International Study - Germany

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SBI 2005

APPLIED ECONOMICS

International Study: Germany

By:

Mike Taglione, JohnZimmerman, Connor Hause,

Kishan Patel, Kevin Morrissey

Due: July 24th, 2013


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Page #1: Germany as a Nation:

An extensive introduction to the Federal Republic of Germany allows one to assess their

current Economic standing. By analyzing the geographic layout of the nation, one can determine

potentially rich natural resources. Likewise, determining the foundation of the nation yields adeep understanding of where the country comes from, what its citizens identify themselves with

and even a potential psychograph for consumers. Lastly it is important to delve into major

demographic and socio-economic factors that are driving forces for sustainable economic

growth in the long-run.

Germany is located in Western/Central Europe bordering countries such as Poland, Denmark

and Austria. The territory covers 137,847 sq. miles, composed of 97.8% land, establishing itself

as the 7th largest country in Europe. The layout is very diverse, ranging from high-elevation

Alps, to mineral rich rivers, such as the Rhine and Danube. The most significant natural

resources attained from this relatively rich land are iron ore, coal, uranium, timber and copper.

Comparable to eastern United States, Germany experiences a continental climate, comprised ofcold winters and warm summer.

The nation is divided into sixteen states, which are the partly sovereign constituent states of the

Republic. A 2012 census yields an estimated population of 80.39 million citizens in a fairly

dispersed landscape. The ethnic subdivision of the nation is made up of an astounding 81%

Germans, 4% Turks, 2% Asian, and 13% other nations (Navigation Und Service). On a very

interesting note, Germany has one of the lowest fertility rates per woman in Europe at 1.36

babies per woman born. On top of this, they have consistently had a death rate that has

exceeded their fertility rate (Germany: Beyond the Demographic...).

The current president is Joachim Gauck, with Chancellor, Angela Merkel. There legislature is

divided into the Upper House (Bundesrat) and Lower House (Bundestag). The political system

is composed of a Judicial, Execute and Legislative Branch, comparable to the US system.

When referring to Germany, the world will often remember a culture-laden environment where

famous artists, philosophers and musicians were born. For example, Martin Luther, a German

native, played a significant role in the Protestant Reformation by challenging the Roman

Catholic Church with his Ninety-Five Theses. However, one of the most notable components of

German history occurred during the early 20th century. After the assassination of an Austrian

Prince and the explosion of the Balkan Powder Keg, Germany was thrust into World War 1,

positioning themselves with the Central Powers. After roughly 2 million German deaths in battle,

they were defeated, ushering the German Revolution. This revolution alongside the Treaty of

Versailles (which rendered Germany at fault for roughly $442 billion dollars) eventually spurred

on the devastation of World War II (The War to End All Wars...). Mid-Depression, the German

Communist Party and the Nazi Party gained a majority control of Parliament, in turn appointing

Adolf Hitler as Chancellor of Germany. Hitler eventually was awarded unrestricted legislative

power, which he utilized to create a centralized totalitarian state. Once again, the German and

Axis powers were defeated; however, the wounds from the war would last decades as the

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German nation was thrust into economic collapse. There are many other significant historical

events surrounding this time period, including the creation of the Berlin Wall, Iron Curtain, etc.

One of the most prestigious facets of the German nation is without question, the

automobile industry. The German car industry has been synonymous with luxury, durability and

innovative engineering. Specifically, Germany hosts six fortune-500 auto-manufacturers. Thisacts as a great component to sustainable economic growth in the long run. Also, as previously

discussed, Germany hosts one of the lowest birth rates in the world. This may not seem like a

considerable factor in the short run; however, the IIASA has deemed the rapidly growing

population rate as one of the most urgent demographic challenges for sustainable development.

Therefore, Germans have a considerable leg-up in long term economic growth. In addition, an

economic headwind Germany possesses is the fact that the nation acts as a central European

transport hub. It houses the third largest worldwide motorway network. On top of this, running

across the nation is a very popular speed limit-less highway known as the autobahn.

Conversely, the nation faces an issue pertaining to its energy consumption. Germany ranks as

the 6th largest energy consumer in the world with over 60% of its primary energy, imported. On

top of this, Germany intends on shutting all of its nuclear power plants down by 2019, furtherincreasing its energy dependence. This serves as a significant tailwind for economic growth in

the future (History of Real Germany).

Page #2: Gross Domestic Product Components

In order to accurately assess the Gross Domestic Product, a brief introduction is

required. The Gross Domestic Product is defined as the market value of all final goods and

services produced in a country during a specified time period, specifically one year in the

following analysis. It is important to note that within the GDP, intermediate goods and services

are not included. For example, Germany will not include the sale of steel to Audi for production

in there automobiles. The car itself is the final good in this case, and encompasses anytransaction to that point. The GDP of Germany, like every other nation, is comprised of four

specific components: Personal Consumption Expenditures (C), Gross Private Domestic

Investment (I), Government Consumption (G), and Net Exports of Goods and Services (NX).

Consumption refers to spending by households on goods or services. Investment

pertains to spending by firms on new plants, inventory and spending by households on new

homes. Government Purchases apply to spending by federal, state and local governments on

goods and services. These purchases include primarily public spending, like police salaries, and

highway renovations. Lastly net exports are the imports subtracted from exports; yielding the

value flowing out of the nation (this could be positive or negative). Please see the five year

running GDP component dispersion.

Figure 1: Germanys GDP over five year period, Values are in millions of Euros

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As shown below, Consumption accounts for 56% of German GDP. Within the component

of Consumption includes durable goods, non-durable goods and services. Using the United

States as a reference point, Germany has a 14% lower consumption percentage. An interesting

component to observe below, is Germanys 8% Net Exports. Therefore, despite the heavy

reliance on imported energy, the value of Germanys exports exceeds its imports. Lastly there is

a 17% and 19% percentage towards Investment and Government Purchases, respectively.

Page #3: Economic Growth

While GDP is a useful tool in determining the standing of a given Economy, it is equally

as important to interpret the economic growth of a nation. Though growth rates may seem

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insignificant from year to year, in the long run, they can account for exponentially different

standards of living. Therefore, economists develop an economic growth model to explain GDP

over an extended period of time. It is important to note that the economic growth model

assesses this growth/decline on a per capita basis, meaning the real GDP divided by the

population. The table below shows the percent change in Real GDP over a 13 year basis.

Take note of the shading from roughly 2008 to 2010. This shading represents the period

of time the United States experienced the Great Recession. This period of time was a normalbut more sever part of the business cycle. Although Germany and the United States are an

ocean apart, their economies are not interdependent. This recession was seen in almost every

country as a result of this recession. In the case of Germany it experienced a peak roughly

around January 2008 (see figure#3) at 610 Billion Euros. At this point in time, Germany was

experiencing a growth rate of 1%. After the Recession hit, a trough was formed in real GDP

roughly around January 2009, at 565 Billion Euros. Germany attributes its recession primarily to

exports. Economy minister, Michael Glos, stated as the world's leading exporter, "[they] have

profited greatly from upswings in the world economy and obviously, when things go the other

way, [they] are an economy that is particularly affected" (EWeekly 1). During this recession,

Chancellor Angela Merkel outlined a stimulus package worth $65 billion. On top of this, theGerman recession action included reductions in health care contributions, bonuses for families

with children and infrastructure investment.

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Page #4: The Labor Market

To analyze the German labor market, one must first start by

calculating the working-age population. This population encompasses all

abled bodies for labor. This population does not only encompass

employed and unemployed though, there is an entire faction of people

that are not in the labor force. Those who arent in the labor force are

either unavailable for work (full-time students), or available but not

currently working. This category also breaks down into discouraged

workers, and those who are not looking due to outstanding

responsibilities (new mothers). Discouraged workers are those who are

available for work, but have refrained as a result of decreased

confidence in job allocation. More importantly, the labor force divided into

those who are employed, and unemployed. An integral way to calculate

the labor market and its effect on long term growth is the unemployment

rate, the percentage of unemployed workers within the labor force.

Another trend worth noting upon is the labor-force participation rate; thisis the percentage of labor force within the entire working-age population. Fitted with a firm

understanding of the Labor Market, one can now assess Germanys current Labor standing. In

May 2012, the national unemployment rate stood at 6.7%, to put this into perspective the US

has an unemployment rate around 7.6%. However, this encompasses employers who are

employed part time while they seek full time employment. Therefore Unemployment is slightly

overstated due to the intensity of employers being factored in. Analysis in part time employment

shows an adjusted rate of 5.7%

In the graph shown above, pay close attention the slight increase around July 2008. This is

certainly an effect of the recession Germany endured in 2008. Despite this slight increase, the

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trend began to decline at a similar linear rate before the depression. The countered effect of

unemployment was a result of the previously discussed stimulus package. This package also

aimed at protecting several sectors from a downturn and a subsequent rise in unemployment

rates. It is also interesting to note the volatile increase in the labor participation rate since the

1980s, please see the graph below. This could be increasing to a variety of reasons such as

increased female workers or outstanding circumstances.

An interesting component of German Unemployment is the division between East and

West Germany. This division is illusory but it tells a tale of two polar opposite economies.

Former USSR dominated East Germany comes in with a 12.7% unemployment rate, while West

Germany boasts a 6.2% rate. Since the 1990 reunification, West Germany has maintained a

significantly higher standard of living and higher income; however, the modernization and

integration of eastern Germany will continue for another six more years. This process maintains

that West Germany transfer roughly $80 billion dollars a year to the East. While having the best

intentions, a strong disparity still exists between these two geographic regions. The divide has

been shrinking on a relatively linear basis since its commencement.

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Page #5: The Inflation Rate

Inflation refers to the percentage increase in the price level from one year to the next.

Two commonly used measures are the Consumer Price Index (CPI) and the Producer Price

Index (PPI). The consumer price index measures changes in the price level of a market basket

consumer goods and services purchased by households. The percentage change in the

consumer price index is then representative of inflation. The equation below is used to calculate

inflation.

CPI is used in Germanys case to generate fair increases in wages for workers andgovernment benefits. Once again the CPI is purely from the consumers perspective. Therefore

it fails to account for citizen habits such as Substitution bias, Increase in Quality bias, Outlet

bias, new product bias. The Producer Price index on the other hand is from the producers

perspective. It specifically is defined as the average of prices received by producers of goods

and services at all stages of the production process.

For the first time in 22

years, German

consumer prices fell,

during the 2008-2009

recession. For a small

amount of time the

German Economy was

experiencing a

deflationary period.

Price drops during this

period were due

largely due to the price

of crude oil halving,from $147 a barrel to

$65. In addition, an

oversupply of goods

and services

contributed to this

period.

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Economists during this period expected a short lived deflationary

period, which is perceived as generally harmless. If short-lived, the

deflationary period could spur on more spending with decreased prices.

After experiencing a period of hyperinflation in the 1920s, Germans still

have bad taste in there mouth; therefore amidst the Euro Crisis, they

are taking considerable precaution before allowing increased inflation.The German government just recently came out in favor of accepting

higher inflation domestically as a sacrifice for price adjustments to help

alleviate this crisis. Some economists believe that this effort will only aid

to a certain extent. Much of the material regarding Germanys stance

within the Euro zone is over my head so I wont type up bologna, but

Germanys target inflationary rate has been slightly increasing.

Page #6: Monetary Policies

Unlike the United States, Germany does not have its own money, therefore they cannot

use their own monetary policy, they abide to the European Central Bank (ECB). When

assessing German monetary policy, it must be viewed from the hands and eyes of the ECB.

The Eurosystem has several mechanisms in which there monetary policy is

implemented. They have three monetary policy tools at their disposal which are open market

operations, standing facilities and minimum reserves. Open market operations primarily refers to

steering interest rates, managing the liquidity in the market and signaling the monetary policy

stance. The instruments available for Open Market operations are reverse transactions, outright

transactions, issuance of debt certificates, foreign exchange swaps and collection of fixed-term

deposits. Standing Facilities aims to provide and absorb overnight liquidity, signal the monetary

policy stance and bound overnight market interest rates. Two standing facilities are available toeligible counterparties, the Marginal lending facility, and the deposit facility. Counterparties can

use the marginal lending facility to obtain overnight liquidity against eligible assets. The interest

rate on marginal lending facility provides a ceiling for the overnight market interest rates. On

the other hand, Deposit Facilities allow Counterparties to make overnight deposits with the

NCBs. The interest rate on the deposit facility normally provides a floor for the overnight market

interest rates. Finally the minimum reserves tool is used to pursue the aims of stabilizing money

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market interest rates, creating a structural liquidity shortage and controlling monetary

expansion. (Guideline of the European Central Bank)

The European Central Bank comprises of two components, a quantitative definition of

price stability and a two-pillar approach to the analysis of the risks to price stability. The

overarching objective of the ECB monetary policy is to hit the target objectives defined by the

two components described earlier. Comparable to the Feds dual-mandate which targetsemployment and price stability, the

ECB has defined price stability as a

year-on-year increase in the

Harmonized index of Consumer Prices

below 2.0%. The governing Council

has clarified that, in the pursuit of price

stability to maintain inflation rates

close to 2.0%. The two-pillars

aforementioned refer to Economic

Analysis and Monetary Analysis.

These two pillars form the basis for theGoverning Councils overall

assessment of the risks to price

stability and its monetary policy

decisions. This is shown on the figure

to the right.

Throughout the course of the

last 5 years, the Eurozone (the 17 countries represented by the Euro) has been in a state of

crisis, consisting of sovereign debt crisis, a banking crisis, and a growth an competitiveness

crisis. With all of these pooled together, one can see the severity of the crisis with Greeces long

term interest rates reaching 29% in early 2012. Most of the European Central Banks Monetary

Policy Decisions have revolved around this crisis.

In the first stage of todays crisis, liquidity was at the epicentre. Money markets seized

up and several market participants found themselves unable to roll-over funding positions.

Concerns regarding bank solvency rapidly surfaced and the crisis then morphed into a banking

crisis. Finally, at the beginning of 2010 the latest turn, several euro area countries debt and

deficit levels were found to be unsustainable. It was a sovereign debt crisis. (European Central

Bank) In order to counter this, the ECB and all major central banks reduced policy rates to

unseen lows. In addition, to fulfill the ultimate objective of lasting price stability, the ECB has

implemented non-standard measures to restore monetary policy transmission. Liquidity support

gives banks unlimited access to central bank money at a fixed price against collateral. In

addition, the set of eligible assets that can be used as collateral has been expanded in an effortto facilitate banks liquefying attempts. Lending maturity terms were extended to help alleviate

bank struggles. The longest maturity of long term refinancing operations was raised from the

standard 3-months before the crisis to 6-months post Lehman crash, to one-year in 2009, and

finally to three years in 2011. The Outright Monetary Transactions was announced to be

implemented in order to eliminate the pricing of un-warranted tail risks in the bond markets.

OMTs entail interventions in government bonds with a remaining maturity of up to three years.

OMTs have a number of characteristics such as the fact that they require the government

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concerned to accept a program involving support by the European Stability Mechanism that

entails strong and effective conditionality. Also it is important to note that formation of the

European Stability Mechanism as a permanent firewall for the Eurozone to safeguard and

provide access to financial assistance programs for members of the Eurozone in financial

difficulty, with a maximum lending capacity of500 billion.

Page #7 Fiscal Policies

Unlike German monetary policy, which is controlled by the European Central Bank, the

nation has full control over their Fiscal Policy. One of the most important factors to German

fiscal policy is the residual effect on exports. Their policy is rooted with the overarching objective

to have steady growth, price stability, high employment and a foreign trade balance which is

based on the Stability and Growth Law of 1967. This law provides the cooperation of federal,

Land and local budget plans in order to give fiscal policy a stronger impact. The four

aforementioned goals are popularized as the Magic Rectangle.

As a whole, Germanys public debt makes up 81.9% of GDP (2012 est.) increasing from80.4% of GDP in 2011. In comparison to the rest of the world, they rank as the 28th highest level

of debt with respect to GDP.

In June of 2009, German parliament added a new fiscal rule for federal and state

governments. This new rule was conceived as a mechanism to impose fiscal discipline and

requires that the structural deficit must not exceed .35% of GDP. It becomes obligatory in 2016.

This rule provides a necessary strategy to reduce the accumulation of public debt. As a whole,

Germany has large automatic stabilizers which will become very important under this new rule.

Because there is no limit on the surplus that can be run, Germany can choose to maintain a

positive structural balance during good times. Specifically this rule is consistent with the

European Stability and Growth Pact which requires countries to maintain a fiscal position close

to structural balance.

In an additional effort to counter the Eurozone crisis, Germans passed a large stimulus

bill that focused on taxes, a child tax credit, and spending on transportation and education. This

bill is roughly 50 billion euros. This policy requires 36.8 billion borrowed euros; it is comprised of

1.6% of GDP. In an attempt to boost the automobile industry, when one trades in their old car,

they receive a 2,500 euro benefit towards their new car purchase. This boost intends to counter

the reduced exports to the United States from the 2009 recession. Regardless of efforts, the

German economy is still expected to contract by 2.5% this calendar year. (Understanding

German Fiscal Policy 1) Below.

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http://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/Eurozone


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Page #8 German Trade

The balance of trade refers to a topic mentioned earlier, net exports. If the value of

exports exceeds the value of its imports, it is then trading at a surplus, vice versa, a trade deficit.

As shown by the graph below, Germany has been trading at a surplus as early as the year

2000. Take note that the value of exports is never exceeded by the value of imports.

Currently Germany is the third largest exporter and importer in the world, accounting for

more than half of the European Unions international trade. The main focus of German exports

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revolves around industrially produced goods such as there unparalleled mechanical engineering

products, and vehicles. On top of this, every fifth job depends directly/indirectly on foreign trade.

Since joining the European Union, German exports have increased significantly, as

58.2% of their exports are delivered to members of the European Union. Both France and the

United States stand as Germanys closest trading partner with 9.5% and 7.9% export allocation,

respectively. Germany depends heavily on the Netherlands as their greatest source of Imports,

with China and France chasing nearby. As a whole the total value of their Exports is equal to

1.492 trillion (2012). Whereas the total value of Imports is equal to 1.276 trillion. A list of primary

export commodities are motor vehicles, machinery, chemicals, computer and electronic

products, electrical equipment and pharmaceuticals. On the other hand, there primary import

commodities are machinery, data processing equipment, oil/gas and metals. These imports are

sourced from the European Union (54.8%) and China (8.9%). (Economy Watch Follow the

Money 1)

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Works Cited

"ECB: European Central Bank Home Page." ECB: European Central Bank Home Page. N.p.,

n.d. Web. 23 July 2013.

"Economy Watch - Follow The Money." Germany Exports, Imports & Trade. N.p., n.d. Web. 23

July 2013.

"Encouraging Noises on Economic Policy from the German SPD and Greens." Social Europe

Journal. N.p., n.d. Web. 23 July 2013.

"Germany: Beyond the Demographic Transition's End." - Population

Reference Bureau. N.p., n.d. Web. 19 July 2013. .

"German Fiscal Policy and the German Economic Recovery." Marginal Revolution RSS. N.p.,

n.d. Web. 23 July 2013.

"German HISTORY - History of Germany." German HISTORY - History of Germany. N.p., Feb.

2012. Web. 23 July 2013.

"The German Labour Market." - Papers. N.p., n.d. Web. 23 July 2013.

Guideline of the European Central Bank. ECB. .

"Navigation Und Service." Pressemitteilungen. N.p., n.d. Web. 19 July 2013.

.

"Understanding German Fiscal Policy." Marginal Revolution RSS. N.p., n.d. Web. 23 July 2013.

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International Study - Germany

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