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Germany Economy

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Germany is the world's fourth-largest economy and the largest in Europe. In 2006, Germany had its best year since 2000 with 2.7% growth; in 2007, growth was at 2.5% despite a 3 percentage point value added tax (VAT) hike at the beginning of the year. In the context of the global financial crisis, economic growth slowed during 2008 and continues to slow in 2009.

From the 1948 currency reform until the early 1970s, West Germany experienced almost continuous economic expansion. Real gross domestic product (GDP) growth slowed down, and even declined, from the mid-1970s through the recession of the early 1980s. The economy then experienced 8 consecutive years of growth that ended with a downturn beginning in late 1992. During most of the post-reunification period, Germany has seen relatively low average real growth and stubbornly high unemployment.

Germans often describe their economic system as a "social market economy." The German Government provides an extensive array of social services. The state intervenes in the economy by providing subsidies to selected sectors and by owning some segments of the economy, while promoting competition and free enterprise. The government has restructured the railroad system on a corporate basis, privatized the national airline, and is privatizing telecommunications and postal services.

The German economy is heavily export-oriented, with exports accounting for more than one-third of national output. As a result, exports traditionally have been a key element in German macroeconomic expansion, accounting for over half of the economic growth in recent years. Germany is a strong advocate of closer European economic integration, and its economic and commercial policies are increasingly determined within the European Union (EU). Germany uses the common European currency, the euro, and the European Central Bank sets monetary policy.

In the early-mid 2000s, Germany adopted a complex set of labor/social welfare reforms to overcome structural weaknesses of the German welfare state and to create policies more conductive to employment. Defying a skeptical German public, the coalition government of Chancellor Angela Merkel initiated additional reform measures, such as the gradual increase in the mandatory retirement age from 65 to 67--a move intended to add 2.5 million to the workforce by 2030. Subsequently, however, there has been active political debate and some rollback of these labor reforms; most notably the government decided to extend the payment period of unemployment benefits to older workers in early 2008.

Nearly 20 years after reunification (October 3, 1990), Germany has made great progress in raising the standard of living in eastern Germany, introducing a market economy and improving its infrastructure. At the same time, the process of convergence between east and west is taking longer than originally expected and, on some measures, has stagnated since the mid-1990s. Growth rates in the east have been lower than in the west in recent years. Unemployment is twice as high, prompting many skilled easterners to seek work in the west, and productivity continues to lag. Eastern consumption levels are dependent on large public net financial transfers from west to east. In addition to social assistance payments, the government will extend funds to promote eastern economic development through 2019.

The United States is Germany's second-largest trading partner, and U.S.-German trade has continued to be strong. Two-way trade in goods totaled $152 billion in 2008. U.S. exports to Germany were $54.5 billion, while U.S. imports from Germany were more than $97.5 billion. At $43 billion, the U.S.'s fifth-largest trade deficit is with Germany. Major U.S. export categories include aircraft, electrical equipment, telecommunications equipment, data processing equipment, and motor vehicles and parts. German export sales are concentrated in motor vehicles, machinery, chemicals, and heavy electrical equipment. Much bilateral trade is intra-industry or intra-firm.

Germany has a liberal foreign investment policy. For 2007, German investment in the U.S. amounted to $202.6 billion, while U.S. investment in Germany was $107 billion.

U.S. firms employ about 800,000 people in Germany; German firms likewise employ about 670,000 people in the United States.

Despite persistence of some structural rigidities in the labor market and extensive government regulation, the economy remains strong and internationally competitive. Although production costs are very high, Germany is still an export powerhouse, and unit labor costs have decreased in the last decade. Additionally, Germany is strategically placed to take advantage of the rapidly growing central European countries. The current government has addressed some of the country's structural problems, with important tax, social security, and financial sector reforms.

Information by U.S. Department of State

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