The German economy is recovering hesitantly from the sharp post-unification boom and recession. Two features of recent West
German performance are novel: there has been an unprecedented loss of jobs in industry, and manufacturing profitability has
been pushed to its lowest level ever and is now low relative to other OECD economies. Serious problems with labour costs and
innovation would be expected to show up in a weakening in the trend of export performance. That this has not yet happened is the
consequence of the existence of an apparently robust innovation system which enables companies to pursue high quality incremental
innovation strategies. However, the experiment of transferring the West German model to the East has proved extremely costly and
has not so far established the basis for self-sustaining growth. Problems in profitability, investment and employment in West Ger
many reflect the failure of the bargaining system-unions, employers, Bundesbank and public sector—to negotiate the sharing of the
burden of unification.
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