The economic system of modern Germany is a social market economy, which began to be created in the country immediately after the end of the Second World War. There were certain prerequisites for this, back in the thirties in Germany, the Freiburg School was created, headed by Walter Eucken and Franz Böhme. They came to the conclusion that the market, as a management system, cannot be left to itself, but needs a social context consonant with the market.

After the war, the first Federal Minister of Economics, Ludwig von Erhard, became the political implementer of the ideas of the Freiburg School. Together with the famous German economists Welhelm Repke and Müller Armak, Ludwig von Erhard introduced the concept of a social market economy, that is, an economy functioning according to the rules of the market, but with the addition of social guarantees (pensions, unemployment benefits, sick pay, environmental protection, social construction, etc.). The new economic policy provided the necessary conditions for the rapid revival of the German economy, at the  same time they started talking about According to the German economic miracle, the growth rate of the country’s economy exceeded 10% per year in the 50-60s of the twentieth century. The modern model of the social market economy in Germany is a compromise between economic growth and an even distribution of wealth. At the center of the system is the entrepreneurial activity of the state, which ensures a more or less equal distribution of social benefits to all members of society.

Another feature of Germany’s macroeconomic development is the so-called “Rhine capitalism”, which is characterized by a significant role of banks in the country’s economy. Banks in Germany have become fairly large shareholders in industrial and service companies,  and their influence on business decision-making is much stronger than in other leading countries in the world.

The changed socio-economic conditions in the world and germany require a certain adjustment of the model of development of the country’s social market economy. In the late 90s of the twentieth century, Germany had a rather low GDP growth rate, almost three times lower than the growth rate of the US economy. A high unemployment rate was registered – about 11.2%, and in the eastern regions – about 20% of the active population. Until the summer of 1999, the  German mark continued to decline, reaching the level of 1.92 marks per US dollar. The main explanation for the weak growth dynamics and the crisis in the labor market was not only the impact of the global monetary and financial crisis, but also the crisis of the German model of the socio-market economy.

The crisis of the social market economy in Germany was largely the result of the erroneous economic policy of the government of the country in the 1990s. It was also due to the shortcomings of tax and pension legislation, the presence of unjustified benefits; reducing investment in science and education; the impact of the negative consequences of the annexation of the GDR; the export of capital and production abroad, the influence of the expansion of American and Japanese transnational corporations; weak competitiveness of many German firms.

The high level of social guarantees has led to the fact that 40% of the net profit of German companies goes to wages, to deductions to social funds, which make up a considerable share of the wage fund. For example, out of 100 marks of net wages, on average, employers’ contributions to social funds account for 81 marks. The cost of labor in Germany thus becomes the most expensive in the world and is about 20.5 marks per hour. A fairly high level of unemployment contributes to the dependency of some Germans and stimulates it. Compared to other countries, Germany is characterized by a high level of taxation. For example, if in the US about 32% of retained earnings go to taxes, in the UK – 45%, then in Germany they reach 65%. This leads to the fact that many German companies develop their production base abroad, and individuals with high incomes move to permanent residence in other countries of the world.

The high level of taxes, the lack of programs to stimulate foreign investment, the high cost of German labor do not encourage foreign multinationals to create production facilities in Germany.  They prefer to engage only in sales here. Moreover, German TNCs move their production base to countries with lower wages and about one third of their R&D is carried out abroad, since it is not profitable to do science in Germany. In order not to cause mass social protests of the population, the state continues to subsidize unprofitable sectors of the German economy, to develop coal, steel, shipbuilding industries, which are uncompetitive in the world market.

All this confirms that Germany needs changes in the model of the social market economy, which successfully developed until recently, but in the context of globalization is proving to be ineffective. It should be noted that Germany’s reform policy is guided not by the experience of the United States, but, first of all, by the experience of its PARTNER countries in the EU – Great Britain and France.

According to German economists, Germany’s transition from a socially-oriented economy to a truly market economy could solve the main problems of its national economy. Reducing the role of the state and focusing on market mechanisms, continuing the policy of privatization and deregulation, closing unprofitable industries, reducing the state budget, abolishing subsidies and reducing taxes would help to improve the German economy and attract foreign investment in it. If Germany does not reform in time, it risks ceding its still strong positions to the closest competitors not only from among European countries, Japan and the United States, but in terms of the level of knowledge intensity of products, it may soon lose to the rapidly developing countries of Southeast Asia.