyprus 04.07.1990 30.06.1993 30.03.1998 13.12.2002 01.05.2004
Hungary 31.03.1994 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Poland 05.04.1994 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Estonia 24.11.1995 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Czech. Rep. 17.01.1996 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Slovenia 10.06.1996 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Malta 16.07.1990 30.06.1993 15.02.2000 13.12.2002 01.05.2004
Slovakia 22.06.1995 13.10.1999 15.02.2000 13.12.2002 01.05.2004
Latvia 13.10.1995 13.10.1999 15.02.2000 13.12.2002 01.05.2004
Lithuania 08.12.1995 13.10.1999 15.02.2000 13.12.2002 01.05.2004
Bulgaria 14.12.1995 13.10.1999 15.02.2000 15.06.2004 01.01.2007
Romania 22.06.1995 15.06.1997 15.02.2000 25.05.2005 01.01.2007
Croatia 21.02.2003 20.04.2004 04.10.2005
Macedonia 22.03.2004 17.12.2005

Source: Piazolo, D. (2001), The Integration Process between Eastern and Western Europe, Kieler Studien
310, Berlin; and supplemented by editors.
EU: Reforms and consolidation – economic aspects 213

domestic market, a common currency ments by the EU to the poorer member

(→European Economic and Monetary countries in the context of the structur-
Union) and a common political process. al funds (→EU: regional and structural
Beyond that, additional countries have policy) are intended to stimulate growth
applied for membership (see table). in these countries and to accelerate the
During the 1999 Helsinki conven- equalisation of standards of living with-
tion of the European Council, Turkey in the EU.
was granted special candidate status, A uniform set of rules was created,
while membership negotiations have to which is binding for all member states.
be initiated on the basis of a This so-called acquis communautaire cov-
Commission report submitted to the ers:
European Council. In the referendums
of 1972 and 1994, Norway rejected the • the content, principles and political
membership conditions, and in 1992, goals of the treaties (including the
Switzerland suspended its membership treaties of Maastricht of 1992, Am-
application. sterdam of 1997 and Nice of 2000);
The large number of membership
applications reflects the economic • the legislation arising from the
attractiveness of the EU. The common treaties and the jurisdiction of the
domestic market, which guarantees the European Court of Justice;
freedom of movement of persons, cap-
ital, goods and services as well as the • the accepted statements and resolu-
freedom to establish an →enterprise, tions within the context of the EU;
makes the efficient allocation of the fac-
tors of production and effective →com- • the positions, explanations and deci-
petition possible within the EU. That sions in the context of the shared for-
contributes to increased prosperity in eign and security policies;
all member states.
But the associated structural • the positions, decisions and accepted
changes demand adjustment in the sec- conventions in the context of the
tors and areas concerned. In industries shared legal and domestic policies; and
that are no longer competitive this can
lead to job losses, while in growing • the international agreements of the
industries jobs will be created. The EU, as well as the agreements
movement of the factors of production, between the member states, which
labour and capital, favours a balanced were made with reference to special
labour market and a higher European EU activities.
economic output. The mass migration
of labour towards the Southern Despite the acquis communautaire’s
enlargement (Greece, Spain and daunting 80,000 pages, all new member
Portugal) which had been predicted in countries have to adopt the entire set of
some quarters did not occur, nor is it rules, so that the same rights and obli-
expected to occur even after the Eastern gations apply to all member countries.
enlargement of the EU. Transfer pay- Therefore, generally no digressions are
214 EU: Reforms and consolidation – political aspects

allowed; however, in particularly diffi- Eastern and Western Europe, Kieler Studien
cult areas, transition periods can be 310, Berlin, Heidelberg.
granted to new member countries
Daniel Piazolo
(environmental policy, agricultural pol-
icy, hygiene standards, the freedom to
establish a business and the right to
own land). But even long-standing EU: Reforms and consolidation –
members require transition periods, political aspects
e.g. regarding the freedom of move-
ment for workers (Germany and As a result of the considerable dynamics
Austria: 7 years). of the European process of integration,
Since certain aspects, rules and stan- the communal framework – originally
dards of the acquis communautaire do not developed in 1952 and then in 1958 for
correspond to the level of development six founder states and a very limited
of the new member countries and also number of political spheres – was sub-
of some of the poorer EU member ject to multiple changes. With the
countries, substantial costs and distor- Single European Act (1987), and the
tions result from the implementation treaties of Maastricht and Amsterdam
(e.g. from environmental protection regarding the European Union (1993
measures). and 1999) as well as the Treaty of Nice
This issue of the compatibility of an (2003), the original treaty system has
expanding EU (with countries with been comprehensively supplemented
increasingly dissimilar economic and adjusted.
power) and EU consolidation (deepen- The European Community devel-
ing) (since some countries support oped from a customs union to a domes-
more incisive shared regulations) tic market. Since the Maastricht Treaty,
requires reforms that go beyond the the organs and committees of the
resolutions of the Nice Treaty of Union occupy themselves (according
December 2000. The plan is to grant an to various different procedures, it is
extended EU sub-group of member true) with modern fields of political
countries the right to push the →inte- activity, such as environmental and con-
gration between the member countries sumer protection, as well as nearly all
of this group forward without automat- traditional responsibilities of the state,
ically expanding the acquis communau- i.e. internal and external security. The
taire in the process. regulation range and density of the
Community has likewise clearly in-
REFERENCES: creased.
CAESAR, R./HEINEMANN, F. (eds) But since the expansion of the polit-
(2001), EU-Osterweiterung und Finanzmärkte, ical spheres and responsibility alloca-
ZEW Wirtschftsanalysen 57, Baden-Baden;
tions referred to above did not go hand
LEACH, R. (2000), Europe – A Concise
in hand with adequate reform of the
Encyclopaedia of the European Union from
Aachen to Zollverein, Fitzroy Dearborn
Community organs, as envisaged in the
Publishers, London, Chicago; PIAZOLO, Treaty of Rome (1958), the EU – par-
D. (2001), The Integration Process between ticularly in view of the planned enlarge-
EU: Reforms and consolidation – political aspects 215

ment rounds regarding the Southern, a qualified majority and a simple major-
Central and Eastern European states – ity of the member states – on separate
is faced with considerable challenges. In request – still another quorum of 62%
order to give the union more depth and of the EU population is necessary
to achieve the ‘implementation of an (depending on the number of member
ever closer union of the peoples of states approximately 71% to 74% of the
Europe’ (Article 1 of the EU Treaty), votes). With this reform step the future
the Community felt the need – besides hurdle for majority decisions is made
the reform of political fields of central more difficult, since in a union which
importance (agricultural and structural has expanded to 27 member states nei-
policy) – to also investigate the func- ther the initial 15 EU members nor
tioning of the institutions (size and later on the 13 biggest or 22 smallest
composition of the Commission, bal- form a sufficient majority.
ance of votes in the Council, greater In contrast to the weighting in the
number of ballots with a qualified Council, the redistribution of seats in
majority). Parliament orients itself more strongly
The European Council in Berlin, guided by demographic standards.
with its Agenda 2000 which was adopt- Germany, representing about 17% of
ed in March 1999, had already intro- the population in a 27-member EU,
duced the reform of the Community’s would achieve a proportion of 13.5% of
→agricultural policy as well as measures the seats with a fixed number of 99
for economic and political cohesion. votes.
This was followed by the summit end- Considering the approximately 70
ing in December 2000 and the Treaty of Articles of the Community treaties
Nice, which aimed at creating the foun- which are subject to unanimity, the
dation for institutional reforms. expansion of majority decisions was
One of the main points of the also one of the quintessential points of
reform process of Nice was the new institutional reform. It has to be pre-
weighting of Council votes. Since with a vented, that in an enlarged Union with
view to future enlargement rounds the up to 27 member states the unanimity
less populated member states would be requirement in the Council leads to a
at an advantage in relation to the larger stalemate within the EU. With the
states, at worst decisions could have Treaty of Nice the sphere of majority
been taken with a qualified majority decisions was extended by a further 28
which would not even have had the points, but important political aspects
support of the simple majority of the which are dealt with at a European
entire population. Added to that was the level, for instance fiscal policy, are
threat of a strong distortion of the pop- invariably subject to the unanimity
ulation weightings of individual mem- requirement.
ber states. For this reason, in Nice, the Bearing in mind the sobering out-
votes were more spread out, now rang- come of Nice versus the positive exper-
ing from 29 (Germany) to 3 (Malta). iences derived from the Basic Rights
Three hurdles are envisaged. This Convention, the idea was promoted that
means that for a legal act, in addition to in order to achieve a more far-reaching
216 EU: Reforms and consolidation – political aspects

Vote distribution in the EU Council and the EU Parliament (EP) in terms of the Treaty
of Nice

Member Population EU-27 Council EU-27 EP EU-27

state in population votes1 Council seats2 EP
millions in % in % in %

Germany 82,5 17.02 29 8.41 99 13.52

France 59,8 12.33 29 8.41 72 9.84
Great Britain 59,2 12.21 29 8.41 72 9.84
Italy 57,6 11.88 29 8.41 72 9.84
Spain 41,9 8.64 27 7.83 50 6.83
Poland 38,2 7.88 27 7.83 50 6.83
The Netherlands 16,2 3.34 13 3.77 25 3.42
Greece 11,0 2.27 12 3.48 22 3.01
Portugal 10,4 2.15 12 3.48 22 3.01
Belgium 10,4 2.15 12 3.48 22 3.01
Czech Republic 10,2 2.10 12 3.48 20 2.73
Hungary 10,1 2.08 12 3.48 20 2.73
Sweden 9,0 1.86 10 2.90 18 2.46
Austria 8,1 1.67 10 2.90 17 2.32
Denmark 5,4 1.11 7 2.03 13 1.78
Slovakia 5,4 1.11 7 2.03 13 1.78
Finland 5,2 1.07 7 2.03 13 1.78
Ireland 4,0 0.83 7 2.03 12 1.64
Lithuania 3,5 0.72 7 2.03 12 1.64
Latvia 2,3 0.47 4 1.16 8 1.09
Slovenia 2,0 0.41 4 1.16 7 0.96
Estonia 1,4 0.29 4 1.16 6 0.82
Cyprus 0,7 0.14 4 1.16 6 0.82
Luxembourg 0,4 0.08 4 1.16 6 0.82
Malta 0,4 0.08 3 0.87 5 0.68

Total EU-25 455,3 321 (682)2

Romania 21,7 4.48 14 4.06 33 4.51

Bulgaria 7,8 1.61 10 2.90 17 2.32

Total3 EU-27 484,8 99.98 345 100.05 732 100.03

Source: Eurostat, European Parliament.

1 The vote distribution in the Council only came into force on 1 November 2004. Between 1 May and 31
October 2004, interim arrangements applied.

2 This distribution of seats was originally supposed to become effective after the European Parliamentary
Elections in 2004. Since Bulgaria and Romania join the EU in 2007 at the earliest, the seats reserved for
them were equally distributed among the other member states, so that the European Parliament already
had the maximum number of 732 members.

3 Deviation from 100% due to rounding off.

EU: Regional and structural policy 217

EU reform, a convention, meeting pub- proposal was eventually accepted in the

licly, should be formed. Between summer of 2004 when the European
February 2002 and June 2003, based on Council had an Irish president, and it
the Laeken Declaration and chaired by was submitted to the member states for
President Valéry Giscard d’Estaing, a ratification. Ratification was denied by
committee of 105 delegates convened voters in France and the Netherlands.
which was made up of representatives However, in 2007 new steps have been
from all the existing and prospective taken to deal with these matters in a
member states, the EU institutions and governments’ conference.
the national parliaments. It was their
intention, as an alternative to a heads of REFERENCES:

state or government conference, to WEIDENFELD, W. (ed) (2002), Europa-

come up with an answer to the ‘critical Handbuch, Gütersloh; GIERING, C. (edi-
tor) (2003), Der EU-Reformkonvent - Analyse
questions’ concerning the ‘future devel-
und Dokumentation, Gütersloh, Munich.
opment of the Union’.
The convention ratified a draft Jürgen Mittag
‘Agreement on a European Constitu- Wolfgang Wessels
tion’, offering numerous options which
could improve the union’s institutions’
ability to act. Reform proposals were
submitted, particularly on the subjects EU: Regional and structural
of defining the competencies of the dif- policy
ferent levels (EU, member states, fed-
eral states/ regions, etc.), the role of the The →European Union is characterised
national parliaments in the integration by considerable internal economic and
process and the simplification of the social differences. In 1998, the average
treaties. Concerning the most crucial per capita →income in the EU’s poorest
issue, which is the voting method in the region (Ipeiros in Greece), was only
Council of Ministers (Council of the 42% of the EU average, while the aver-
EU), the convention advocated the age income in the most affluent region
double majority principle. This would (Central London) amounted to 243%
mean that from 2009 onwards, the of the EU average (see figure, next page).
Council’s qualified majority decisions The income differential at national
would require both a majority vote level among the member states is slight-
from the member states (50%) as well ly less steep, but it nevertheless ranges
as a majority vote from the EU popula- from 66% in Greece to 176% in
tion (60%). Luxembourg.
However, since the December 2003 Differences in terms of →unemploy-
governments’ conference could not ment are also marked. In 1999, regional
agree on the double majority principle, unemployment ratios ranged from
the convention’s draft comprehensive 2.1% in the Aland Isles in Finland, to
constitutional proposal also failed. But 28.7% in Calabria in Italy. The national
due to changed (party-) political affilia- unemployment ratios measured
tions among the EU member states, the between 2.4% in Luxembourg and
218 EU: Regional and structural policy

Comparative prosperity in the European Union

Gross domestic product in purchasing power standards (PPS) per inhabitant

16.1% in Spain. The reduction of these along the lines of financial equalisation
differences is the most frequently cited in Germany was politically impossible
reason for the existence of European in the EU. This is why the EU desig-
regional and structural policies (RSP). nated different types of ‘problem
The basic structure of the EU RSP regions’, which are developmentally
was established in the late 1980s. At that assisted by the RSP. After some amend-
time, especially the less affluent EU ments were made to these so-called
member states wanted to see the EU RSP ‘objectives’, they have been
domestic market grow by making the detailed as follows for the period of
economically backward regions of the 2000–2006:
EU more competitive. This is achieved
above all through investment in the • Objective 1: Developmentally back-
areas of infrastructure and human capi- ward regions (defined as average per
tal, as well as through encouraging pri- capita income of less than 75% of the
vate investment. EU average). These regions are in-
The direct redistribution of finan- habited by about 22% of the total EU
cial resources among the member states population, especially in Greece,
EU: Regional and structural policy 219

Portugal, Spain, Italy and the former the other hand, the RSP can only have
GDR. About 70% of the RSP budget a positive effect if basic economic con-
is used for this objective. ditions such as →price level stability and
an appropriate tax burden have already
• Objective 2: The regions which are been put in place.
particularly affected by economic and But it has to be noted that RSP
social changes (e.g. out-dated indus- funding tends to be spread too broadly,
trial regions and rural areas with with the result that its effectiveness is
downmarket economic develop- reduced. The furthering of human cap-
ment). About 18% of the EU popula- ital, for example, in relatively prosper-
tion live in such regions and about ous EU regions through Objective 3 of
12% of total funds flow to Objective the EU RSP is economically barely jus-
2 regions, which is a significantly tifiable. In terms of the subsidiarity
smaller per capita percentage than principle, the EU RSP is generally only
Objective 1 regions. supposed to be implemented when a
member state is not able to solve its
• Objective 3: Assistance with the adjust- structural problems on its own.
ment and modernisation of the edu- From a political perspective, howev-
cation, vocational training and er, it is in the interest of the ‘rich’ mem-
employment policies and systems. ber states to secure RSP funds for their
This assistance, which adds up to own benefit through instruments like
12% of the RSP total funds, may be Objective 3.
granted to any region which is not Then there is the problem that the
classified as Objective 1. The detailed coordination between EU RSPs and
regional allocation of funds has large- other policy areas is often inadequate.
ly been left up to the EU member This means that there is a risk that the
countries themselves. concentration of national and European
funds for research and development in
Beyond that, a number of quantita- the economically strongest regions in
tively less significant measures have the EU will reinforce the very econom-
been put in place in the context of the ic differences inside the EU which were
EU RSP; for example, the promotion of described earlier (→EU: industrial,
cross-border cooperation. The total research and technology policy).
cost of the financial measures planned In conclusion it can be stated that
for 15 member countries for 2000–2006 →EU enlargement represents a consider-
had been estimated to be about s213 able challenge for the RSP. Since the
billion (at 1999 prices). average per capita income of most of
Since the early 1990s, the EU RSP the new member countries lies
has effectively supported the economic markedly below average of the older
progress of at least some of the targeted members, the Eastern enlargement is
regions. Compared with the EU aver- leading to a significant increase in
age in the 1990s, the per capita income Objective 1 regions. This in turn will
in Spain, Portugal and Ireland, for either necessitate a considerable
example, has increased markedly. On increase of the funding set aside for
220 EU: Social policy

RSP in the budget, or a reduction of the Thus, economic reasons were deci-
assistance allocated to the current sive here as well. While equal pay was
member states. intended to counteract competition dis-
tortions, the social protection of
REFERENCES: migrant workers formed a significant
EUROPÄISCHE KOMMISSION (2001), prerequisite for the free exchange of
Zweiter Bericht über den wirtschaftlichen und goods, labour, services and capital in the
sozialen Zusammenhalt, Brussels; Further
sense of the ‘four basic liberties’. Both
documentation is available at: http://www.
principles commonly attempt to coun-
htm; MAIER, G./ TOEDTLING, F. (1996),
teract possible discrimination based on
Regionalökonomik und Stadtökonomik Vol. 2 – nationality and/or gender.
Regionalentwicklung und Regionalpolitik, In particular, numerous decisions of
Vienna. the European Court of Justice illustrate
that the non-discrimination principle
Reiner Martin enjoys a broad legal interpretation with
high practice-oriented relevance, par-
ticularly since an individual member of
EU: Social policy a European Union (EU) member state
is able to bring charges of discrimina-
The European Community (EC) was tion. With the Single European Act of
originally established as an economic 1987, the protection of workers’ health
community and was understood to be a and safety (Article 118a, now Article
project through which the political 137 EC Treaty) has become a third col-
integration of Europe could be achieved umn of Community →social policy.
using economic means. In contrast, Since then, Community-wide regu-
socio-political questions such as a lations that outline the minimum pro-
Europe-wide adjustment of the social visions for the organisation of working
security systems have played only a sub- conditions with regard to the protection
ordinated role. The refusal to adopt of the safety and health of the employ-
comprehensive social harmonisation ees can be issued. In contrast, the regu-
has led to the fact that the presence of lation regarding the ‘harmonisation of
the ‘social dimension’ of the Com- social systems’ postulated in Article 136
munity can be seen only in specific reg- of the EC Treaty has enjoyed much less
ulations. concrete realisation. It expresses a
The socio-politically relevant rather vague expectation that with
European Community Law has its increasing economic integration, the
roots in the principles of equal treat- general living and working conditions
ment of males and females regarding within the Community will be har-
pay (Article 119), as well as in the monised. Concrete action, however,
creation of employee freedom with remains within the authority of individ-
regard to the area of social security ual member states.
(Article 51), which is anchored in the Only with the forthcoming realisa-
1957 treaty establishing the European tion of the internal market at the begin-
Economic Community. ning of the 1990s was the dimension of
EU: Social policy 221

the social Community put on the agen- states. As the socio-political strategy
da, since the states with high labour and plan of the European Commission
social costs feared a destabilisation of from 1998–2000 already suggested, the
their competitive positions. emphasis lay – in view of the
With the 1989 adoption of the Community-wide high rate of →unem-
Charter of Fundamental Social Rights ployment – on employment policy (and
and the treaty establishing the EU not on the social protection policies).
(Maastricht Treaty, 1 November 1993), Standardisation in the direction of a
the ‘agreement on social policy’ conceptually harmonious European
received a legal advancement – in the social policy is, for reasons of different
same way as the principle of majority historical development as well as politi-
was allowed with regard to the labour cal and cultural conditions, unlikely to
and social Community legislation for come to fruition in the foreseeable
the 14 signatory nations (without the future. This is especially so when one
United Kingdom). considers institutionally important
At the same time, a ‘two track’ areas such as social security, dismissal
Europe was created, at least as far as protection and autonomy in bargaining,
social policy is concerned, by having as well as the active labour policy par-
regulations that need not apply to the ticipation that remains subject to the
United Kingdom. The benefit is that principle of unanimity – and thus sub-
nations of lesser economic power can ject to the authority of the individual
gradually harmonise with regard to eco- nations.
nomic and social convergence, while In future, European social policy is
more advanced nations need not lower likely to seek individual measures for
their levels of efficiency. harmonisation within the areas of pen-
Thanks to the ‘social dialogue’, a sion, health, nursing care and unem-
further innovation was generated. This ployment so that these areas do not go
was the right to hearings and to propose counter to economic integration. The
or nominate on behalf of the unions primacy of economics over social policy
and management vis-à-vis the European would thus remain.
If the social partners agree on regu- REFERENCES:

lations autonomously on a Communi- KOWALSKY, W. (1999), Europäische

ty-wide level, these are then converted Sozialpolitik. Ausgangsbedingungen, Antriebs-
kräfte und Entwicklungspotentiale, Opladen;
into European law. This has, however,
hardly been the case. The few excep-
(1997), Europäische Sozialpolitik, Baden-
tions have included the formation of Baden; PLATZER, H.-W. (Ed.) (1997),
European works councils (→industrial Sozialstaatliche Entwicklungen in Europa und
relations constitution). die Sozialpolitik der Europäischen Union. Die
It was only with the participation of soziale Dimension im EU-Reformprozeß,
the United Kingdom in the social Baden-Baden.
agreement in 1997 that the basis for a
unified and comprehensive European Hans Jürgen Rösner
social policy was created for all member
222 EU: Trade policy

EU: Trade policy which the Council empowers the

Commission (Article 133 EC Treaty).
Customs unions such as the European The EU trade policy has accepted
Union were authorised by the General the empirically proven fact that division
Agreement on Tariffs and Trade of labour and open markets are the best
(GATT) and in the World Trade way of creating →income and →employ-
Organization (WTO) (→international ment, while at the same time increasing
organisations) because it is assumed that the standard of living. Through open,
to phase out trade barriers between the competitive markets, productivity gains
member countries without at the same can be achieved that would otherwise
time erecting more customs barriers for not be possible. This connection is not
third countries, would bring about an always obvious, because the ‘creative
opening of national markets worldwide. destruction’ associated with competi-
At the same time, GATT/WTO expects tion – meaning the progression to more
member states to get actively involved demanding products and activities –
in the liberalisation of the global econo- results in job losses in those branches
my. which are no longer able to compete.
In 1958, the European Economic Economic policy is supposed to react to
Community (EEC) expressed the this by widely promoting education and
theme of its trade policy (Article 110, further training and by, if necessary,
EEC contract) as follows: ‘The creation offering the ‘victims’ of progress tem-
of a customs union reflects the desire of porary support (→unemployment: social
the member states to contribute to the security).
gradual removal of the limitations to As the largest exporter of goods and
international trade and to phase out services, the EU is clearly interested in
customs barriers, in the interests of all gaining access to foreign markets. In
parties involved and for the promotion addition, it is increasingly recognised
of a harmonious development of world that opening its own market yields
trade.’ higher prosperity and employment
This objective has remained gains than the removal of trade barriers
unchanged and was, as Article 131, on the part of the trading partners.
incorporated into the EU Treaty of Trade barriers, whether practised at
Maastricht/Amsterdam. It was rein- home or abroad (protectionism), will
forced by the maxim that the not prevent transformation but will
Community respects the principle of an only delay it at enormous cost.
‘open market economy on the basis of Starting in 1985, the rules of com-
free →competition’ (Articles 4, 98, 105, petition in an open market were imple-
EC Treaty). mented with particular consistency and
In 1970, trade policy was transferred success in the EU, concurrently with
from the member states to the the Domestic Market Programme. The
Community. The European Com- introduction of freedom of movement
mission submits proposals to the for goods, services, labour and capital
Council of Ministers for the imple- (four types of freedom), invigorated
mentation of a common trade policy, to internal European trade and resulted in
EU: Trade policy 223

lasting, positive effects on income and access have a positive effect, the same
employment in all EU member states. must apply in the global market – about
Consumers and →entrepreneurs can one-fifth of which is represented by the
choose from a greater variety of prod- EU. This means that the more the EU
ucts at lower prices, which increases opens its external borders with third
buying power. The costs of travel, countries, the more it will benefit in
goods, transport and communication of terms of income and employment. For
information and news have gone down most industrial goods this realisation
dramatically. Today, both European and has resulted in openness of the Euro-
non-European suppliers can sell their pean market, which with average cus-
merchandise in any EU country under toms duties of 2.4% must be seen as
the same legal conditions. exemplary.
Service providers, by contrast, The politically motivated considera-
remained subject to certain limitations, tion of specific interests is, however,
which is why at the beginning of 2001 causing the EU to continually make
the European Commission started exceptions despite its better knowledge.
implementing a package of steps At the instigation of just a few EU
intended to promote the integration of member countries, the European
the European service markets. import of textiles and clothing stands
By the end of 2002, any obstacles to out through its quantity limitations and
the transnational exchange of services high customs duties. This harms not
were supposed to have been identified only buyers in Europe but many devel-
and eliminated as far as possible, so that oping countries which depend on the
service providers can just as well con- export of these products. These devel-
duct their activities in the whole of the oping countries are deprived of the pos-
EU or in just one member country. For sibility of sales opportunities in the
the users of services, be they companies context of the international division of
or consumers, this means, as it does for labour. They are also deprived of the
goods, a larger number of suppliers opportunity of taking responsibility for
who are not only competing with each their own progress.
other but who are also competing in Another example of the lack of con-
terms of quality and innovation, there- sistency in EU trade policy is the cus-
by benefiting the consumer. As the toms duty of 10% on imported cars,
freedom of services in Europe is which from the macroeconomic per-
realised more consistently, the transi- spective is an unjustifiable interference
tion from the industrial to the service in the market process (US: 2.5%). The
and information society is sped up. If import limitations and subsidies for the
the same proportion of the workforce benefit of the coal mining industry
were employed in the services sector as (about s100 per ton) is another exam-
in the United States, there would be an ple which shows up the problems and
additional 36 million jobs in the EU. costs of protectionism.
If in the European domestic market In addition, the European agricul-
the principles of competition, division tural policy is increasingly becoming an
of labour and unhampered market economic nuisance, both inside and
224 EU: Transport policy

outside the EU. The policy’s one-sided are not very concrete and are limited to
focus on protecting European produc- the rail, road and internal waterways.
tion, which by international standards is The cause of the impreciseness was
uneconomical, puts an extra burden on the substantial difference in viewpoints
EU consumers and taxpayers. At the regarding the conceptual organisation
same time, as in the textile sector, many of the →transport policy. While the EEC
developing countries are deprived of Commission at that time, as well as
market access to the European con- some of the smaller member countries,
sumers and their buying power. demanded a competitive regulatory
→Deregulation and the opening of framework, Germany, France and Italy
the agricultural markets will be difficult oriented themselves along the lines of
and sensitive topics at future interna- the ‘particularities of transport’ theory.
tional talks under the umbrella of the According to these teachings, the area
WTO. There, the EU will have to sub- of transport is an exception where the
mit to being judged by its own princi- principles of market competition do not
ples of conduct in a market economy. apply. This anti-competition perspec-
tive has been anchored in the EC Treaty
REFERENCES: (Article 75 (1)).
EUROPEAN COMMISSION (March Despite many initiatives on behalf
2001), Single Market News; WORLD of the European Commission in favour
of a liberalisation of market access and a
Trade Policy Reviews, European Union,
gradual dismantling of national inter-
ference with transport tariffs, as well as
Detlef Böhle coordinated frameworks for →competi-
tion within and between the transport
carriers in Europe, almost every attempt
to create a structured European trans-
EU: Transport policy port policy was condemned to failure.
It was only with the European
The 1957 treaty establishing the Parliament’s claim to the European
European Economic Community Court of Justice (EuCJ) regarding the
(EEC) already contained statements EU Council’s failing to act and its poli-
about a common transport policy: cy of procrastination, and the EuCJ’s
Article 3 in general form, Articles 47-87 subsequent decision to extend free
more concretely regarding common movement of cross-border services to
rules. This policy concerns, among transport from 22 May 1985, that a
other things, issues of transnational change in common transport policy
traffic, rights of passage for transport became visible. The EuCJ found
enterprises in a member state in which against the quantitative restrictions, but
they do not reside, road safety and the did not give clear criteria for the estab-
elimination of discrimination. This lishment of a new policy.
concerns Community agencies as well The mostly positive experience with
as transnational transport between the already liberalised transport markets
member states. The terms of reference and the massive academic critique on
EU: Transport policy 225

the ‘particularities of transport’ theory, traffic congestion. Further, by introduc-

motivated the government heads to ing uniform technical standards, it is
create a free European transport market trying to create internationally har-
without quantitative restrictions in the monised control systems within the
same year, until 1 January 1993. realm of air traffic control and coordi-
The subsequent liberalisation nated transport route planning with
efforts applied first and foremost to the regard to trans-European transport net-
road transport of goods. Partly with the works. These should allow both eco-
support of the member states, and part- nomical and smooth flowing traffic.
ly against their substantial resistance, Finally, in the light of →EU enlargement
the mandatory margin tariffs were the Commission is striving to liberalise
somewhat abolished and free price for- transport relations with the new mem-
mation in transnational transport was ber countries – and to lead them to a
implemented. The Community licence common transport market.
took the place of the quantitatively fixed Despite the focus on a stronger
transport authorisation, which made it market competition orientation,
possible to transport goods within the European transport policy still faces
EU without restrictions. It also elimi- substantial policy planning tasks. Thus,
nated the restriction on cabotage that the member states have a range of pos-
prohibited enterprises from performing sibilities for action within the frame-
transport services in another member work of the principle of subsidiarity
state. that allows them to avoid the desired
Gradually, the liberalisation spread competition by massive market inter-
to other facets of transport, although in ference.
varying degrees: the liberalisation of On the other hand, where the
tariffs and market access regarding air Community has the appropriate com-
traffic between the member states petencies, no adequate realisation of the
meant that market access within the Community law has occurred. Short-
member states was also liberalised. At distance public transport is, therefore,
the same time, the navigation of nation- despite the demand for more competi-
al inland waterways was opened to all tion through tendering procedures, still
enterprises. With regard to the rail sys- a closed market to which private ven-
tem, the EU requires separate calcula- dors have only very limited access.
tions for the rail network and the train Most often in regard to air transport
operation, as well as the discrimination- and sea ports, the general prohibition of
free access to the national networks for competition-inhibiting aid →subsidies is
all railway operators – public or private. circumvented by the issue of special
With its more recent activities, the exemptions or violations. Rail trans-
EU Commission has aimed for a fairer port, too, has not been able to eliminate
allocation of transport-dependent costs the state’s influence on the rail net-
to their respective initiators, regarding works in many countries, thus making
the costs for the use of the transport access to rail networks sometimes
routes (route costs), environmental impossible for newcomers.
costs as well as the costs that arise from
226 Family policy

REFERENCES: income, child and childcare allowances)

EWERS, H.-J./ STACKELBERG, F. v. and social transfers, such as child bene-
(1998), Verkehrspolitik, in: Klemmer, P. fit, educational aid and aid for the pro-
(ed), Handbuch der Europäischen Wirtschaft-
tection of the unborn child. Since ‘fam-
spolitik, Munich, pp. 1152-1192; HART-
ily expenditure compensation’ was
WIG, K.-H. (1999), Marktwirtschaftliche
Optionen der Verkehrspolitik in Europa, in:
renamed in 1996 as ‘family contribu-
Apolte, Th./ Caspers, R./ Welfens, P. J. J. tion compensation’, it has become pos-
(eds), Standortwettbewerb, wirtschaftspolitische sible to claim either child benefit or a
Rationalität und internationale Ordnungspolitik, tax rebate.
Baden-Baden, pp. 89-112. Time spent on childcare and educa-
tion is recognised and taken into
Karl-Hans Hartwig account in the calculation of old-age
pensions and pension plans for widows
and widowers. The child allowance fea-
Family policy tured in Germany’s latest pension
reform plan has added more provision
The term ‘family’ is rooted in civil law for retirement, covered by capital
and defined as parents living with their resources. All this supports and pro-
children in one household, while the motes parenting. The situation con-
parents may or may not be married to cerning the legally prescribed national
each other, may never have been mar- →health insurance where dependants
ried or may have single status. This have free cover, and also concerning the
means that marriage is no longer a pre- additional child allowance for the
requisite for the existence of a family, unemployed in the social security sec-
which instead now means the sole or tor (→unemployment: social security), is
shared custody for one or several chil- similar. Besides these purely material
dren. contributions, aid in support of the
Family policy in Germany is there- cohesion and educational effectiveness
fore understood as all those protective of families through marriage, parenting
and supportive measures that are aimed and educational counselling as well as
either directly at the children or indi- family planning must be mentioned.
rectly at their parents. Just as the new term ‘family contri-
The protective measures provided bution compensation’ makes clear, chil-
by the law start with protection for the dren do not represent a burden on soci-
unborn child and protection of the ety, but parents through the investment
mother, as well as the legal right to of money and labour are making an
claim maternity leave and part-time essential contribution for the continued
employment. The measures continue existence of society. It is therefore the
with child support and support for ado- joint task of the federal government and
lescents, protection of the youth and the states at government level, and that
employment protection legislation. of the municipalities at local level, to
Where supportive measures are build a society which favours the child
concerned, one has to distinguish and the family. Besides the provision of
between tax relief (tax split of family affordable living space – which must be
Federal Cartel Office 227

tailored to the needs of children and Federal Cartel Office

ought to be located in child-friendly
surroundings with a family-focused The Federal Cartel Office (FCO) is the
socio-cultural infrastructure – a satis- most important German competition
factory range of supportive and comple- authority. As an independent federal
mentary facilities which assist the fami- authority, it falls under the Federal
ly in the care, education and training of Ministry of Economics and Technology.
their children should also be available, In terms of the relocation programme,
together with health-promoting meas- its headquarters were transferred from
ures and institutions. Berlin to Bonn. The FCO is primarily
The most important task family pol- responsible for the implementation of
icy-makers have to tackle in the future the →Act Against Restraints of Competition
seems to be, on the one hand, the which came into force on 1 January
creation of conditions which favour the 1958 as a competition watch-dog. The
combination of parenting with gainful FCO has a staff of about 300 employees
employment, particularly for single and officials, of whom about 150 are at
parents; and, on the other hand, ensur- executive level – almost exclusively
ing that domestic activities receive lawyers and economists, in approxi-
more general respect. mately equal numbers.
Decisions regarding mergers (amal-
REFERENCES: gamations), monopolies and abuse of
MÜLLER-HEINE, K. (1999), Ziele und market power are taken by the 11 deci-
Begründungen von Familienpolitik, in: sion-making divisions of the FCO, each
Arbeit und Sozialpolitik, Parts 9-10; WIN-
of which is responsible for certain
GEN, M. (1997), Familienpolitik. Grundla-
gen und aktuelle Probleme, Stuttgart; LAM-
PERT, H. (1996), Priorität für die Familie.
A decision on each case is made by a
Plädoyer für eine rationale Familienpolitik. committee consisting of the director of
Berlin. the division concerned and two associ-
ate members of the same division. In
Hans Jürgen Rösner this capacity, the decision divisions are

Mergers in Germany, 1973–2004

Organisation chart as of 1 April 2007 Organisational chart of the Federal Cartel Office
Postal address

Kaiser-Friedrich-Str. 16
Responsibilities of Decision Divisions:
L1 53 113 Bonn
All decisions in administrative and
Telephone: 49-228-9499-0
administrative fine cases; LP
PRESIDENT Telefax: 49-228-9499-400
Participation in proceedings of the PRESS OFFICE
IVBB: 01888 7111-0
supreme Land authorities
email: poststelle@bundeskartellamt.bund.e
Only informal contacts are possible via e-mail.
L2 P Please read the information provided on our
website http://www.bundeskartellamt.de
VICE-PRESIDENT Litigation and General
Z1 Z2
Legal Matters G ECON
Federal Cartel Office

Administration Information department General Competition Project Group Economic

Law Issues Concepts

VK1 VK2 VK3 G1 G2 ext 230 G3 G4 E/G5 ext 240 SKK ext 386
1st Public 2nd Public 3rd Public German and European General Economic German and International Special Unit for
Procurement Procurement Procurement Antitrust Law Policy Public European Merger Competition Combating Cartels
Tribunal Review Tribunal Review Tribunal Review __________________ Relations Control
Procedures Procedures Procedures
ECN Coordination Unit

B1 B2 B3 B4 B5 B6 B7 B8 B9 B10 B11
1st Decision 2nd Decision 3rd Decision 4th Decision 5th Decision 6th Decision 7th Decision 8th Decision 9th Decision 10th Decision 11th Decision
Division Division Division Division Division Division Division Division Division Division Division

Extraction of iron Agriculture and Health sector Waste Mechanical and Media Telecommuni- Gas Wholesale and Prosecution of
ore and non- forestry (incl. medical management plant engineering cations retail trade in administrative
metallic minerals technology, industry Culture, sports, Electricity consumer goods offences in
Wood products pharmacy, health Metal industry entertainment Broadcast conjunction with
Construction insurance and Financial services engineering Mineral oil Tourism and hotel violations of Sec 1
industry and relat- Food industry hospitals) Iron and steel Advertising catering industry ARC and Art. 81
ed services (build- Other services industry EDP District heating EC
ing materials, Textile industry Chemical industry Electrotechnology Transport
glass, ceramics) Trade fairs Coal mining
Other consumer Measurement and Postal services
Real estate and goods control technology Paper industry Water
related service
Automotive Patents and
Wood industry industry (incl. rail, licences
(excl. furniture air and water
production) vehicles)
Federal Employment Agency 229

not subject to any directives but make Federal Employment Agency

autonomous decisions.
Concurrently with the sixth amend- The German Federal Employment
ment to the Act Against Restraints of Agency (FEA) is an officially registered
Competition which came into force on autonomous body with legal capacity
1 January 1999, two additional federal and directly answerable to the federal
public procurement divisions were government. Autonomous organs
established at the FCO. The public pro- (through the employees, employers and
curement divisions are responsible for the public bodies) are the Executive
the examination of the placing of public Committee and Board of Governors as
orders in the area of federal govern- well as the administrative committees
ment responsibility. of the state employment offices and
The FCO follows up on all employment agencies. According to
restraints of competition which are the Social Security Code III (from 16
effective in Germany. Some of its spe- December 1997), the FEA is the regula-
cific functions include enforcement of tory body responsible for ‘employment
cartel prohibition, the monitoring of promotion’.
abuse and merger control (→concentra- Historically, the FEA, founded on 1
tion). But the FCO is responsible for May 1952, takes the place of the
the enforcement of cartel prohibition German Reich Institute for Labour and
and the monitoring of abuse of power Unemployment Insurance, established
only when the restriction of competi- on 1 October 1927 and after the
tion extends beyond the borders of a National Socialist ‘synchronisation’,
German federal state. If the effect is based on the Employment Creation
limited to a state, the respective region- and Unemployment Insurance Act of
al competition authorities follow up on 16 July 1927, which had closed a gap in
the alleged competition offences. Bismarck’s social security legislation.
Merger control, however, is exclusively At the beginning of 2002 the federal
dealt with by the FCO. government introduced a commission
In its capacity as the competent for ‘modern services in the job market’,
authority, the FCO also attends to all the so-called Hartz Commission. Its
matters which have been transferred to task was to make the German job mar-
the member states in terms of the com- ket more effective and labour adminis-
petition regulations of the European tration more efficient. On the basis of
Economic Community Treaty. Finally, the proposals made by the Hartz
on the basis of its practical experiences Commission, four laws concerning
the FCO makes official statements on modern services in the job market
matters regarding the political and legal (Hartz I-IV) were ratified. As part of a
aspects of competition. reform process, the Federal Labour
Office was renamed the Federal Em-
REFERENCES: ployment Agency on 1 January 2004.
Internet: www.bundeskartellamt.de As long ago as the 19th century,
municipal labour offices had sprung up
Kurt Stockmann
especially in the big cities. Growing
230 Federal Employment Agency

mass unemployment during the sents a crucial security for the liveli-
Weimar period in the wake of the special hood of the majority of workers. Private
labour requirements of a war economy insurance against the risk of unemploy-
and the emergence of a variety of insti- ment is not on the cards due to the col-
tutions for labour registration and lective interconnections of losses in the
unemployment support made it obvious event of economic, structural and
that a comprehensive, neutral and ef- growth crises. Besides, the fact that the
ficient labour organisation was needed. individual can have an impact on the
Linking a public labour service with risk of unemployment (‘moral hazard’)
income protection in the event of means that it is a risk which cannot be
→unemployment can be regarded as a privately insured.
first step in a preventative (prophylac- There is no uniform total labour
tic) →social policy in relation to the risk market. Rather, it is divided into spe-
of unemployment. The Employment cialised technical, qualification-based,
Promotion Act of 1969 and its amend- industry-based and regional labour
ment of 1997 (Social Security Code III) markets. The labour market is charac-
had reinforced the emphasis on finding terised by a particular lack of trans-
work, preserving employability and the parency of supply and demand. Work
integration into regular gainful employ- contracts are incomplete and the mobil-
ment through the expansion and ity of workers is limited. These condi-
systematic development of the sophisti- tions make it as difficult to bring about
cated methods of an active →labour mar- the smooth interlocking of →supply and
ket policy. demand in the labour market as it is to
In view of the specific imperfections steer the resource ‘labour’, both at indi-
of the job market, such institutional vidual and macroeconomic levels,
arrangements for gainful employment towards optimal allocation from which
(institutionalised job market) can, in high economic yields can be obtained
economic theory, be seen as a path to through employment, in quantity and
greater prosperity. quality terms.
The founding fathers of the →social With the help of information about
market economy, in their desire to over- the state and development of the labour
come the historical problems of the market through vocational guidance
‘worker question’, had made the defeat and the finding and allocating of jobs as
of unemployment the central issue of well as through the speedy occupation
their economic policy (Ludwig of open places, the FEA can support
→Erhard, Alfred →Müller-Armack and equilibrium in the labour market
Walter →Eucken). The FEA can there- (Social Security Code III, section 1). By
fore be regarded as an indispensable offering this service, the FEA creates an
element of the systematic order of the important opportunity for employers
job market in the social market econo- and employees to become aware of
my (→labour market order). their special responsibility for the
Despite the improved situation of development and preservation of oper-
workers in Germany in the decades ational efficiency and for employment
since the 1950s, earned income repre- (Social Security Code III, section 2).
Federal Employment Agency 231

Despite the abolition of the former ment promotion. Furthermore, it de-

labour office monopoly (allocation monstrated that the labour market pol-
monopoly), the FEA, even in a phase of icy of the FEA can be effective only in
increasing internet job websites, is the combination with a macroeconomic
only comprehensively competent, growth and →employment policy (see sec-
neutral, available and decentralised tion 1 Employment Promotion Act and
institution of its kind; it has 10 regional Social Security Code III, section 1).
managements, 180 employment agen- Although this is not always taken into
cies and 660 offices. The FEA is the account, the restrictions of active labour
officially appointed service provider market policies, particularly of job cre-
(public employment service) for all ation, were felt during the fight against
labour questions relating to →vocational mass unemployment in the transforma-
training and further education, mobility, tion and adjustment process of East
occupation and self-employment. Germany.
The granting of wage compensa- For the assessment of job creation
tions in the case of unemployment measures (in the presence of high
(unemployment pay, maintenance unemployment and lacking demand for
money, unemployment relief) depends labour), general legal principles and
on a justified contribution-based claim, regulations concerning the administra-
and in principle depends on the previ- tion of a welfare state are significant.
ously earned income. The level and Labour market relief, the preservation
duration of claims (as well as their ces- of job qualifications and employability
sation when a new job is started) are through educational measures and
often seen, by international compari- development contributions for the
son, as being one of the causes of per- regional infrastructure, as well as bridg-
sistently high unemployment. ing functions for long-standing job-
In order to be able to offer success- seekers and others who have difficulties
ful services for employees and employ- finding work, play an important politi-
ers and the preservation of employabil- cal role.
ity through preventative job promotion,
the FEA requires scientific analyses of REFERENCES:

the labour market and employment; LAMPERT, H. (1997), Die Wirtschafts- und
these are compiled by the FEA’s Sozialordnung der Bundesrepublik Deutschland,
13th edition, Munich/ Landsberg a. Lech;
Institute for Labour Market and Occu-
pation Research (Social Security Code
(1996), Geschichte der Arbeitsverwaltung
III, section 282). in Deutschland, in: Siebrecht/Kohl/ Streich,
Besides ongoing monitoring of the Aufgaben und Praxis der Bundesanstalt für
implementation of business policy Arbeit, 9; KLEINHENZ, G. (1979),
goals, labour market policy instruments Verfassung und Struktur der Arbeitsmärkte
are subjected to a constant outcome in marktwirtschaftlichen Systemen, in:
analysis. More than once, an analysis of Lampert, H. (ed), Arbeitsmarktpolitik,
the active labour policy has led to mod- Stuttgart, New York, pp. 8ff.
ifications and improvements of the
effectiveness and efficiency of employ- Gerhard D. Kleinhenz
232 Federal Republic (Bund), federal states (Länder), municipalities

Federal Republic (Bund), federal beyond that will the next level authori-
states (Länder), municipalities ty be responsible.
It follows that the Basic Law, which
In a multilevel state, the competencies is committed to federalism, tends to
for public tasks, expenditures and assign the execution of sovereign pow-
incomes must be regulated between the ers and the fulfilment of public tasks –
different levels. Regarding the task dis- including legislative competence – to
tribution, two fundamental models are the states. First of all, and not in line
applicable: for a central solution the with this, to deal with certain central
tasks are preferably assigned to the affairs (e.g. national defence), the Bund
super-ordinate level. The advantages of has been invested with exclusive legisla-
such a system are seen particularly in tive powers. Second, the Bund also has
greater administrative efficiency, since concurrent legislative powers, where
thanks to the bundling of competencies the provision of equal living conditions
for the purpose of national task fulfil- for all citizens or the preservation of
ment, costs can usually be saved. legal or economic unity (e.g. the judici-
For a decentralised solution, howev- ary and the welfare service) are con-
er, the tasks tend to be assigned to the cerned. Third, the Bund can participate
subordinate level. The advantage of in joint tasks if relevant measures by
such a regulation lies specifically in a individual states are of national rele-
greater efficiency of supply, since the vance and represent an improvement of
national task fulfilment can take place living conditions (e.g. agricultural
closer to the citizen. In each case, there- structure and coastal protection). Lastly,
fore, the advantage of the one equals the the municipalities are left with volun-
disadvantage of the other solution: tary tasks (e.g. theatres), legally assigned
however, the argument against consis- mandatory tasks (e.g. water supply) as
tent centralisation is that certain public well as with matters they carry out as
services are meaningful only if they can agents of the Bund and the Länder (e.g.
be offered locally (e.g. service provi- registry offices).
sion). Geographically, besides the distribu-
Consistent decentralisation, mean- tion of functions among the domestic
while, is limited by the desire to ensure regional government authorities, the
equal access for all to other public serv- European Union should count as the
ices (e.g. avoidance of a downward fourth level. When the principle of sub-
West–East or urban–rural gradient). For sidiarity is applied (e.g. Article 5 of the
the three-tiered regional government EEC treaty) it, too, has been assigned its
authorities in Germany – the Federal own competencies (e.g. the monetary
Republic (Bund), the 16 federal states system). At a national level, on the other
(Länder) and the more than 16,000 hand, this also applies to the so-called
municipalities – the principle of sub- →parastatals, which are tasked with
sidiarity applies: national services which social safety (e.g. unemployment or
are limited in their effects to an area or pension insurance). The distribution of
a region are to be regulated locally responsibilities and functions goes
and/or regionally. Only if the effects go together with expenditure distribution,
Financial constitution 233

which has to be ensured by an appropri- ferent levels, which means that each
ate distribution of funds. case should be allocated to either local,
regional or central powers, based on its
REFERENCES: own merits.
DICKERTMANN, GELBHAAR, S. It also has to be taken into account
(2000), Finanzwissenschaft. Eine Einführung in that issues which are dealt with by the
die Institutionen, Instrumente und ökonomischen
public sector and the relevant expendi-
Ziele der öffentlichen Finanzwirtschaft, Herne/
ture (→public expenditure) have to be
Berlin, pp. 37ff.
reconciled with an appropriate budget,
Klaus Dieter Diller which is administered by a regional
government authority. This means that,
besides the federal division of labour,
the functioning of the public sector also
Financial constitution requires proper regulation of finances
(→public revenue).
The financial constitution is a set of The powers for the public sector
guidelines for the coordination of pub- responsibility are:
lic activities. In Germany, this sector is
subject to Article 20 of the Basic Law, • Decision-making competence I: Which
which deals with the federal system. regional government authority is
This system is based on ‘regional gov- competent to make decisions regard-
ernment authorities’ – the federal gov- ing how the implementation of these
ernment (Bund), the states (Länder) and responsibilities is to be organised?
the municipalities. Beyond these stands
the relationship with the →European • Executive competence: Which regional
Union (Article 23 of the Basic Law). government authority will be tasked
The core of the financial constitution with the execution of these responsi-
can be found in Chapter X of the Basic bilities?
Law entitled ‘Finance’.
Whether or not a particular issue • Financial competence: Which regional
ought to be the government’s responsi- government authority is responsible
bility depends – from the point of view for the arising expenditure in the
of the market economy – on whether context of the performance of these
public sector involvement would responsibilities?
achieve more substantial welfare gains
in that case than the otherwise Regarding the expenditure, which is
autonomous private sector. If public for the most part covered by taxes and
sector involvement is considered desir- borrowings, there are the following
able, the question is whether the issue powers:
should be dealt with by the federal gov-
ernment, the states or the municipali- • Decision-making competence II: Which
ties. regional government authority takes
Public sector involvement is charac- decisions on the structuring of these
terised by specific competencies at dif- revenues?
234 Financial constitution

• Administrative competence: Which re- ket’ and ‘state’, and also for the relation-
gional government authority is