Germany - Economy



Germany, with a GDP of over $2 trillion, has the world's third-largest economy and the largest in Europe. Agriculture, forestry, and fishing accounted for only 1% of GDP in 2002, while industry, including construction, comprised 31%, and services 68%. Germany's unit of currency, the mark, is one of the strongest in the world.

In the western FRG, GNP increased at an annual average rate of 7% between 1950 and 1960 and 5.4% between 1960 and1970. This rate slowed to 3.1% between 1970 and 1980 and2.3% between 1980 and 1990. However, the unification of Germany in October 1990 proved a heavy economic burden on the west. In 1992, the former GDR Länder accounted for only 8% of GDP. Transfer payments and subsidies for the east resulted in a large public deficit. Alarmed at the potential for inflation, the Bundesbank pursued a tight monetary policy. This boosted the value of the mark and had a recessionary effect on the European economy. The unemployment rate in 1993 was 7.3% in the west, but 15.8% in the east because so many antiquated, inefficient enterprises were unable to compete in a market economy. These factors led to the recession of 1992–93 with growth in the GDP dropping to 1.1%. The economy recovered in 1994, posting a growth rate of 2.9%, but declined to 1.9% in 1995 and an estimated 1% in 1996.

Strong exports in 1997 were expected to bring the growth rate back to 3.5% with sustained growth projected at 4–4.5% for 1998–2000. Such hopes failed to materialize, as the real growth rate for 1998 was 2.7%. The costs of reunification saddled the country with $300 billion in debt, forcing western Germans to pay a 7.5% "solidarity" surtax for reconstructing the eastern section. Even with the infusion of cash, the eastern sector was essentially bankrupt in the late 1990s with 25% unemployment and worker output at 50% of its western counterpart. However, high unemployment did not result in a drop in the hourly wage rate. High labor costs also plague the west where workers average a 38-hour work week and enjoy six weeks of vacation per year. To remain competitive, German companies are cutting staff and relocating manufacturing jobs to lower wage countries.

The coalition government of Social Democrats and Greens elected in 1998 pledged to combat Germany's economic sluggishness through a reform program dubbed "Future Program2000." This program included budget cuts, tax reforms, and a major reform of the pension system. The government also tried to coordinate better labor-management cooperation in its effort to implement its reforms. Gerhard Schröder's Social Democratic and Green coalition government was returned to power in 2002, and Schröder called on citizens to "renew Germany" by pulling together during difficult economic times. Germany, on the brink of recession, saw a drop in the government's popularity in 2002, which was compensated by Schröder's foreign policy position—popular with German voters—opposing the US-led war in Iraq that began on 19 March 2003. Schröder threatened to resign in 2003 if his reform package, called "Agenda 2010," was not passed by 2004. This program included a relaxation of job protections, reductions in unemployment and health care benefits, and an easing of the rules on collective bargaining. Indeed, the Social Democrats' traditional support from unions was compromised by the proposed reforms, including, as in France, pension reform: strikes broke out in Germany, France, Austria, and Italy in mid-2003 due to opposition to cuts in oldage benefits. Germany's budget deficit was rising in 2003, totalling 3.6% of GDP, and thus exceeding the 3% of GDP limit established by the EU. GDP growth was forecast for just 0.4% in 2003 and 1.5% in 2004.

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