The Economics of Germany - Essay Example

11 December 2007 The Economics of Germany In the years since World War II, Germany has become one of the strongest economies in the world. However, for every positive aspect of the country's economic growth, there is a negative side. The development of the country has been steady over the years, but in a 21st century global economy, it has met with the same social issues facing the rest of the world-immigration, aging populations that are straining social-welfare and pension systems, and the growing unemployment rate. Poverty has also become an increasing problem in a country that most people have for several years thought of as affluent. After World War II ended in 1945, Germany was split into four military occupation zones-French, British, United States, and the Soviet Union. In 1948, the Soviets withdrew from the four-power governing bodies and initiated the Berlin blockade, which lasted 11 months. On May 23, 1949, the Federal Republic of Germany (FRG) was established on the territory of the Western Occupied zones and declared full sovereignty on May 5, 1955. On October 7, 1949, the German Democratic Republic (GDR) was established in the Soviet zone with East Berlin as its capital. From that time on, the two largest states were known as "West Germany" and "East Germany," Berlin was divided into East Berlin and West Berlin, with West Berlin completely surrounded by East German territory. As a western capitalist country, West Germany enjoyed prolonged economic growth, while East Germany soon became the richest, most advanced country in the Soviet bloc. Even so, many of East Germany's citizens looked to the West for political freedoms and economic prosperity. In 1989 the Berlin wall was removed, and German reunification finally took place on October 3, 1990, when the GDR was incorporated into the FRG (History 2007). Present Per Capita and Standard of Living Its per capita income of more than $28,700 makes Germany a broadly middle class society (Background 2007). In the western part of the country, Germany's standard of living is among the highest in the world, with powerful incentives to save offered by the state. Earning power for both workers and employers assures income to meet cost of living. There is no exaggerated difference between compensation for blue-collar workers and white-collar employees. In 1990, the absorption of the eastern German population and economy into western Germany had only a marginal effect on western living standards. On the other hand, East Germany, with its lower earning power suddenly had to pay West German prices, and the wholesale shutdown of former state factories and enterprises caused vast unemployment in industrial cities (Germany: Standards of Living 2007). Third quarter growth for Germany in 2007 was at its strongest for the year, boosted by higher spending on company machinery and construction. The prediction, however, for the fourth quarter and into 2008 is for slower growth due to high oil prices and a strong euro. But the latest preliminary gross domestic product (GDP) figures suggest Germany is on track for annual growth of about 2.5 percent, which would be one of the best performances in the past 15 years. The euro's rise against the dollar increases expenses for exporters while high energy costs are impinging on company profits (Germany Grows 2007). More attention should be paid to domestic product than to capital gains. Poverty With welfare reforms scheduled to be implemented in 2005, social organizations were warned of a dramatic increase in the number of poor people in Germany (Corbett 2004). Corbett stated that according to an association of German charities, the number of poor people in Germany were expected to increase from 2.8 million to 4.5 million-almost double. The average income in 2004 was roughly 2,200 ($2,700) a month but by counting the number of people living on the lowest level of social welfare assistance, the charitable organizations note that after the reform HartzIV, these people would have a monthly income of 345 minus rent covered by the state. Poverty is a global issue: it exists everywhere to some degree, regardless of what welfare model a country uses. About one in five UK households and one in eight German households are poor. Rates of child poverty are even higher, affecting one in four children in Britain and as many as 35% of children in parts of the former East Germany. Even Scandinavian countries have not eradicated poverty entirely, but they do have the lowest poverty rates in the European Union and some of the lowest in the world, averaging around 5% overall and less than 5% for children (Poor 2006, par. 4). In reference to the 2010 package of economic and social welfare reforms, Thomas Kieselbach, Chairman of the Scientific Committee on Unemployment and Health, predicted that "Germany can expect its image abroad to change if nothing is done to combat the increasing social exclusion of the nation's poor (Corbett 2004, par. 20). Income Distribution Some 20 plus years ago, 85 percent of employment contracts in western Germany were full time and protected by social security. In 1997, the proportion dropped to 67 percent while 33 percent of contracts were more or less atypical. In addition, an estimated 5 million persons were engaged in marginal part-time work and were not covered by the social security system. On the whole, the wage earner's income as a proportion of total national income reached the lowest recorded level in decades in 1997 (Schfer 1998). In contrast to earned income, according to Schfer, the profit income of companies and the self-employed showed an above-average rate. With polarization of income, the state had fewer means for making future provisions with regard to infrastructure-including education, science and research-requiring a revision of economic policy. As of 2004, DW-World notes (Corbett 2004), social welfare reforms were creating more problems than benefits with families forced to move into lower rent areas. Children were the most affected, with lower educational standards for low-income families and lack of health benefits. Germany's effort to unite the country by merging East and West has not been successful to date. Wikipedia addresses the issue of employment, stating that in 2005 the unemployment rate was 12.6 percent while in East Germany it was 20 percent (History 2007). Income distribution, which at one time was more or less even across the board, is now showing a wider rift between blue-collar workers and white-collar employees. Nevertheless, Germany's present rate of growth makes it the third largest economy in the world. It showed substantial improvement in 2006 due to recent economic reforms and strong global economic growth, but the resulting domestic social problems are yet to be addressed. Economy In the 2000s, Germany has been at the center of the European Union (EU), often acting with France in this connection. The German economy is heavily export-oriented, and the country is a strong advocate of further integration with the EU. Domestic structural problems are said to be the cause of recent slow performance with high unemployment. With Germany's focus on the exporting of goods, the domestic economy is suffering. The coalition government under the leadership of Chancellor Angela Merkel agreed to address these issues, but is faced with a skeptical German public (Background 2007). Germany's location in the midst of the European Union makes the EU especially appealing to Germany. Because they are surrounded by different countries-Germany is east of France, Belgium and the Netherlands; north of Switzerland, Austria and Liechtenstein; west of Poland and the Czech Republic, and bordering the North Sea and the Baltic Sea south of Denmark-working with their bordering countries is more feasible than trying to compete with them. Germany has been focusing more and more on making decisions with the help of the EU. The more interaction they have, the more successful the export business will be. In the meantime, http://www.theodura.com/maps (2007) however, if Germany does not focus more on its domestic problems, the predictions of the media that 2008 will show a downward turn in the economy will be correct. Reform proposals known as Agenda 2010, announced in 2003, were approved by Germany's Social Democratic Party (SPD) and went into effect in January 2004 (Camerra-Rowe 2004). According to Camerra-Rowe, this has been a drastic change in policy. Rather than promoting traditional social democratic values such as collective responsibility, worker's rights, and the expansion of state benefits, the reforms include cutting unemployment benefits, reducing health insurance coverage, and raising the retirement age. Increased global competition in product markets and the liberalization of capital markets make it difficult to pursue traditional demand-management and social welfare policies. Agenda 2010 redefines policy-making within the SPD and long-term effects will determine the feasibility of these proposals as a way to stabilize the economy of Germany. Unemployment Germany has a capital-based economy, and as noted by senior research fellow, O.N. Hishow (2006), disappointing growth calls for increased labor input to invigorate output. The country, he says, can learn from the United Kingdom and Spain who have successfully accomplished this move toward labor-based growth. Within the European Union, growth, employment, and technological progress show improvement in Scandinavia, UK, and Spain, while faltering economies in Germany, France, and Italy suffer persistent high unemployment, causing EU to fall below the United States statistically (Hishow 2006, 5-6). In exploring the areas most affected by unemployment, it is obvious that Eastern Germany is an area of deep concern. There are 5 Lnder or states in East Germany and 10 in West Germany plus Berlin, a total of 16 states (States 2007). Following reunification in 1990, East Germany had to adjust to a capitalist policy after losing state subsidies and guaranteed employment to a far different type of society, and while West Germany continues to enjoy a thriving economy, East Germany is still trying to catch up. The coalition parties "believe that direct wage subsidies for unskilled work in the new Lnder could be the right approach if they help reduce unemployment among low-skilled workers" (Labor III-4). Inflation The forecast of leading economists in November (Atkins and Guha 2007) suggested that inflation in Germany would reach its highest level in 20 years-3 percent or above-due to energy and food prices throughout the EU. As of 2006, the inflation rate in Germany was 1.7. It was noted that the Federal Reserve faces a similar dilemma in the United States where consumer price inflation reached 3.5 percent and could reach 4 in the coming months. This matches other economists warning that Germany's economy is about to show a downward turn. Germany's labor market performance over the last 20 years has been pretty much straight across the board, neither good nor bad, due to rigid labor market practices and barriers to entrepreneurship, with rising unemployment only one part. Infrastructure and Economic Development In contrast to a number of other European countries, and especially in contrast to the U.S., Germany has been unable to make much progress in reforming labor market institutions and the welfare state in order to reduce unemployment rates. The German economy lacks the vitality of earlier eras and is weak in areas of high technology, which has caused it to show less and less improvement in its efforts to improve the infrastructure of the country. Germany is known for its excessive level of regulation, which discourages risk taking, investing in skills, in new firms, or in venture capital. According to Berthold and Fehn (2003), a broader package of institutional reforms, including the labor market, as well as the goods and capital market, are necessary to improve Germany's overall economy (53). In addition, Germany needs to inspire confidence in the public that such a bold reform will pay off. HartzIV and Agenda 2010 have helped the economy in the short term, but unless attention is paid to the very areas affected by the reforms-education and health-the long-term prediction for the German economy is not good. The education system, which was at one time one of the best among OECD countries, has lost its reputation for excellence, and until improvements are made, entrepreneurial creativity will be lacking. Welfare incentives have been curtailed to encourage workers to find jobs, which unfortunately creates more poverty and hopelessness, which in turn leads to lack of incentive to work. Although Germany has made great progress since its 1990 reunification, introducing a market economy and improving its infrastructure, an inflexible labor market has created persistently high unemployment. German employers tend to invest overseas or install more machinery rather than create new jobs at their domestic facilities. In eastern Germany, economic growth has been lower than in the west, unemployment is twice as high, and skilled workers are apt to seek work in the west (Background, 2007). Future plans call for a bridge linking Denmark and Germany and a renovation of the country's railway network. In addition, Germany plans six turnkey biomass-fueled power plants. The obstacles facing Germany's construction industry must be addressed by encouraging more flexibility in the present labor market. In addition, further attention to Eastern Germany's development is recommended if the country is to become economically stable in the world economy and achieve self-sustained economic growth in that part of Germany (Germany Infrastructure Report 2007). According to Germany's Federal Government reports (Federal 2007), the policy to promote economic development, especially cooperation in the field of research and development, is being coordinated in an intensive dialog between the Federal Government and the new Lnder. The specific areas needing improvement are based on unemployment rate, income index, and taxable capacity. Factors Contributing to Germany as a Developed Country There is no doubt that Germany is a developed country. The term "developed country" refers to countries with developed economies, usually with a high gross domestic product (GDP). This level of economic development is often based on high income and a high human development index. The countries of Western Europe, including Germany, are considered developed countries (Developed 2007). Certainly, Germany's BMW has a reputation for high quality, high cost goods. Following World War II, the Macarthur and Marshall Plans were instituted to allow Japan and Germany (as well as Europe in general) to accept Western principles and develop economic strength. By the 1960s, these countries were on a path toward success. Germany and Japan developed highly competitive automobile industries and by the 1980s competitive electronic and pharmaceuticals industries as well. From the 1990s into the 2000s, high speed telecommunications took precedence, and Germany has not kept up with high tech computing advances and innovations. The term "industrialized countries" has given way to "developed nations" in a global market (Hardy 2007). The world view of Germany is helped by its environmental performance and its aid to developing countries, but it would score much higher if it increased participation in international peacekeeping efforts and provided more support for the creation and dissemination of technological advances (Center 2007). Long-term Growth in Germany According to Daniel Gros of CEOS (2007), the "German industry has been forced by weak domestic demand to go abroad, while France shows strength in the domestic market." However, Gros predicts that the fiscal adjustment in Germany shows a more solid base and is better placed than France to continue with an upswing over the long term. Germany has made an effort to be more open to international commerce, and as long as it continues, the future looks bright for the German economy. Germany's stagnation prior to 2000 was said to be caused by tightened spending. The country is beginning to show more vitality, and at present, with its strong export performance, Gros seems to feel that Germany will achieve long-term growth. An evaluation of the country's infrastructure in terms of health, education, and welfare, however, brings out many weaknesses that must be addressed before Germany can depend on a growing economy. The coalition parties in Germany "believe that direct wage subsidies for unskilled work in the new Lnder could be the right approach if they help to reduce unemployment among unskilled workers" (Labor III 4, para. 1). Conclusion This analysis of Germany's economy indicates a need to address social issues such as education, research and development, health services and welfare. The country should be concentrating on technology rather than industry. Because Eastern Germany has never caught up with Western Germany following the reunification, it has a higher rate of unemployment and lacks educational resources. It is important for the German government to offer more educational opportunities to the Eastern states in a global economy that relies on technological progress. Germany at present seems more focused on the export market and finding ways to meet the competition globally when it should be concentrating more on local concerns and how to increase domestic output by educating workers. This would allow them to enter the employment market at a higher level, thereby decreasing their need for welfare. In addition, by encouraging and offering opportunities for higher education in the research and development field, German citizens will fill the gap that exists for qualified researchers while increasing the standard of living throughout Germany, but especially in the Eastern German states that are presently much poorer than West Germany. It might be feasible for Germany to study countries such as the United Kingdom, Denmark and Spain in which poverty rates are extremely low while growth, employment, and technological progress show improvement. There are reforms underway in Germany that seem to be helping the economy at present, but more attention is needed to improve health and education services. Germany has never been noted for taking chances but by focusing more on innovation and imagination, although the country at first might show a loss, in the long run it will show a more stable improvement in its overall economy. According to a 2005 article on the CORDIS (Community Research and Development Information Service) Web site, German Research Minister Edelgard Bulmahn noted that the government's research policy is divided into three strands: the first promoting innovation, particularly among small and medium-sized enterprises (SMEs), as a means of fostering employment and economic growth. The second strand is the promotion of health and quality of life. Funding for medical research has already risen by 37 per cent over the past seven years. Sustainable development forms the third strand and is therefore in line for 800 million of euro over the next five years (CORDIS 2005). Ms. Bulmahn encourages research support for Germany's best scientists to pursue careers at home. According to her, "economic growth, secure jobs and social security depend on the productivity and innovative power of German research" (par. 13). The United States economy is expected to slow down next year, and most forecasters predict that Europe's leading economies will go the same way. As noted by BBC News, "the European Commission recently reduced its forecast for 2008 in the eurozone-of which Germany is the biggest member-to 2.2 per cent" (Germany Grows 2007, par. 7). The main reason for this slow down in the economy is the euro's rise against the dollar and high energy costs making it more expensive for exporters. However, as long as Germany continues its present path to economic improvement and sustainability, it will remain strong and in the top echelon of economic success. It would appear to be on the right track. Works Cited Atkins, R., and Guha, K. Last updated 28 November 2007. "Inflation Hits Eurozone." Financial Times Limited. 2 December 2007. http://www.ft.com/cms/s/0/55ff8ca6-9d10-11dc-af03-0000779fd2ac.html Background Note: Germany. August 2007. Bureau of European and Eurasian Affairs. 29 November 2007. http://www.state.gov/r/pa/ei/bgn/3997.htm Berthold, N., and Fehn, R. February 2003. "Unemployment in Germany: Reasons and Remedies." 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