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German
Economy

Germany has a highly developed social
market economy.  It has the largest
national economy in Europe, the fourth-largest by nominal GDP in the world, and
fifth by GDP (PPP). Germany is a founding member of the European Union and the
Eurozone. Germany is world’s export champion (until 2009 it was at number one
position). Its economy has been resilient in the face of recent global economic
downturn by making necessary short-term sacrifices for long-term
success.Germany is the largest market in Europe. It constitutes 20 percent of
European GDP, and is home to 17 percent of the total European Union (EU)
population. Stable annual average GDP growth of 1.8 percent the past five years
provides proof of further economic potential. The German economy is both highly
industrialized and diversified; with equal focus placed on services and
production.

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Capitalist Economy

The idea is to have a basically
capitalist economy but make it the state’s job to mitigate its negative aspects
by providing strong regulation against things like monopoly abuse, and a strong
social safety net. A special feature in Germany 
is codetermination policy-  in
large companies, half of the board of directors must consist of representatives
elected by the employees, usually trade union functionaries. This is believed
to result in a less antagonisic climate between employers and employees and
fewer strikes than in other countries.The German model of prosperity supports
allowing local entrepreneurs to develop and initiate new industries which help
the people to communicate better with the world and to meet their needs in
becoming current world players in the technology industries. The flow of goods
exported from Germany are grouped into sectors, and Germany has the dominant
role in exporting for markets which specialize in goods which are the result of
patents, niche markets and new innovations and inventions within the country.

Sectors
of German economy

 

The agricultural sector amounts to less
than 1% of GDP and employs 1.3% of the German workforce. The agricultural
sector has benefited greatly from state subsidies. The main agricultural
products include milk, pork, livestock, sugar beets and cereals. German
consumers tend to prefer organic agriculture. The country is going through a
deindustrialisation process of the food sector.

 

The industrial sector amounts to about
30% of GDP – a dramatic decline from 51% of GDP in 1970. The automotive
industry is one of the country’s largest industrial sectors, but the German
economy also retains other specialised sectors, including electric and
electronic equipment, mechanical engineering and chemical products. The
decision to abandon civil nuclear energy by 2022 is likely to change the
industrial landscape in the near and distant future.

 

The service sector amounts to about 70%
of GDP and provides work for 70% of the German workforce. The German economic
model relies heavily on a dense network of small and medium-sized enterprises
(SMEs): more than 3.6 million SMEs employ 68% of salaried workers in Germany.

Fiscal and Monetary policies

Fiscal Policy

In 2010, Germany cut 14 million euros in
taxes as agreed by the outgoing government coalition of Christian Democrats and
Social Democrats.  In 2011, they are
aiming to cut 24 million euros in income taxes benefiting in particular low-
and middle-income earners as well as families. 
There are still many details to go into this plan, but regardless
Germany’s goal is to cut income taxes tremendously.  This represents an expansionary fiscal policy
as Germany is decreasing taxes. With expansionary policy comes the goal to
close a recessionary gap, decrease unemployment, and stimulate the
economy.  Reducing taxes creates an
opportunity for the economy to adjust itself while government spending can
create new jobs.  With more jobs and less
taxation on income, this will help contribute towards closing the recessionary
gap and stabilizing the economy.

Monetary Policy

Germany does not have its own money so
they can not use their own monetary policy. 
Germany has to abide by what the ECB (European Central Bank) says.  The ECB is expected to raise interest rates
1.5% by the end of this year. This rising of interest rates will not effect
only Germany, but all the rest of the countries that are involved in the ECB. This
can result in unstable prices, and alter many costs of living making it harder
for citizens to get approved for loans on many things.  It increases the cost of borrowing, increases
mortgage income payments, increases incentive to save rather than to spend,
rising interest rates affect both consumers and firms, and government debt
interest payments increase.

FDI

Germany is considered an attractive
country for foreign direct investment (FDI), but the global recession and
subsequent Eurozone crisis in 2012 have hampered the influx of FDI in recent
years. After reaching USD 33.3 billion in 2015, FDI inflows dropped to USD 9.5
billion in 2016, the second lowest level since 2009. In terms of FDI stock,
Germany is now the 10th destination for foreign investment (8th in 2015) after
being outranked by Ireland and the Netherlands. In fact, German FDI stock has
been melting away since 2012, dropping from USD 1.08 trillion to USD 771
billion in 2016.

 

 

Among the country’s strengths are a
highly powerful industrial network, a highly skilled workforce with a good
command of English, reliable infrastructure, a favourable social climate, a
stable legal framework and a location in the heart of Europe. Its main weakness
is a high tax rate (for both individuals and businesses) and rather inflexible
labour laws.

 

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