Germany is located in the center of Europe and borders the Netherlands, Denmark, Belgium, Poland, Luxemburg, Czech Republic, France, Austria, and Switzerland. The Federal Republic of Germany has an area of about 357 010 square km (61st in the world), which is equal to the general area of the state of Montana in the United States. The population of Germany according to 2008 data is 82,060,000 people (14th in the world), and population density is 230 people per square km. (German Culture) The largest part of the population is concentrated in large cities.
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Background & History: 1949 – present
After World War II, the Eastern region of Germany became occupied by the USSR and on October 7, 1949, Germany was officially divided into two countries: the Federal Republic of Germany (FRG) or West Germany, and a socialist state German Democratic Republic (GDR) or East Germany. Only on October 3 1990 when the Berlin Wall was ruined, East Germany was liquidated and the whole of Germany was reunited into the FRG.
Favorable dynamics of the West-German export in the post-war period resulted in a positive balance of payments and a stable increase in the value of the West-German Mark. But after the reunion of Germany, when East Germans began to widely use financial facilities for the purchase of products of West-German origin, Germany’s foreign trade balance became substantially less favorable. The population’s purchasing power in the East is far less than in the West. Although 30 years before the reunion of Germany the wage level in the two German states was approximately identical, prices for the luxury goods – cars, household appliances, clothes, meat, coffee, chocolate, etc. – grew considerably after the two sides were reunited (Watkins).
The German economy is characterized by a combination of social balance and market freedom. The basic features of this economic system are the following:
- full employment of the population;
- social security, social justice, and social progress;
- private ownership of capital goods and free pricing;
- creating conditions for competition and providing of competition;
- a conscious policy of strengthening of economic growth in the market environment;
- the policy of stable currency;
- freedom of foreign trade, free currency exchange (Berghahn, 2008, p. 46).
The Germans refer to their economy as a “social market economy,” to show that the system it has developed after World War II has both a material and a human dimension. They stress the importance of the term “market” because they wanted an economy free of state intervention and domination. “The only state role in the new West German economy was to protect the competitive environment from monopolistic or oligopolistic tendencies–including its own” (Solsten, 1995).
However, the high level of social guarantees can be problematic, as 40% of the net profits of German companies go to labor compensation and deductions for social funds. A strong fiscal responsibility is placed on the general population, as well as businesses to maintain such funds. Today, the rate of the tax for retained earnings in Germany is 50%. According to Berghahn, at the end of 2000, Germany reached a peak in developing its national economic model and now needs modernization (Berghahn, 2008, p.138).
Germany’s economy is highly industrialized. If compared to many developed countries of the world, a very large stake in the production of GDP is made by industry. The industry contributes 29% of GDP (in 2003), and 87% of total export (2006), which makes it a catalyst for foreign trade. Eight million people work for industrial companies in Germany. The German government is keen to attract new foreign investors and multinational corporations, including chemical and pharmaceutical companies from India and the USA (Berghahn, 2008, p. 218).
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Another feature of the German economy is its export orientation. According to International Monetary Fund data, since 1997 the German export of goods and services has been growing faster than the percentage of world trade. Even in 2001, when the volume of world trade reduced by 0.2 %, the export of the Federal Republic of Germany grew by 6.7 %. Germany’s major business partners are countries of the European Union. In 2004, Germany exported goods and services in the amount of €75 billion to France and €61 billion to Great Britain. Additional business allies include the USA, India, China, and countries of Eastern Europe in connection with the expansion of the EU to the East (Holscher, 2006, p. 197).
Nevertheless, such prosperous countries as Great Britain, the USA, and Japan are also considered to be economic rivals of Germany, especially in spheres of the automobile industry, technology, and innovation production. Germany is not going to yield its status as the world’s biggest exporter. But, its current surplus may reduce because spenders like the USA and Great Britain export more and consume less. Between 2004 and 2007 Germany’s net exports increased by 60%. Germany’s current economic surplus reached 6% of GDP in 2008, worrying its economic partners within the euro area, which didn’t want to hold down salaries but could no longer devalue their goods and services. Similar to China and Japan, Germany has benefitted from the overindulgence of others.
Germany is the world’s #3 pharmaceutical market and the largest in Europe. Although the consumption of pharmaceuticals nationally is limited by government policy, the export market is still expanding. The industry is under strict price restrictions and the government longs to limit pharmaceutical expenses. The pharmaceutical market is forecasted to grow in the next years and to reach $63.5 billion by 2013, which is $770 per capita.
Some traditional industries, for example, steel-making and textile industry, in the last few years have seriously lost their positions in Germany as a result of shifting of markets of sale and competition from the side of countries with low salaries or, as in the case of the pharmaceutical industry, as a result of mergers and incorporation passed to the property of foreign companies (Berghahn, 2008, p. 327).
Analysis of Economic Data
The total German GDP for 2008 was $3,322,147 (4th in the world), and GDP per capita was $40,415. As a result of long-term structural changes, Germany’s stake in GDP between 1970 and 2001 decreased from 51.7% to 23.8%. Meanwhile, the costs of services provided by state and private sectors in GDP grew sharply. In 2008, the level of inflation in Germany was 3.3% – the highest index in 15 years. However, in other European countries, this index appeared even worse. Economists also expect Germany’s economy to reduce by 2.25% this year (Deutsche Welle, 2009).
Germany’s GNI per capita grew from $25,050 in 2000 to $38,990 in 2007. However, despite the growth in GNI, Germany’s rank compared to the development of other countries fell from 15th to 24th during that same period.
The Human Development Index (HDI) gives a composite value of three directions of human development: long and healthy life (defined by life expectancy), education (defined by literacy level), and a proper standard of living (defined by purchasing power parity/income). In 2008, Germany’s HDI was 0.935, which was 22nd out of 177 countries ranked. In 2009, the index grew to 0.940 and made Germany 23rd in the list of 179 countries.
According to the agency Bloomberg, the unemployment rates in 2009 in Germany were 7.9%. Bloomberg states that the decreased German export and a reduction in production and discharges are the main reasons for unemployment, which is mainly attributed to the world economic crisis. The government of Germany recently announced its readiness to pay social security to the personnel who have transferred to part-time work.
Therefore, some German companies prefer reducing working hours over-discharging employees. Despite the global recession, some say the economic growth in Germany will continue, but at a slower pace. If German economists persuade the government to suggest a considerable fiscal stimulus, the situation could be bettered. Demand is supported by fiscal policy, and there is no risk of deflation. Experts believe that the crisis in Germany will be short-lived, and the summer of 2009 will return the economic growth (Buergin, 2009).