Germany's social model is a variant of embedded, non-liberal social capitalism that attempts to bridge the gap between efficiency and solidarity through interdependent socioeconomic and political institutions. These arrangements have placed Germany in the middle ranks of OECD welfare states, even though labor market regulation is well above average. Germany's macroeconomic policy institutions, in particular its powerful central bank, have given primacy to price stability (Busch 1995). The interaction between this corporatist–centrist welfare state and employment relations system (Schmidt 1998) and “institutionalized monetarism” (Scharpf 1987; Streeck 1997) has shaped the adjustment strategies for responding to changing economic conditions. Evaluations vary. Germany has often been presented as a model “middle way” between Anglo-Saxon liberal democracies and Nordic social democratic welfarism (Schmidt 1987, 2001b). For others, Germany's welfare and social model provides a negative blueprint, full of institutional rigidities, insider–outsider conflicts in a rigid labor market, and a dense network of institutional veto points built into institutions, adding up to a Reformstau (gridlock). To these critics German social capitalism, at least since the mid-1990s, is no longer a successful “diversified (high) quality production regime” (DQP) (Streeck 1997). Some even call Germany “the sick man of the euro.”

This chapter begins with a brief description of the institutions of the Federal Republic's labor and macroeconomic regimes in most of the postwar period, showing how they framed adjustment to changing environments between the end of the postwar “economic miracle” and the exceptional double challenge of German unification and the introduction of EMU in the 1990s.