Germany’s economy

Germany, the third-largest exporter and importer of goods, is a federal parliamentary republic located in central-western Europe. With a population count totaling 82 million inhabitants, Germany is the most inhabited member country of the European Union. In today’s economy, Germany stands to be a great power with a strong and sustainable economy. By nominal GDP, Germany possesses the world’s fourth largest economy –a global superpower in numerous technological and industrial sectors. It goes without saying that the country is very developed ensuring a high standard of living for its inhabitants through a universal health care system, tuition-free education, social security, and environmental protection. The federal republic of Germany was a founding member of both the European Union, and European Economic Community. When it comes to international relations, Germany has been a significant contributor to the economic progress of the world. It is an active member of NATO, the United Nations, and other international institutions. The German labor force is undeniably highly skilled maximizing the GDP of the social market economy. It is known for its high level of innovative production, considerably low levels of corruption, and significantly large capital stock. Internationally, Germany is well regarded as the home to modern and luxury cars, as the automotive industry is intensely competitive.
 
The top five exports of Germany are vehicles, pharmaceuticals, chemical and electrical goods, and machinery, and aircraft. The most well-known international German brands include Mercedes-Benz, Adidas, BMW, and Audi. Germany is one of the most important trade partners for the Central and Eastern European Countries (CEECs) Its geographical location makes intensive trade with Poland relatively easy. Although the German trade structure was affected by reunification, trade within industries –specifically the Czech Republic, Hungary, and Slovakia –accounts for more than 60 percent of Germany’s total trade. The reunification of east and west Germany proved to be both socially and economically benefiting for East German families. Along with significant increases in the standard of living, families have also experienced rising family incomes, and greater choices in consumer goods. The unified system offers stability and inclusivity under West German institutions. The Deutschmark emerged as the major currency for the Federal republic of Germany after the reunification –ultimately becoming obsolete in 2002 and replaced by the Euro. In relation to the American currency, one Euro equals 1.23 US dollars. Today, Germany has coined the title of an ‘economic superstar’ experiencing exceptional economic growth since the late 1990s where they were once referred to as ‘the sick man of Europe’. Although “Hartz reforms”, a series of legislative labor market reforms, receives credit shifting the German economy further study reveals that these were implemented nearly a decade after progress had begun. The work of employer associations, work councils, and trade unions laying out contracts and mutual agreements boosted the economy.

German imports account for over seven percent of total global imports, importing a sum of over two trillion euros worth of goods from around the world. As mentioned earlier, over 60 percent of German imports are from intra-industry trade, along with over 20 percent trade supplied from Asian trade partners, 7 percent from North America, and smaller percentages from Africa, and Latin America. The top five imports for Germany are machinery, vehicles, mineral fuels, pharmaceuticals, and plastic articles. The relative distance to the German market has shown to be a significant determinant to product diversity of trade relationship. Imports from smaller countries are typically for one single commodity, while those imported from larger nations consist of various products. “Unconditional survival probabilities are higher for import trade relationships with countries that have a high per capita income, are geographically close to Germany, and share similar institutions (such as language or membership in the European Union).

Exchange rate movements, in contrast, have no measurable linear effect on exit rates; exit rates appear to be low for particularly stable exchange rates.” (Nitsch, 2009) Importers reliably improve productivity of the German economy as a source of foreign input and technology which can be used for innovation of capital and intermediate goods. Germany typically imports from a smaller number of foreign markets as firms that import from a larger number must in turn be more productive. International trade is highly revered for its firms, industries, and regions –many firms export and import at the same time, trading both small and large numbers of different goods. The amount of average exported and imported goods is significantly larger in West Germany than calculated in East Germany.

Germany typically exports and imports nearly the same goods; Its top five exports –vehicles, pharmaceuticals, chemical and electrical goods, and machinery, and aircraft –are very closely related to its top five imports –machinery, vehicles, mineral fuels, pharmaceuticals, and plastic articles. The countries in which Germany conducts trade with are also very similar as its top exporters are other European countries, Asian importers, North America, and smaller percentages to Latin America and African countries. Although most of Germany’s trade is done intra-industry, it imports several goods from these same regions and countries. “In West Germany, some 1,200 firms that are in the highest per centile (and that cover one percent of the 11, 929 exporting firms) export more than 300 goods or import more than 200 goods. In East Germany, some 200 firms export or import more than 130 goods. Note that both the number of exported goods and the number of imported goods is on average considerably larger in West Germany than in East Germany.” (Wagner, 2012) While countless firms trade relatively small amounts of goods from a limited number of countries, those that trade more expansively with larger amounts of goods are responsible for many German imports and exports. The difference of firms that choose to trade with large numbers of countries and goods, and those that choose to only trade with a limited few is productivity levels. Large variations of trade and goods increases the efficiency of capita, energy, labor, and assets. This causes a chain reaction of increased international competitiveness, and growth of economic welfare.

As of 2016, Germany’s balance of trade averaged to an all-time high of 25455.63 EUR million –accompanied with a trade surplus of 17.4 billion EUR. “Germany runs regular trade surpluses since 1952, primarily due to strong exports of vehicles and other machinery. In 2017, the largest trade surpluses were recorded with the US, the UK, France, Austria, Spain, Sweden and the UAE; while the biggest trade deficits were recorded with China, Vietnam, Norway, Russia, the Netherlands, Ireland and Czech Republic.” (Germany Balance of Trade, 2018). The country’s current account surplus totals to 21950 EUR million as of 2018. Germany’s devotedness to a politically divided and economically weak structure has resulted in lower wages and increasing trade balances. Although national currencies no longer existed within the EMU, Germany’s exchange rate consistently depreciated over time causing a major impact on trade flows. Germany has operated on a policy of borrowing from its neighboring regions –only after exploiting its own people resulting in relatively frozen wages.

Although logically it is impossible to obtain a national competitive advantage, especially through cutting and restraining wages, this is the path that the EMU has chosen to take to quickly bring themselves from its recession. While temporarily successful regarding GDP, it has resulted in an unpretendingly high balance of trade and account balance. To maximize the value of its exchange rate, Germany would need to rapidly increase wages and take an upward adjustment. The current balance of trade and account balance are due to the ECUs false understanding of the concept of free trade. “Although slightly lower, the current account balance is set to remain broadly in surplus thanks to a massive trade surplus. The balance of services traditionally posts a deficit, especially due to tourism. The income balance is expected to remain in surplus with income from investments abroad, which are increasing due to recurring current surpluses, exceeding remittances sent overseas by emigrants and investors.” (Coface, 2018) This behavior of increasing exports and reasoning behind free trade will ultimately tarnish the economic future of Germany.

The development of aggregate demand in relation to other international trading partners has significantly increased Germany’s international competitiveness. “In late 2017, the amount of open positions stood at 1.1 million: an all-time high. Labor demand is especially high in the trade, education, and health sectors, accompanied by high levels of demand in manufacturing industries and for part-time workers. Therefore, by the end of 2018, the threshold of 45 million people in employment could be reached for the first time ever, with the unemployment rate set to continue its downward trend towards 5%. In addition to this, export growth picked up in 2017 and will likely remain dynamic in 2018 as well, due to the broad-based upswing in the world economy.” (Coface, 2018) Although the unification considerably boosted the economy, pressures to adjust to the European economy intruded on the domestic economy. By adjusting to this European standard, Germany implemented a much weaker currency than the country’s original currency of the Deutschmark as Germany is a part of a selected few countries running a balance of payments surplus. As a result, German exports are relatively cheaper than to international consumers. A strength of the German economy is its insistence of companies to not spend beyond their means, this allowed the interest rates of the country to remain stable. The German philosophy of looking down on borrowing from other has positively affected the economy. Strong employment protection and other workforce reforms, have proved to provide a much more stable and flexible labor force. “Reform in federal fiscal relations, healthcare and the pension systems, as well as the education system, including at tertiary level, are all important areas where public sector action could generate large benefits.” (OECD, 2006) Major strengths of the German economy include its solid industrial base, low unemployment rates, diversity of exports, and integration of European production processes.

Economic problems in emerging and partner economies, coupled with rising energy prices significantly threaten the growth of the German economy. Uncertain situations in emerging economies are significantly weakening Germany’s ability to be a strong exporter. Major weaknesses of the German economy include: Ageing infrastructure, demographic decline, shortage of venture capital, and high dependence on European markets. The shortage of engineers and low start-up activity are also significant weaknesses of the German economy which will soon weaken the economy if not addressed. Although dynamic growth will continue will into 2018, public and external accounts in surplus and political uncertainty are both significant aspects of the country which much be resolved sooner than later to maximize the potential of the economy. Germany’s reliance on exports is also a considerable weak point of the future of the economy as uncertainty could surely shift its economic dynamics. The German economic model relies heavily on the recent investment boom of other nations around the world, but those booms are rapidly ending, especially in countries like China and Russia. Germany is undeniably highly sensitive to international demand; any small changes significantly impact the economy. As the baby boomers continue to age, the number of people retiring will also increase hindering the country’s growth rate.

In relation to economic principles discussed in class, the German Economy is heavily founded on both the law of demand, and principles of the market demand curve. The country’s integration of both serve to be a strength and weakness for the economy as it is heavily dependent on the demand of international trade partners. The law of demand states that as the price of goods increase, the quantity demanded will also increase. This has been a positive influence on the German economy as its exportation of rather expensive goods has significantly increased the per capita production. The downside of its reliance on highly valuable exports, is that according to the law of demand the revenue from exporting will surely decrease when the demand for German exports decreases. The German economy also works on a market demand curve, which can be calculated by totaling the quantities each consumer buys at each price. Germany’s production of luxury cars, and other expensive commodities has allowed it to operate with a high market demand curve as consumers are clearly willing to spend large amounts of capital on purchasing German goods. The country has achieved some sort of market equilibrium, especially in supply and demand of luxury cars, as consumers of those goods reliably demand as much as the country produces.

Conclusively, the German economy has seen exceptional growth since its reunification, but will need to critically assess its current wages and dependence on exports to continue to progress. Although it has the largest national economy in Europe, it will need to critically assess its conformity to European trade standards to prevent an inevitable economic crash. Germany’s exceptionally high trade surplus has made it the largest capital exporter of the international trade economy. Although its exports and imports are relatively similar, its reliance on revenue from high exportation can prove to be problematic later. Germany participates in high amounts of intra-industrial trade, making it highly dependent on the European economy. Free trade is a significant booster for the German economy, as its creation has intensified the country’s economic development, opening new markets for local products and stimulating investments.

Source: Essay UK - http://turkiyegoz.com/essays/economics/germanys-economy/


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