German Economy

The ways to a strong economy

The German economy is considered the powerhouse of Europe. Even though it was anticipated to be a dead man amongst Europe’s big players like France in the early 2000s, it has become a rising Star, nowadays. This development started to develop with the big reforms that took place in the early 2000s. Back then Schröder’s infamous “Agenda 2010” was nothing more than a phantasm to bring Germany back to the days of former glory. But over this decade these harsh reforms turned the Economy into the one we know today.

The “Agenda 2010” was basically a reform catalogue for the German welfare system and the labor market to make the country’s economy more competitive. Especially the welfare system was known to not create any incentives for unemployed people to go working because it would cover the needs of unemployed too well. Due to this, the idea to cut the welfare money, especially for long term unemployed workers arose. The general idea of saving money with the Agenda 2010 was not just a side effect it was more or less unavoidable because of the Treaty of Lisbon that forced Germany to save money.

The “Agenda 2010” had an especially huge impact on the further economic development of Germany. A big part of the Agenda were reforms concerning the business culture, because jobs can’t be created ‘from scratch’ in a western market economy. By having this in mind, pro-employer reforms were decided. This did not just have an impact on the job market, but also raised the General amount of investments in the small firm sector, the backbone of the economy.

It is fair to say that the “Agenda 2010” brought the German economy to today’s glory. Especially the other powerhouses in Europe turn green with envy, when they look at the reforms that took place in Germany during the early 2000s. It might not have made such a huge impact, if the 2008 Euro Crisis wouldn’t have happened. But especially the crisis showed the competitiveness of the German economy compared to the rest of Europe. Now Germany is in a very comfortable position in comparison to the other European countries.The meaning of the “Agenda 2010” for Germany becomes quite obvious, when considering, that even chancellor Merkel thanked Schröder (who actually is a member of a rivaling party) for the harsh, but necessary steps he rung in in the early 2000s.

The Job Market

The Job Market in Germany is a prime example of a widely focused structure for the demand and supply of workforce. Oriented towards a pan-European labor supply, the general architecture of the job market in Germany relies heavily on certain core features, of which most of them are the result of a thorough evolution of the job market throughout the last 250 years. Due to historical developments, economic urgencies and also the socio-economic agendas of the various political parties that have governed Germany during that time, a strongly regulated labor market in favor of the employees has emerged.

A vast majority of rules and regulations serve as the judicial background for most of the blue- and white-collar jobs. This is where the traditionally powerful labor unions exert their great influence on the job market in categories like wages, working times and general working conditions. To foreigners, the power of labor unions in Germany may sometimes look overwhelming and in some instances even malevolent to the general well being of the economy.

However, this strong position of the unions grew out of a deeply rooted historical system of social injustice, which makes it an essential part of the job market in Germany and thus even more important for foreign investors, to have sufficient knowledge in being able to deal with these special requirements in order to establish a successful business.

Another major influence on the German job market and at the same time a huge positive factor is the structure of education following the traditional school system.

This is where the so-called “Dual System” comes to work, meaning a combination of higher education at university level with a regular job education in a company or corporate business. The German Economy was one of the first to introduce this system and has since benefitted from its merits and has since been asked multiple times to share their knowledge and experience in this field with other countries.

The final major characteristic of the German job market is the huge and extremely benevolent system of social security, which has its core focus on the maintenance of the once acquired social status in terms of a job loss. This means that, given certain conditions are met, employees who lose their job can obtain a social security payment of up to 70 % of their last wage for one year, thus giving them enough time and opportunity to look for a new job while being able to maintain the social status they have already achieved.

Germany and the service sector

The service sector is of fundamental importance to Germany’s economy. This sector deploys work for almost 75% of Germany’s citizens, and by this simple fact, has a huge impact on the economy of the country and its economic power. It’s also, not very surprisingly, the biggest sector with a share of almost 70% of the GDP. But what makes Germany such an interesting location for the service sector and what are the locational advantages that make this sector so overwhelmingly successful?

Locational advantages   
All of the big consulting companies like Ernst & Young, Deloitte or Kearney ranked Germany as the country with the best locational advantages in Europe. Germany would even be one of the Top 10 countries in the world, according to those studies. These facts are not just random figures, they are caused by fundamental locational advantages of Germany as a country. A major advantage is of course the excellent location of the country itself.

Being located in the heart of Europe provides German firms short delivery routes across the continent and makes Germany an important organ in Europe’s trade. But it’s not just the trade firms that are attracted to Germany, it’s also the banks, consulting firms or insurance companies that enjoy the advantages of this country. This is due to several reasons, like the good educational system or the marvelous labor productivity. The country provides the firms with exceptionally skilled workers that live in a country with one of the highest livability rates in the world. This whole package is backed with a well-functioning state of law, a very stable democracy and very liberal external trade policies. It’s not a surprise that big players come to Germany and expand their business in Europe from there.

A forecast for the service sector
At the moment Germany is in the pole position, when you compare the service sectors in Europe. But the government also put huge pressure on the economic system with two fundamental reforms. First there was the plan to break even in terms of achieving a balanced budget. It’s not necessarily a bad plan in general, but it might be the wrong moment to do so. Whilst other countries in Europe are trying everything to make this important sector more competitive, Germany is still remaining on the taxation pedal, to achieve this challenging goal. Instead it could be important to have a sound grasp of contemporary developments and to liberate the prevailing structures. This could be a reason for firms to favor other countries instead.
Another reason for a possible decline could be the pension reform of employment minister Andrea Nahles. Many firms dislike that Germany has lowered the retirement age to 63 because that could cause a serious unbalance in the prestigious social welfare system.

A historic backround of the Germany economy

Things didn’t look too good for the German economy at the end of World War II after the unconditional surrender. The nation was frustrated and exhausted, after a war that stretched the limits of the people. Almost everything lay in ashes, especially the residential properties, which had to be recreated. It can be considered a lucky strike, that 80 to 85% of the production capacity had not been bombed by the Ally winners of the war.Luckily they kept in mind, that there had to be a process of recreation in Germany after the war.

These production capacities were the key to a rapid restoration of the German economy and lead to the so called “Wirtschaftswunder” in the 50s. This term describes the swift economic boom after the war and is still a myth in Germany nowadays. Between 1952 and 1960 the GNP rose by 80% and the investment rate by 120%. But this huge success was not only due to the, often mentioned, German traits like the work mania.

The Allies, especially the US created the European Recovery Act, also known as Marshall Plan, which laid the foundations for Germany’s recovery. The US-government saw that Germany needed foreign money, backed by a stable currency, to rebuild faster. Over the years, the US granted over 1.4 Billion Dollars as a credit for the German economy. Another crucial point for the success of the plan and the ultimate renaissance of the economy was the stability of the currency. The head behind this monetary reform was Ludwig Erhard, who granted most of the political glory for bringing Germany back to former prosperous times. This reform was needed because of a massive glut of money that harmed the German trade and only left room for bartering. Furthermore the Bretton-Woods-System was introduced, which linked the “Deutsche Mark” to the US-Dollar.

Having a stable currency and a flood of American money meant a lot to the economy and its people. The country started rebuilding bombed structures and reached a reasonable economic vitality in the 60s. People in West-Germany started to enjoy life, and the consumption reached western levels. The economic story of success continued to the oil crisis in 1972, despite two minor economic dips in 1966 and 1967. Germany was struck very hard by the oil crisis because it relied mainly on oil imports and the car industry marks one of the main industries in Germany to this day.

Germany witnessed by far the biggest challenge with the reunification of its two parts. Attaching the Eastern Part to Western Germany meant to clear a very high hurdle, financially speaking. The Kohl-Government attempted this step with a brief privatization of the formerly state-owned enterprises. The reunification also meant a huge cash flow from Western- to Eastern- Germany to rebuild its ruined structures. Germany still struggles with this problem today, even though one cannot feel the ambivalence between the former parts any more.