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Germany's Troubles Bubble Up
Subject Economic growth
Topic International Finance
Key Words Currency Union, Exchange Rates, Economic Growth
News Story

Economic data point to a myriad of problems in the German economy. Economic growth is 0.3 percent and is considerably lower than growth rates in other European Union (EU) countries. Unemployment is about 10 percent, or 4.2 million people, and has increased over the last two years. Germany's budget deficit is 3.7 percent, an amount that exceeds the European Union rules. There is widespread pessimism about the economy and this has resulted in a decrease in retail sales and an increase in bankruptcies. Many analysts believe that reforms are badly needed in order to get Europe's largest economy moving.

When the European Union was formed, Germany was its economic leader and it was thought that German business acumen, technology, business/government relations and leadership would lead the EU to challenge the U.S. in world markets. Now Germany is floundering with no reversal of its economic fortune in sight, and many worry that Germany's problems will cause the rest of the EU to suffer.

Given Germany's situation, one would expect German politicians to be offering a number of remedial proposals. This has not happened. The average German worker is to a large extent insulated from economic downturns by the country's social safety net. Germans have government-provided health care, nursing care, welfare and education. Although many realize that reforms are needed, they are wary of proposals that might reduce their benefits or pensions.

Reformers argue that jobless benefits are too high. Unemployment insurance is about 60 percent of net pay for the first six months, but continues at reduced levels for long periods after. Many workers find jobs "off the books" so that they continue to receive jobless benefits even while working. Another area targeted for reform are government regulations concerning the hiring and firing of workers. Reformers argue that the laws are too restrictive, making business formation difficult and firms reluctant to hire new workers. Retirement benefits are the third area marked for reform. German law calls for mandatory retirement at age 65 and allows retirement at full benefits many years earlier. The average German now retires before age 60.


(Updated April 3, 2003)

Questions
1.

The article discusses the many economic problems that Germany is facing. Given that Germany is a member of the European Union, what impact does a troubled German economy have on the other EU members?

2. What impact would you expect a troubled German economy to have on the value of the euro? The exchange rate between the euro and the dollar?
3. German laws and regulations make it difficult and expensive to decrease the size of a firm's workforce. How would this affect the willingness of a German firm to hire new workers? If German firms have a choice of building new productive capacity in German or another country, how would these laws and regulations impact that decision?
Source Steven Komarow, "German coziness puts nation at risk," USA Today, February 10, 2003.

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