The conviction is widely held in German political circles today that a phase of postwar development is ending and that the Federal Republic is approaching a new era of political, social and economic challenge. The reconstruction achieved in the years after the war led to a remarkable economic upsurge. But that success cannot make us overlook the continuing failure to solve our most outstanding political problem-that of reunification. A great deal of German energy and much-touted German industriousness has spent itself in the market place, while-for whatever reason-our number-one political problem has hardened in its status quo. The oft-cited "German phoenix" which rose out of the ashes has actually been paralyzed in one wing.

But if the Germans are not to find themselves some day in circumstances of acute political frustration, a new Federal Government must find ways and means to make progress in solving the problem. This will not, nor can it, happen overnight; on the contrary, a long, stony path may lie ahead. But the goal must not be lost sight of. Certainly its attainment can be approached only in careful steps, and just as certainly the fruits of economic progress must figure as tools. Indeed, economics is already playing a role (albeit a very limited one), for example, in the Federal Republic's aid to West Berlin and in interzonal trade.

Aid to Berlin consists of financial contributions to its budget and favorable tax treatment. In recent years this aid has made it possible for the city to pursue an expansionist economic policy-in spite of the erection of the Wall in 1961. In 1964, Berlin's gross product, industrial output and investments were each II percent above 1961 levels (in constant prices). This policy has enabled Berlin to come to grips with its labor shortage: since 1963 the city has shown a net gain from migratory movements to and from West Germany which more than compensates for the high urban death rate. Once again the population is growing. And finally, in combination with the guarantees of the three Western allies, the policy of assistance has greatly contributed to West Berlin's position as the focal point of the German question-a living reminder that that question must not be dropped from the international agenda.

Trade between the two zones of Germany is also a significant political factor. Since the Jessup-Malik Agreement of 1949 ending the Berlin Blockade, all interzonal trade agreements have been concluded between "the currency zone of the Deutsche Mark-West" and "the currency zone of the Deutsche Mark-East." This commerce is all that is left of a once great bond integrating the German economy-even though it is high as compared to trade between the Zone and the principal Western powers. Last year the total volume was DM 2.2 billion, compared to DM 100 million for trade with the United States and DM 170, 150 and 110 million for trade with Great Britain, France and Italy respectively. It should be emphasized, however, that we do not consider our trade with the Zone in any way similar to the commerce of other countries, for it is simply a remnant of the earlier single domestic market-and even today no tariffs are levied. Thus, in one important respect the economic division of Germany remains incomplete. From a purely commercial point of view, interzonal trade is of no great significance to West German industry; in fact, we have some trouble disposing of the goods we get from the Zone. But it is of great political significance for free West Berlin. Although free access to the city is based on the original right of the Western allies, we are convinced that trade is a weight which we can toss onto the scales. For "the other side" has a very real interest in obtaining goods from us.

These examples indicate the extent to which the economic achievement of the Federal Republic has already had a bearing on the German question. The harassment of West Berlin during the week of April 5-10, 1965, when the German Bundestag was meeting there, threw a glaring spotlight on this situation and the ambiguities surrounding it. The special conditions of West Berlin's existence were once again made clear, showing that preferential treatment and aid to Berlin make good sense. But it also shows that the Allied guarantees and the fact that interzonal trade can be stopped at any time are effective instruments of policy only after harassment has reached a certain level of intensity. Up to that point, the Eastern authorities can arbitrarily mobilize and expand disturbances along the routes to Berlin-and thereby reveal the latent dangers of the present desolate circumstances in which the German question has been left.

There are countless signs that no spectacular act will succeed in solving the German problem, but only an extremely difficult process of gradual change. At some point along the way we may have to take on considerable new economic burdens. We must arm ourselves for this eventuality through the steady growth of our national product. And the government must better prepare the people for it than it has so far done.

II

It is not only the unsettled aspects of the German question which give the new phase of our development its distinctive quality. Economic and social evolution has raised new problems which can no longer be solved with the patterns of thought and action of 1948-1949, when the market economy was reintroduced in Germany. The élan vital of competition will continue to be an indispensable component of our free society-but that élan alone is not enough. We must not remain bound to a model which has devolved into an inadequate cliché, when actual developments have progressed far beyond it. What is sorely needed is a modern concept, which is forward looking and geared to the mixed economy in which we live.

The Federal Republic is an expanding industrial society, a prosperous society. It may even be argued that we are on the threshold of the Affluent Society. In any case, it is also characterized by "private wealth and public poverty." As early as 1960, at the S.P.D. Party Day in Hannover, Willy Brandt put the fulfillment of important community tasks at the center of his program: basic improvements in public and individual health, public transportation, urban development and land use shaped to the needs of tomorrow, and more strenuous effort in the areas of education and vocational training. It is indeed a fact that increased social investment and the building up of our infrastructure are prerequisites for further economic growth and continuing social stability. Ludwig Erhard himself recently took up this cry when he proclaimed a new program of "community action" at the 1965 C.D.U. Party Day in Düsseldorf. Nothing could more conclusively demonstrate the universal recognition that we are entering a new phase of social and economic development.

Some parts of the private sector of the economy, too, have encountered difficult structural problems which will require more elaborate economic policies than in the past. Since 1958 a crisis has existed in the German coal-mining industry, and the present problems of competition between coal and oil cannot be solved by a laissez-faire policy. To deal with this matter, we should establish a forward-looking energy policy, which would work toward equalizing the competitive opportunities of the various basic energy industries, actively fight against any abuse of economic power in the oligopolistic markets for new products, and which would promote the adaptation and rationalization of the coal industry. If shutdowns and decreases in production are inevitable, the transfer to new occupations must be facilitated.

Another area badly in need of a purposeful policy is agriculture, which has been floundering for years in the very difficult process of accommodating both to the conditions and effects of technical progress and industrial expansion and to the requirements of the Common Market. General subsidies are not enough; a specific, comprehensive program for change and adjustment is needed. Agricultural production and marketing arrangements must be modernized, farming operations brought to optimal size, farmers assisted in moving into new occupations. Education in rural areas must be tremendously improved, and the social security of those involved in farming must be made comparable to that of industrial workers.

These are only a few of the defective spots in our economy which must be removed through measures directed specifically to that purpose. It is evident from these examples that the magic words "market economy" are not sufficient to accomplish what is needed. Similar tasks are at hand for small-business policy, land-use and regional policies, and in the housing and ship-building industries.

Apart from these problems in particular sectors of the economy, it must be our goal to achieve a more satisfactory distribution of income and property. It is characteristic of economic policy discussions in Germany that the nationalization of industry is never proposed. Modern plans relating to the question of ownership are concerned exclusively with increasing private ownership in the hands of the workers. At the S.P.D. Party Day in Karlsruhe in 1964, the party expanded the conventional "magic triangle" of economic objectives (full employment, stable prices and foreign economic equilibrium) into a quadrangle by adding the fair distribution of income and property as a fourth objective. Within this "magic quadrangle," all goals must be pursued as efficiently as possible; economic policy should not concern itself with any one at the cost of the others. Proposed measures for property distribution are not designed to correct the existing order but to achieve wider distribution of future capital accumulation. One such measure would be the creation of investment funds for public benefit. Another would be to make it possible, through wage agreements, for employees to have a share in the new wealth created by private enterprise.

These examples show that S.P.D. does not question the free economic order, but in fact affirms it. What we do criticize is the "cultural lag" in official policy, which has not kept up with actual conditions. The fact that the C.D.U. is finally proposing to take account of "the new realities," as Rainer Barzel suggested at the last Party Day, only proves again the need for a new approach.

As mentioned before, there are no plans for nationalization in the Federal Republic; the evidence of what is happening in the Zone is too frightening for that. Next to the distribution of property, our social critics are most concerned with the need for improvements in the organization of enterprise. How can the democratic organization and the public-mindedness of Big Business be improved? Hasn't the system applied in the German coal and steel industries since 1951-giving the workers a share in management decision-had a favorable effect on labor relations? Can that system be extended to large enterprises in other fields? These are questions that will grow in importance in the near future.

The answers will be politically significant, not only for the Federal Republic, but for East-West relations as well. Our system has again and again proven itself superior to the Eastern system in both freedom and material productivity. But in the future more than ever we must demonstrate that we are devising a new social order-one which can no longer be understood in the old capitalist terms but which forges a new synthesis between the market economy and the welfare state. In this way, the creative energies of private enterprise and the guiding social function of the state will support one another. Such a social model can be effective far beyond the limits of our Western world.

III

Before getting involved in a discussion of the necessary strategies and instruments of German economic policy, let me renounce any intention of renewing the old debate over the possibility of reconciling competition and planning. Representatives of conservative economic doctrines are still disposed to see the matter in terms of sharp alternatives, when actually developments have gone far beyond that stage. Government influence on the levels of employment, investment, foreign trade, etc., is entirely compatible with individual competition in the market.

In the future, the goal of optimal growth with full employment will be given high priority. Steady expansion is essential to today's modern industrial society; structural changes are much more easily managed in a growing economy than in a stagnant one. It is easier, too, to undertake new tasks when the economic cake is growing than when the means for undertaking them can be found only by cutting into existing claims. In summary, we need economic growth to accomplish the great common tasks before us, to compete in international markets, to make our contribution to the developing countries, to hold our own in the international contest for rapid rates of growth, and, finally, to be prepared when the day comes to settle the reunification question.

Hence this plank in the 1964 economic platform of the S.P.D.: "We shall promote the driving strength of the market economy, its achievements, the investment activity of entrepreneurs and its dynamic, technological progress." In dealing with an economy which has enjoyed full employment for ten years, such a policy must embrace a whole range of coördinated measures. The protection of particular industries is not the main goal; the central issue is to increase productivity and adaptability. And labor policy must promote increased mobility of the labor force. Above all, business competition must be preserved and any restrictive practices fought. The line established by the first German anti-cartel law of 1957 must be strongly pushed.

Through such a policy of incentive and higher flexibility, the economy should move continuously upward. But at the same time, progress must be combined with stability; expansion must not degenerate into inflation. For this purpose, the global instruments of fiscal and monetary policy must be used to give over-all guidance to the economy. The objective is not to apply detailed measures regulating each enterprise and its activities, but to alter the market conditions for all enterprises so as to produce the desired results. General guidance is a forward-looking economic policy; it is not planification en détail. In French practice, the state makes recommendations for private investment policy, and so may depart from the system in which the entrepreneur's drive adapts itself to the market and its opportunities.

The Federal Republic needs to develop its system of national economic accounts. With this we could set up a quantitative framework for all the government's economic, social and financial policies. This over-all accounting should also give both businessmen and unions a clear idea of possible developments in the medium term, and, above all, offer a factual basis for wage negotiations. This is important because, while the parties to the negotiations are of course autonomous, wages must be kept in step with over-all economic growth. On the necessity of a growth-oriented and anti-cyclical fiscal policy there is general agreement today. The recently published first report of the "Board of Experts on the Appraisal of General Economic Development," which was created by law in 1963, has provided enough information on this point-although the advice was not altogether well-received by the government because of the Board's support for flexible exchange rates. However, in the future such institutions as the Board of Experts will play a far more significant role.

A steadily growing economy is associated with high profits for the entrepreneur: profits are the prizes given for progress. At the same time, other members of society must share the fruits of progress. Therefore a welfare program is the third central component of modern economic policy. This requires, in the first place, expenditures for social security, which are a form of internal redistribution of income. A welfare program makes a decisive contribution to the preservation of social stability in periods of rapid economic growth. Without the support of welfare programs-however imperfect they may have been-our present social prosperity would not have been attained. The economic success of the Federal Republic up to now is by no means due solely to the impetus of the market economy, but equally to our country's strong tradition of social welfare, which goes back to the time of Bismarck. Without the housing program and pension reforms, the market economy would long since have collapsed. A dynamic market economy and the "social state" are each requirements for the well-being of the other.

In summary, the combination of the market economy, monetary and financial guidance and welfare policy is the only solution for our times. These are the technical building materials of a socially balanced, growth-oriented society-a society which can be described as "the humane society" or "the great society."

IV

As a world trader the Federal Republic today stands second only to the United States. Moreover, exports account for 20 percent of our G.N.P., almost four times as much as the corresponding figure for the United States (5.3 percent). Thus the Federal Republic has a great effect on the world economy, but at the same time is heavily dependent on it. For that reason we must continue to pursue liberal foreign trade policies; in the future, there will be even less of a case for protectionism than in the past. For only by keeping in step with the international division of labor and world price levels can a nation find new reserves of productivity, and with them opportunities for economic progress.

The Federal Republic is interested in an international currency system which encourages economic growth and the free movement of goods and capital. The gold-exchange standard now in effect has survived because it made possible a powerful postwar expansion of trade and production in the free world. Especially in recent years, however, the demand for liquidity has been met largely through the balance-of-payments deficits of the two reserve-currency countries, Britain and the United States. Even though prices remained remarkably stable in the United States, one effect of this has been "imported inflation" elsewhere. Returning to the gold standard would be no solution, since it would be accompanied either by a catastrophic deflation throughout the world or by a jump in the price of gold that would produce a complete upheaval among the nations involved in world trade. If, however, both Britain and the United States should successfully manage to solve their balance-of-payments problem, the system would then be put to a real test. What is needed is to develop the gold- exchange standard further in such a way that through the International Monetary Fund liquidity could be adequately increased in harmony with the needs of a growing world economy.

Closely connected with the debate over the American deficit is the question of American capital investment in Europe, which is often criticized. The economic principles presented above mean that Europe must not be a closed society in respect to foreign investment. Investment is an important contribution to economic growth on both sides of the Atlantic and an excellent vehicle for the international spread of scientific and technical progress.

In the Common Market, the Federal Republic must promptly bring its weight to bear in favor of an emphatically "open" policy. In the long run the least possible discrimination against third countries will produce optimal growth. We must also recognize our key role in intensifying economic coöperation across the Atlantic. The Grand Design of President Kennedy, the Atlantic Partnership, is a legacy for all of us. The Kennedy Round is a test of Europe's desire to coöperate in the economic realm. It is up to us as Europeans-and as Germans-to see that the Common Market does not become a "gigantic discrimination" (Röpke), but minimizes the discriminatory effects of regional union by a general expansion of international trade.

Another important question for German foreign economic policy is the problem of bringing together the two large European regional organizations, the Common Market and EFTA. In the long run, prosperity for Western Europe can be achieved only by a fully interdependent development of the countries now grouped in the two organizations. The division now existing is not yet too painful, since trade between the two organizations has developed relatively well because of a high level of world economic activity. But the further integration proceeds within the Common Market and the greater the regional preferences within EFTA become, the more the tariffs between them will be felt, and the stronger the vested interests will become in enterprises which flourish under protection and which will be determined to keep it. Time here works not with us but against us. The moment is coming when we must once again undertake a great effort to come closer together: the date for the complete abolition of internal tariffs in both groupings is fast approaching. The year 1967 will be crucial if a common road to a unified Europe is to be found.

Because of its industrial structure, the Federal Republic has the strongest interest in trade with the EFTA countries and must therefore lead the way in building this bridge. Several years ago, a German, Alwin Münchmeyer, proposed a bridging measure which, with certain modifications, might be worthy of consideration again today. His idea was that the Common Market as a whole should join EFTA-a proposal so striking in its simplicity that it was like Columbus' egg. The Common Market, as the "eighth" member, could then look to its own development, even to the point of full integration and political unification-if all six so desired-without impairing the endeavors of the other seven. Today it is commonly held to be impossible, on economic and psychological grounds, for the powerful and partially integrated Common Market to join the far looser organization of the Seven. This to me is a superficial argument. For even a fully integrated great national economy- which the Common Market is not yet-might join the loose organization of a free-trade zone.

But perhaps today one should not, as a matter of fact, speak of joining, but rather of a collective agreement between the two communities to make the plan acceptable. Under such a plan the separate identity of the Common Market would be entirely compatible with the loose structure of the free- trade association. Another point in favor of the plan is that the very difficult bilateral negotiations could be entirely avoided.

What we need today is a real political initiative to overcome the present European malaise. We are living in a world of stormy political changes, and if free Europe lets its hour pass by, it will one day be embarrassed to find that its opportunities exceeded its foresight. If General de Gaulle had the two hard alternatives placed before him, either to admit Britain to the Common Market or to join the Common Market to EFTA, one might well suppose that he would at least accept the second.

Policy toward trade with Eastern Europe is also assuming ever greater significance. The increasing industrial development of that area requires greater trade with the outside world. Through their commercial policies, the Western countries have the opportunity to encourage the tendencies that already exist in Eastern Europe to open up economically. They will be the more successful in this effort if their commercial policies are coördinated, especially in the matter of credit terms. In view of the efforts of some of the Eastern states to achieve economic autonomy, some differentiation in dealing with them is entirely possible and appropriate: the East cannot be regarded as a monolithic bloc. However, in building up trade, an agreed "international division of labor" within the Western world is also possible. Why should not some countries become more heavily engaged in trade with the East than others? It is enough if we on our side are united on basic principles; this much is in fact necessary, in view of the particular structure and organization of the state-trading countries. The O.E.C.D. would be an excellent instrument for the purpose, for it is a more comprehensive organization than the others presently concerned with Eastern trade. Its membership includes not only all the industrialized states of the free world but also the neutral countries of Europe, and herein lies its advantage for this purpose.

V

The Federal Republic of Germany stands at an economic and social crossroads. The economic progress so far achieved through the coöperative efforts of all must not lead us to ignore the greater and more complicated tasks which await us. The period of reconstruction through which we have passed was to a large extent characterized by a policy of laissez-faire. It was not without reason that it reached its culminating point and its most pregnant expression in the slogan "No experiments." But this cannot represent the lasting order of things. Changes already under way during this period have established new political yardsticks.

Contemporary German society is different from the society of the immediate postwar years-far more dynamic, more open and more aware. Social and occupational mobility is increasing, both vertically and horizontally; old social classes will thereby be abolished, but new fields of tension will emerge. Nevertheless, our society today is more homogeneous than that of many other countries. Placed in a world of vast change, that federal German society requires policies with clear definition and clear priorities, a readiness to venture and to create new institutions, in order to pursue social progress while preserving the gains that continuity and stability can bring.

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