Germany: You Are the Weakest Link!
Subject Economic Growth
Topic International Finance, Productivity, and Growth
Key Words Economic Growth, Unemployment, Collective Bargaining
News Story

Europeans are concerned that they will not be able to escape the worst effects of the U.S. slowdown, and Germany is one of the major reasons for that concern. Germany has Europe's largest economy and accounts for about a third of the gross output of the 12-nation euro-zone. While growth in France is about 3 percent, and Spain, Portugal, the Netherlands and Finland have even higher growth rates, German economic growth is forecast to be only 2 percent this year. Germany has lagged behind the rest of Europe for several years.

Economists believe that Germany's growth has been hampered by its inability to create jobs, which is, in part, the result of over-regulated labor markets. German laws provide workers extensive protection against layoffs. Collective bargaining usually takes place at the industry level, giving an individual firm little freedom to negotiate terms tailored to its needs. New legislation has given workers some input on many management issues, adding additional frustration. The result of these regulations is that German job growth is less than half of the European job creation rate, and substantially less than that of the U.S.

While other European countries have highly regulated labor markets, they have adapted to the changing economy by introducing additional flexibility. Germany has not. As a result, unemployment has fallen by a third in France, from 12 percent to 8.8 percent, and in the Netherlands unemployment is 2.4 percent. German unemployment, on the other hand has remained very high: up to 17 percent in some parts of the country. Germany's problem is a mismatch of skills and employment needs. A large part of the German unemployed population consists of long-term unemployed, workers who do not have the skills that German firms are seeking.

Real wages for German workers have been stagnant for the past five years. Gasoline price increases and taxes have reduced disposable income. As a result of slow income growth, German consumers are cautious about their spending, placing another restraint on economic growth.

(Updated June 1, 2001)

1. Describe some of the reasons listed in the article to explain why German economic growth has lagged the rest of Europe.
2. Long-term unemployment appears to be a significant problem in Germany. What measures can the German government take to remedy this situation?
3. What affect does a slowdown in the U.S. economy have on Germany's economy?
4. What affect does reluctance on the part of German consumers to spend their money have on the German economy? On the other euro nations?
Source Edmund L. Andrews, "Germany Looks Like Europe's Weakest Link," The New York Times, April 28, 2001.

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