Federal Republic of Germany
Introduction
Germany, officially the Federal Republic of Germany (German: Bundesrepublik Deutschland), is a country in West-central Europe. It is bordered on the north by the North Sea, Denmark, and the Baltic Sea; on the east by Poland and the Czech Republic; on the south by Austria and Switzerland; and on the west by France, Luxembourg, Belgium, and the Netherlands. Germany is a parliamentary federal republic of sixteen states (Bundesländer). The capital city and seat of government is Berlin. As a nation-state, the country was unified amidst the Franco-Prussian War in 1871. After World War II Germany was divided, and it became reunified in 1990. It is a founding member of the European Union, and with over 82 million people it has the largest population among the EU member states. The Federal Republic of Germany is a modern great power, a member state of the United Nations, NATO, the G8, the G4 nations and ranks fourth worldwide in defence spending. Germany is the world's third largest economy by nominal GDP, the world's largest exporter of goods, and the world's second largest importer of goods. In 2007 it holds the rotating presidencies of both the European Council and the G8 summits.
Economy
Germany's affluent and technologically powerful economy - the fifth largest in the world in PPP terms - showed considerable improvement in 2006 with 2.2% growth. After a long period of stagnation with an average growth rate of 0.7% between 2001-05 and chronically high unemployment, stronger growth has led to a considerable fall in unemployment to about 7% at the end of 2006. Among the most important reasons for Germany's high unemployment during the past decade were macroeconomic stagnation, the declining level of investment in plant and equipment, company restructuring, flat domestic consumption, structural rigidities in the labor market, lack of competition in the service sector, and high interest rates. The modernization and integration of the eastern German economy continues to be a costly long-term process, with annual transfers from west to east amounting to roughly $80 billion. The former government of Chancellor Gerhard SCHROEDER launched a comprehensive set of reforms of labor market and welfare-related institutions. The current government of Chancellor Angela MERKEL has initiated other reform measures, such as a gradual increase in the mandatory retirement age from 65 to 67 and measures to increase female participation in the labor market. Germany's aging population, combined with high chronic unemployment, has pushed social security outlays to a level exceeding contributions, but higher government revenues from the cyclical upturn in 2006 reduced Germany's budget deficit to within the EU's 3% debt limit. Corporate restructuring and growing capital markets are setting the foundations that could help Germany meet the long-term challenges of European economic integration and globalization.
Market Overview
The German economy is the world's third largest and, after the expansion of the EU, accounts for nearly one-fifth of European Union GDP. Germany is the United States' largest European trading partner and is the sixth largest market for U.S. exports. Germany’s "social market" economy largely follows free-market principles, but with a considerable degree of government regulation and generous social welfare programs and protections. Germany is the largest consumer market in the European Union with a population of over 82 million. However, the significance of the German marketplace goes well beyond its borders. An enormous volume of worldwide trade is conducted in Germany at some of the world’s largest trade events, such as CeBIT, Medica, Hannover Fair, Automechanika, and the ITB Tourism Show. The volume of trade, number of consumers, and Germany’s geographic location at the heart of a 27-member European Union that added ten members in 2004, and two more in 2007 make it a keystone around which many U.S. firms seek to build their European and worldwide expansion strategies.
Market Challenges
Real German GDP expanded by 2.7 % in 2006; forecasters predict economic growth to reach 1.8 % in 2007. Consumer demand, which had been sluggish for several years, is picking up. The economy continues to be mainly driven by exports, although there was an uptick in investment spending in 2006. Business confidence indices rose in early 2006 and still show signs of optimism, despite the increase in the value-added tax from 16% to 19% in January 2007. The German economy continues to suffer from structural problems, including inflexibility and over-regulation in labor markets, taxation, and business establishment, as well as high social insurance costs. The German government recognizes the need for reform and is pursuing a series of initiatives. While many observers regard these programs as a useful start, most expect that additional reforms to enhance Germany’s global competitiveness will be required. German firms focusing on exports, especially in the automotive, chemicals, and high tech sectors, recently have enjoyed healthy profits and have exported more goods and services than firms from any other country. The retail sector, by contrast, continues to struggle. Major manufacturing firms have increasingly shifted their production overseas to maintain global competitiveness and reduce costs.
Persistent high unemployment, particularly long-term (longer than one year) unemployment, is among Germany’s most serious political and economic problems. While her government has seen initial progress in reducing unemployment during its first year in office, the government of Chancellor Angela Merkel recognizes that it still has a long way to go. Since the beginning of 2006, what had been an export-led recovery has begun to expand into the domestic economy. Investment in machinery and equipment has grown rapidly and business confidence has risen – the latest survey results from the Munich-based Ifo Institute showed optimism is holding at a 15-year high. More recently there have been signs that the economic recovery has finally reached the labor market. The non-seasonally adjusted unemployment rate dropped to 9.6% in November 2006 – the lowest since the fall of 2001 – compared with a Eurozone average of 7.7%, according to data released by Eurostat, the European Union’s statistical office. Average unemployment was forecast to decline to 4.5 million in 2006, with a further decline to 4.3 million in 2007, assuming continued healthy economic growth. While much of the improvement has been the result of an expanding number of temporary or low-paid jobs, more importantly, the numbers of socially-insured jobs and of self-employed have been rising, too. Germany presents few formal barriers to U.S. trade or investment, although Germany’s participation in the EU’s Common Agricultural Policy and German restrictions on biotech agricultural products mean barriers for some U.S. goods. Germany has pressed the new EU Commission to reduce regulatory burdens and promote innovation in order to increase the EU member states’ competitiveness. The Merkel government has talked about the need of regulatory reform in Germany as well. Germany's regulations and bureaucratic procedures can prove baffling. While not directly discriminatory, government regulation is often complex and may offer a degree of protection to established local suppliers. Safety or environmental standards, not inherently discriminatory but sometimes zealously applied, can complicate access to the market for U.S. products. American companies interested in exporting to Germany should make sure they know which standards apply to their product and obtain timely testing and certification. German standards are especially relevant to U.S. exporters because, as EU-wide standards are developed, they are often based on existing German ones.
Market Opportunities
For U.S. companies, the German market--the largest in the EU--continues to be attractive in numerous sectors and remains an important element of any comprehensive export strategy to Europe. While U.S. investors must reckon with a relatively higher cost of doing business in Germany, they can count on high levels of productivity, a highly skilled labor force, quality engineering, a first-class infrastructure, and a location in the heart of Europe.
