Germany has traditionally been the largest economy in Europe and a world leader in science and engineering. It had the third largest economy in the world in 2000, following the United States and Japan. In 2000 it contributed for about one-third of the gross domestic product (GDP) of the eurozone (the 11 member countries that joined the European Monetary Union in 1999), and was considered the economic powerhouse of the European Union (EU). Its GDP per capita of US$26,513 in 1999 and its living standards were among the highest in the world.
Recovering from the destruction of World War II, Germany's economy experienced a long period of strong economic growth that has been widely referred to as the "German miracle." During this period of growth, extensive and generous social services and benefits accompanied high-tech market capitalism . A broad cooperation among government, business, and labor complemented free market principles in economic decision-making. Companies were considered responsible not only to shareholders but also to employees, customers, suppliers, and local communities. However, this domestic capitalist model that linked business to a social conscience was challenged during the 1990s with the reunification of East and West Germany—which had been divided since 1949—and the consolidation and globalization of German businesses. The economy acquired more liberal U.S. traits in order to compete with foreign companies. European integration, including liberalization at the state level, the transfer to a single European market, and the adoption of the single European currency, also contributed to a more liberal economic landscape, which meant that market forces played a greater role in determining the shape of the economy while government decisions played a smaller role.
The integration of East Germany and West Germany after the 1989 collapse of the Berlin Wall brought the economy under significant economic strain. East Germany's large government debt and persistent unemployment—the product of years of communist control in that country—forced West Germany to offer an estimated US$100 billion annually to the poorer east German states. During the 1990s the shrinking number of tax-payers and the growing number of retirees, high labor costs, greater foreign competition from emerging markets (such as eastern Asia), and high capital outflows (by German banks and corporations investing abroad) also added to the economic stresses of reunification. The integration of the centrally planned East German economy was difficult, and many regions in western Germany have also been slow in restructuring and closing down obsolete heavy industries. Due to high labor costs and the country's image as an over-regulated economy, foreign direct investment in Germany was rather weak through the 1990s. The financial meltdowns in Asia, Russia, Mexico, Brazil and other emerging markets in the late 1990s also afflicted the economy, which was highly dependent on the export of manufactured, particularly capital, goods (machinery and equipment).
The government has pursued economic and social policies, such as budget cuts, tax cuts, and structural reform to encourage growth in foreign and domestic investment and job creation. In 1999 the Future Program 2000 was adopted, calling for a DM30 billion federal budget cut in 2000; radical business, family, and energy tax reforms; and a reform of the mandatory old age pension and health-care system. The government launched the Alliance for Jobs campaign with labor and business to discuss wage policies, making early retirement options more attractive for small and medium-sized firms, providing more work time flexibility, more trainee positions, and cutting overtime work. The government is working to increase the labor market flexibility (the readiness of workers to relocate to areas and industries with better growth perspectives) and to increase international competitiveness by reducing the costs of operating German businesses (by tax cuts and other measures).