Unemployment Rate in Germany - Assignment Example

The 2013 Index of Economic Freedom Report noted that the country has an average inflation rate of about 2.5% (Heritage Foundation, 2013). The impressive employment and inflation figures in Germany may be attributed to the sound economic policies that the country has held over the years. For instance, by reducing public spending and ensuring high standards of accountability in the government’s system, Germany was able to withstand the turbulent effects of the European debt crisis that affected some European countries, though the debt crises affected other Eurozone members leading to the current inflation rate in Germany.

The country has the Euro as its main currency though undervalued compared to Deutschmark’s real value. Moreover, Germany is one of the countries that have managed to raise the working hour flexibility and reduction in structural unemployment. These factors have been critical in sustaining Germany’s economy, leading to a sound job market that translates into a low unemployment rate. Strong fiscal policies in public spending and deficit cuts have led Germany to reduce its debt burdens, a significant step towards controlling its inflation rates.

However, Germany’s unemployment rate may be blamed on its transition system of education that holds many youths in vocational schools, which hardly translates to real job opportunities. Such transition schools do not offer skills that are relevant in the market, with graduates from these centers failing to secure jobs. One way to reduce the unemployment rate is to deal with policies that would encourage Foreign Direct investments, FDIs. Currently, FDI in Germany stands at $40.4 billion (Heritage Foundation, 2013). This is not enough for a country with a sound economy and better export terms than its Eurozone members. By attracting FDIs, more economic activities will spur across the country, suggesting more employment and reduced inflation rates.

2. German fiscal policies are designed to reduce unemployment levels and prevent any recessionary forces in the economy. For instance, in 2010, the government had to cut more than 14 million euros in taxes; in 2011, the government agreed to cut another 24 million in income taxes (Stiftung, 2013). The benefit of tax cuts as a fiscal policy in Germany was that the government managed to close a significant recession gap. The result was stimulated economic growth through encouraged consumption. Furthermore, the economy had a better chance to readjust while the government concentrates more on job creation. This explains why Germany has a stable economy considering the low taxation and increased employment opportunities. However, the disadvantage was that the government through these tax cuts reduced its budgetary allocations to important sectors in the development of the country. The country could have funded social development projects with the huge amounts of taxes forfeited in tax cuts.

The European Central Bank is mainly responsible for Germany’s monetary policies (Stiftung, 2013). When the bank raises interest rates to curb rising inflation rates, the result is a change in the cost of living considering commodities will have unstable prices as a response to the interest rates increase. Most Germans would have to save rather than spend and faced increased costs of borrowing that hampered developments, and higher interest rates for government debts. The increase would hurt both the government and Germans in general and may have slowed down development. However, such an increase in interest rates by the European Central Bank would curb inflationary rates by checking spending, which would facilitate economic stability in Germany.

3. One of the best economic reforms with some impacts on German economic growth is the strict austerity measures that insulated the country from the recent Eurozone debt crisis. Though the EU required a 3% debt-to-GDP ratio (Byrne & Derbin, 2013), Germany 2011 passed an austerity measure policy to lower the ratio to 2.5%. The country introduced sales taxes and increased taxes among the wealthy class, a move that proved necessary in reducing the country’s budget deficit. Moreover, the modernization of Eastern Germany for $70 billion per year emerged as a strategic reform to initiate growth in the area. The results were increased employment and spurring of investment growth as the government opened up new areas for industrial growth. In addition, there was increased domestic consumption as the reforms created more job opportunities in some of the affected areas. Furthermore, the 2010 and 2011 major tax cuts played a major role in motivating spending among Germans and facilitating wealth creation, which bolstered economic growth.

4. Germany leads other Eurozone members in the volume of exports and leads globally as the largest exporter of its GDP. Assume a fixed supply of Euros, which implies a fixed demand for dollars. Any factor that alters the equilibrium by increasing the demand for Euros would cause the price of Euros to appreciate against the dollar. Consequently, there are more German imports in the US; the demand for Euro will increase, and more dollars supplied to meet the rising demand, which will have the cost of the Euro to rise and the dollar to depreciate against the Euro. Germany as a leading exporter of products, services, and technologies across the globe utilizes this mechanism to have the Euro remain strong against other currencies due to increased German exports to such countries. Germany manages its foreign debts by stressing on short-term debts contrary to long-term debts, due to the ease of management and control involved. Furthermore, Germany uses public spending cuts to prevent the accumulation of both internal and external debts. Read More