Germany's Economy: Successes and Challenges

Why Germany Won't Ever Quit the EU

germanys economy
Hamburg has been the trading capital of Germany for centuries. Photo: Westend61/Getty Images

Germany's economy produced $3.841 trillion in 2015 as measured by Gross Domestic Product (GDP). It's the world's sixth-largest economyChina, the European Union (EU), the United States, India, and Japan. (To compare GDP between countries, you must use Purchasing Power Parity.)

Its GDP growth rate was 1.5%, much better than the 0.4% growth rate in 2013. It's slower growth than the 2.4% U.S. rate, but a bit faster than the EU average of 1.9% growth.

Germany's GDP per capita was $46,900, a bit lower than the $55,800 enjoyed in the United States but better than $37,800 in the EU overall.

Before the 2008 financial crisis, Germany's growth was usually less than 1% per year, for three reasons:

  1. Modernization of Eastern Germany. It initially cost $70 billion per year. It cost $12 billion in 2008.
  2. High unemployment (9.5%) and an aging population (20% age 65+). That means Germany depletes it Social Security fund faster than it can add via payroll taxes.
  3. Germany managed to get its budget deficit below 3% of GDP, as mandated by the EU. It lowered fiscal spending, which is what it advocates to solve the Greece debt crisis.

What Type of Economy Does Germany Have?

Germany has a mixed economy. It allows a free market economy in consumer goods and business services. But the government imposes regulations even in those areas to protect its citizens.  Germany has a command economy in defense since everyone receives the benefit, while those with higher incomes pay more in taxes.

 The government provides health care insurance. That means you pay in according to your ability, and receive benefits according to your need. 

Benefits From Eurozone Membership

Germany benefits from its membership in the EU and its adoption of the euro. Like many other eurozone members, the power of the euro means interest rates stay low, which spurred investment.

In fact, many say Germany profits the most from its membership. Its 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. The resultant prosperity means that German consumers have more money to spend locally. As a result, the domestic market recently became a more significant driver of economic growth.

German Chancellor Angela Merkel

Current Chancellor Angela Merkel was a low-key physicist and economic reformer from East Germany. She won the 2005 election by promising reform to lower the unemployment rate, high even before the recession. In fact, her efforts reduced it from 11.5% to 9.5%. She had to move cautiously to keep the other members of her coalition on board.

The recession allowed Merkel to successfully push through stimulus efforts and tax cuts, but this increased Germany's budget deficit to 3.3% -- a violation of the EU's 3% debt-to-GDP ratio. Austerity measures put in place should lower the deficit to 2.5% in 2011. That included a sales tax increase and higher taxes on the wealthy. It was necessary to raise the revenue needed to decrease Germany's budget deficit to within the EU's budget guidelines.

This success means that Merkel pushed for austerity measures to resolve the Greece debt crisis. Opposition to her leadership delayed resolution, which resulted in its expansion to a eurozone debt crisis

Refugee Crisis

In 2015, 1.2 million refugees from the war-torn Middle East applied for asylum in Europe. Nearly 75% were men, and 40% of them were between 18-34. That's because the trip itself is dangerous. But that created a problem for Germany. On New Year's Even 2016, a gang of young refugees robbed and sexually assaulted more than 600 women. There was a large political backlash. Many countries sealed off their borders to new refugees. As a result, 8,000 migrants were marooned in Greece. The EU signed an agreement with Turkey to take back refugees who had reached Greece. In return, the EU would pay Turkey 6 billion euros.

 (Source: "Disaster in the Making," Der Spiegel, May 26, 2016."Migrant Statistics," The Economist, January 16, 2016.)

Struggles With High Unemployment

Unemployment in 2015 was 4.8%, better than the 7.7% rate during the recession. However, Germany has struggled with high unemployment because of historical and even cultural reasons. First, Germany has laws which make it difficult to lay off workers and lower wages. Second, the reunification of East and West Germany after the fall of the Berlin Wall also heightened unemployment, as the economy had to absorb workers from the former Communist bloc. Third, the culture support saving for a rainy day rather than boost the economy by spending.

Unemployment would have been worse in Germany were it not for reforms launched in 1998-2005. The government subsidized businesses to reduce working hours. That kept people employed during the recession, although only part-time.

German-Russian Relations Are Unique

While President of the EU in 2007, Merkel met with Russia’s President Vladimir Putin at his private country retreat, Bocharov Ruchei in Sochi. Merkel and Putin enjoyed a relatively cordial relationship. That was thanks to Putin’s fluency in German and Merkel’s schooling in then-Communist Eastern Germany, which gives her a good command of Russian.

Merkel arrived just one week after Russia cut off gas supplies to Belarus, which carried the main pipeline to Europe. Merkel got assurances that Putin’s pipeline politics would not affect the EU's or Germany's energy supply. Russia does not want to jeopardize German foreign direct investment in Russia or bilateral trade.Putin also agreed to:

  • A new EU-Russia Partnership and Cooperation Agreement.
  • Acceleration of a gas pipeline construction to Germany under the Baltic Sea.
  • Construction of an oil pipeline leading to Russia's Pacific Coast, to avoid going through “transit countries” Ukraine, Belarus, and Poland.
  • Establishment of a gas reservoir in Germany, adding a new distribution center for Russian gas.