Current Issues In The German Economy

Over the past 100 years, Germany has made a name for itself on the economic world stage after successfully picking up the pieces of a broken economy from the terrible collapse of the early 1920’s. To this day, Germany remains the top economy in the European Union and within the top five economies of the world, as a result of significant social and economic measures that have brought it to where it is today. However, there is currently cause for concern in studying the German economy, with a variety of both domestic and international troubles that threaten to launch them into a recession. These factors will be discussed in greater detail following a synopsis of the current macroeconomic vital signs of their economy, and succeeded by a proposal of various ways of how to address the problems at hand.

Germany operates on a mixed economy with government regulations in place to protect consumers. They — like most of the European Union — have adopted the euro as their official form of currency, and use it to carry out all domestic transactions. The real GDP of Germany in 2018 was $3. 97 trillion US dollars, up from $3. 693 trillion in 2017. Their GDP has been on a steady incline for the last 35 out of 40 quarters, showing economic growth since 2000, as their GDP per capita has also been increasing as it “was $46,749 in 2017, better than the 2016 average of $45,923,” although it is still “lower than the $53,129 enjoyed in the United States and less than the European Union overall at $36,593”. The unemployment rate in Germany has been on a steady decrease from 2005 when it was 10%, whereas currently it is 5% in 2019. But the 2019 rate, is still an increase from where it was in 2017 at 3. 8%, showing that just recently has there been an economic shift that has disrupted their positive economic growth in the past year. As of 2015, 16. 7% of the population was below the poverty line, a comparable rate to many states in the United States. In 2017 the inflation rate stayed consistent at 1. 7%, and about 45% of the GDP per capita goes towards taxes and other revenues, while their national saving rate is about 28% of their GDP per capita.

Germany’s main economic reliance comes on their exports. Germany is home to 500 of the world’s largest corporations and over 45,000 foreign businesses that contribute to a majority of their employment and economic affairs with other countries. Their main business sectors include “automobile construction, mechanical engineering, electrical engineering, chemicals, environmental technology, fine mechanics, optics, medical technology, biotechnology and genetic engineering, nanotechnology, aerospace, and logistics”. Germany has narrowly avoided a recession the latter part of 2019 mostly in part of their success in exports; their exports “unexpectedly increased by 1. 5% in September, beating market projections of a 0. 3% increase”. Their exports are a main driver of their GDP and continue to be where Germany focuses most of its energy. The abundant export market can be to thank in many ways for how they narrowly avoided slipping into a recession in the past quarter.

But like any other country, Germany has had — and will continue to have — its run in with economic challenges, some residing in the present-day affairs concerning their economy. One of Germany’s biggest challenges right now is facing tariffs from other countries, namely the United States. Recently the United States mentioned a tariff on the import of European automobiles, and with Germany’s main export to the United States being automobiles, it puts the German economy at risk if the demand for European cars in the United States were to decrease, due to a price increase from the tariffs. Currently, Germany has not felt the effects of this issue as much as it should as the demand for European automobiles has remained high, but they can be expected to feel it more when concerning their export market in the future. Along with their vast automobile industry, comes the new environmental regulations and expectations placed on the European Union upon their agreement with the Paris Climate Accords. Germany is hit the hardest by this as the switch to electric vehicles becomes more popular, and the new emission rules sets a standard on automobile companies to switch to more environmentally sustainable materials and production methods (Arnold).

Another issue the German economy will be facing is the unease of domestic issues concerning population and employment. Even when international affairs get rocky, something the German economy has always had to fall back on was a strong domestic economy. However, “potential growth is estimated to fall on account of demographic changes over the next 20 years,” leading many German economists to call for measures “to secure the supply of skilled workers”. Currently unemployment rates are significantly lower than they have been in previous borderline-recessive times, mostly due to the abundant labor market opening up to workers. The German economy will need to secure strength in its domestic economy, something that should not be too difficult as “the labor market is likely to remain fairly robust and wages are expected to grow considerably”. The raise in wages will be a positive influence in many households, leading to more disposable income for most to participate in more economic affairs, which can only be a good thing in Germany’s domestic economy, as uncertainty looms in their international affairs.

However, along the broader spectrum of this topic, one could also look into the workforce itself, an area where Germany has been — and will be — changing drastically. Over the past decade, more and more citizens are entering into retirement age, at a higher rate than workers from the younger generations are able to replace them. This is a large factor in their current employment situation, as more jobs are competing for the few skilled workers in the workforce, which is driving wages up for those jobs, and contributing more to disposable income for the consumer. That is the overwhelming driving factor, largely impacted by “low fertility rates and a large increase in net immigration are increasing pressure on the country's social welfare system and necessitate structural reforms”. The amount of elderly generations that are leaving the work force and needing government assistance through one of Germany’s many social programs, are outweighing the number of employees paying income taxes that are there to fund such programs, leading to a dilemma of not knowing how to pay for their social institutions. This was one of the reasons why Germany was open to bringing in immigrants in the first place, because many of the immigrants would be of working age and contributing to the income taxes to help pay for the social structure in place.

However, although Germany may be facing a variety of issues both with their domestic and international economic affairs, there are some remedial actions that could take place. Many economists from the Eurozone believe that the central banks have done all they can in this case, and the majority of the focus should be turned to the government to help. The first action suggested is to be introducing an increase in public spending out of Germany’s income taxes. Professor Peter Bofinger of Würzburg University, an ex-member of Germany’s economic council recommends “that the country should take advantage of the these below-zero borrowing costs to invest in infrastructure and social housing”. By focusing in areas such as transportation, infrastructure and investing in social programs such as social housing, the government could give the economy a push in the right direction while looking for ways to stabilize the looming recession threat that has been plaguing Germany over the last few quarters. The “government plan to invest 15 billion euros during 2016-18, largely in infrastructure, is intended to spur needed private investment,” as a result “domestic consumption, investment, and exports are likely to drive German GDP growth”. Also investing in areas such as manufacturing, as manufacturing remains one of Germany’s most prominent economic growth factors. Germany’s “strong manufacturing base means it has plenty to export to other members of the Eurozone and does so more cheaply. That gives German companies a competitive advantage that only improves over time. That creates prosperity, giving German consumers more money to spend locally. As a result, the domestic market recently became a more significant driver of economic growth”. Another way to stimulate growth in the economy would be by giving back to domestic business. A point brought up again by Professor Bofinger was the lacking tax breaks on German businesses. By offering tax incentives to German businesses it would spur investment, and result in more domestic economic activity as well.

Overall, when international industrial affairs seem to be doing poorly, Germany can fall back on its domestic market to stabilize their economy. Even while trade may be uneasy with the rise of the United States and China’s trade war, or the European Union’s unsettling divide over Brexit, Germany can rely on its citizens and local businesses to keep them afloat as “the domestic economy is in rude health, with employment at a record high and ultra-low interest rates prompting consumers to spend more and pushing up property prices”. Keeping domestic affairs at a good level, and making sure that the correct policies and recommendations, as stated above, are put in place where the need for domestic measures to be taken is apparent will keep the country from letting the trade issues affect it too drastically as the unsettlement continues.

With the trade concerning the United States as well, the value of the German euro to the American dollar is something that makes its products more valuable to consumers in the United States. As of 2018, “the euro had depreciated by 14% against the U. S. dollar. ” With such a depreciation factor in play, Germany’s good appeal to the United States as they become cheaper to buy, especially in relation their Chinese counterparts, which although are cheaper in cost of production, have been hit by import tariffs harder than Germany has.

Recently, economist have been divided as to whether or not Germany will be falling into a recession—as seen by the data that has come out in the recent quarter. It has been a cause of worry for many who believe that the tariffs on the automobile industry, or the uncertainty of employment and income taxes in the homeland will end up being a driver for a decline of growth in the German economy. However, this is not a case for worry. Germany has a strong domestic backing that will continue to grow as they resolve issues within infrastructure transportation, and supporting of small businesses and new social programs meant to broaden the spectrum of worker’s rights and encourage employment in the local economy. Even without knowing how the trade issues between the United States, China, or the rest of the European Union will pan out, Germany’s perseverance in domestic growth will be the fuel needed to keep its economy pushing forward through times of question.

10 October 2020
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