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Economy and Trade

Germany—the world’s fourth-largest economy and Europe’s largest—is also the world’s biggest exporter, with other EU countries being the biggest destination for its manufactured goods. Strong growth in 2007 caused unemployment to fall below 8% in 2008, a post-reunification low. This suggested that reforms introduced by the former chancellor, Gerhard Schroeder, were starting to take effect. His successor, Angela Merkel, introduced further reforms, including raising the retirement age from 65 to 67. However, the combination of the strong euro and the credit-crisis-inspired slump in global demand means that Germany’s economy has been disproportionately affected by the global economic crisis. Since late 2008, Merkel’s government has focused on the introduction of policies designed to shield Germany from its worst effects. The modernization and integration of the eastern German economy—where unemployment exceeds 30% in some municipalities—has imposed a significant burden, requiring annual transfers from west to east of up to US$80 billion. Germany was a founder member of the European Union and the Eurozone.

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Economic Policy over 12 Months

In view of the long-term goal of rebalancing the budget by 2011, the coalition government of Chancellor Angela Merkel was initially wary of adopting an expensive stimulus package. The finance minister, Peer Steinbrück, expressed his hostility towards such neo-Keynesian largesse when he labeled the tax-cutting package introduced by the United Kingdom government in November 2008 as “crass” and “breathtaking.”

However, governmental hostility to such a policy response had evaporated by late 2008 and the government adopted a €80 billion (US$102 billion) two-year stimulus package in February 2009. In a debate in the Bundestag, Steinbrück said: “This stimulus package is essential.”

The package—equivalent to 1.6% of Germany’s GDP—includes investment in schools and roads, steps to reduce the cost of medical insurance, a cut in the basic rate of income tax, and €100 cheques for every child. The package also hands €2,500 bonuses to people who trade in old cars for newer, more environmentally friendly models.

The opposition Free Democrats had threatened to derail the package unless it included deeper tax cuts. However, Merkel managed to secure their support by proposing an overhaul of the tax system and the adoption of “further steps” to reduce the tax burden on individuals and companies.

Merkel believes the stimulus package will enable Germany to emerge from the current economic crisis in a stronger position. She describes it as “a bridge” for investment and employment until the next recovery, arguing that it will leave a lasting legacy of energy-efficient school buildings and improved communication networks.

However, Steinbrück, a member of the Social Democratic Party, has warned that the rescue packages being introduced around the world, including Germany’s, could spark inflation. He warned it might be difficult to remove excess liquidity from the system once the financial crisis and recession are over.

In February 2009, Merkel’s cabinet also approved a bill that will enable banks to be nationalized. If approved, the legislation will enable the federal government to take control of mortgage lender Hypo Real Estate, which has already required €100 billion of state loan guarantees. Steinbrück said that Hypo Real Estate would not be allowed to fail as it would send shockwaves across Germany’s financial system.

Since winning the 2005 election, Chancellor Merkel has been governing in coalition with the leftwing Social Democrats. She has abandoned campaign pledges to introduce market-oriented reforms in Germany and instead moved towards the political center. However, there is speculation she may ally with the right-wing Free Democrats ahead of federal elections scheduled for 27 September 2009.

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Economic Performance over 12 Months

Until early 2008, the conventional wisdom in Germany was that its economy would remain largely untouched by the credit crisis. The assumption was that the Berlin government’s fiscal responsibility, the absence of a house-price bubble, and lower levels of indebtedness would ensure that the credit crisis would largely remain an Anglo-Saxon problem.

By summer 2008, that schadenfreude had evaporated. A combination of the strong euro, high oil prices, tighter credit markets, and slower growth had conspired to hammer Germany’s exporters. Manufactured exports—traditionally one of Germany’s greatest strengths—had become the country’s Achilles heel.

The German economy contracted in both the second and third quarters of 2008 with the slump intensifying in the final three months of 2008. In the October—December quarter, the Federal Statistics Office said that GDP shrank by 2.1% compared with the third quarter. On an annualized basis, the shrinkage was 8.2%—Germany’s worst economic performance since reunification in 1990.

Merkel’s government has predicted that the economy will shrink by 2.25% in 2009. However, others are more pessimistic. Norbert Walter, chief economist at Deutsche Bank, believes output is more likely to collapse by more than 5% in 2009. According to a report from the European Economic Advisory Group, the German economy can be expected to shrink by a further 0.2% in 2010, signaling a more prolonged downturn in Germany than in some neighboring countries.

Exports of cars have been particularly hard hit. Volkswagen’s German plants have been forced to adopt a shorter working week, as the company seeks to avoid a build-up of unsold inventories. Along with many other German companies, the carmaker has opted for shorter working hours rather than cutting jobs. The government said it would pay companies’ social-insurance payments for workers who are put on short-time working. Unemployment has increased but only marginally—it climbed to 7.9% in February 2009 from 7.8% the previous month.

Holger Schmieding, chief European economist at Bank of America, believes that Germany may have been unfairly penalized. “At first glance, Germany should not have been vulnerable to a credit crunch,” he said. “Yet the German economy fell off a cliff in the final quarter of 2008.”

He believes this is largely because the nation’s exporters are struggling to access the “financial bridges” (short-term funding) they normally use to cover themselves between making a product and selling it outside Germany’s borders. Schmieding believes the bridges have become harder to obtain because banks are prioritizing domestic over cross-border lending.

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Support for Inward Investment and Imports

Germany Trade & Invest exists to provide importers and inward investors with information about the opportunities in Germany, and the general investment and business climate in the country. It provides a central, detailed source of information about the legal, business, and tax climate in Germany, as well as information on grants and incentives. The German Business Portal provides a central portal for business information and practical information on living and working in Germany. The federal government’s website provides an overview of its latest policy initiatives.

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Tax Exemptions

The average nominal corporation tax of less than 30% makes Germany competitive with other European countries. All industrial imports are subject to an “import sales tax” of 19%. Equivalent to the value-added tax levied on domestically produced items, this places the same tax burden on imported and domestic products. A discounted tax of 7% is levied on food products, books, newspapers, artworks, etc.

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GDP growth: 1.3% (2008, European Commission est.)

GDP per capita: US$34,800 (2008, est.)

CPI: 2.8% (2008, European Commission est.)

Key interest rate: 2.0% (since Feb. 09)

Exchange rate: euro per US$—0.6734 (2008, est.)

Unemployment: 7.9% (Feb 09, government figures)

FDI: US$924.7bn

Current account surplus/deficit US$267.1bn (2008, est.)

Population: 82.4 million (July 2008, est.)

Source: CIA World Factbook except where stated

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Further reading on Germany


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