German Ministry for Economic Affairs and Energy

Prosperity for all’. A thriving economy combined with a social rebalancing scheme
Introduction
Our free and open society is characterised by the notion of solidarity and by the principles of the social market economy. According to these principles, the government must afford businesses freedom to operate on a level playing field whilst also promoting prosperity and social security for the people living in Germany.

In this age of globalisation, digitisation and demographic change, our economic and social order must overcome new challenges. We must therefore renew our social market economy and make it shipshape for the future. After all, the social market economy has proved to be our best answer to the challenges and changes we are confronted with. It will help us maintain our way of living, working, and doing business. The social market economy is what we need to renew the promise of prosperity and social security for the people living in Germany and Europe in the 21st century.

It is for policy-makers to define the regulatory environment that will allow us to deliver on the promise of ‘prosperity for all’. The social market economy depends on a legal environment that provides for legal certainty for business and for social security for the people. The best way to achieve this is to leave as much as is possible to the market and keep the bureaucracy to a minimum.

Safeguarding competition
The market economy is a system that encourages companies to develop innovative products that offer an added benefit. Companies vie for customers and are thus encouraged to use their resources as efficiently as possible, allowing them to offer excellent products and services at attractive prices. Businesses that constantly develop new products and improve their existing ones whilst also harnessing the potential for price reductions stand a good chance of success and also improve our quality of life. In other words, competition drives innovation and progress and changes our lives for the better.

At the same time, however, competition is hard and cumbersome. Companies sometimes try to circumvent it by trying to fix prices with competitors or by simply buying up the competition. This is why, in a social market economy, the government has the task of safeguarding competition by preventing any abuse of market power. The government lays down rules that make sure that new competitors can access the market and that there is a level playing field. These rules also need to apply for digital services.

Equal opportunities and performance-pays
The social market economy is good for companies and good for employees. As a general rule, wages and salaries are determined by supply and demand. Collective agreements negotiated between employers and the unions also play an important role in ensuring that performance pays and allowing employees to have a fair share in the wealth generated. Furthermore, our society practices solidarity in that it provides for all those who are not able to generate an income, or can only earn very little money due to their age, for medical reasons, or as a result of unemployment. Our public social security system is financed by contributions from both employers and employees and provides for a strong safety net.

Our tax and welfare system is also designed to promote social cohesion. The government makes sure that people are protected against serious risks (e.g. by making health insurance mandatory), and promotes equal opportunities by providing schooling that is both compulsory and free of charge, therefore offering everybody the chance to succeed in education.

Underlying legal basis
There are no specific provisions in the German Basic Law that would make the social market economy a constitutional requirement. However, there are some key elements in our legal system which establish the social market economy as Germany’s economic system. For example, the German Basic Law lays down the principles of private ownership, freedom of contract, freedom of association and the right to choose one’s profession and job. In addition to this, the German Basic Law establishes the Federal Republic of Germany as a democratic country that promotes social justice. This means that both a centrally planned economy or an unfettered market economy are impossible to establish in Germany.

In May 1990, the Treaty establishing a Monetary, Economic and Social Union between the Federal Republic of Germany and the former German Democratic Republic set forth in law that the social market economy constitutes the common economic order for the whole of Germany.