South-Western EconNews

South-Western College Publishing - Economics

German Economy on Brink of Recession

Subject

German Economy

Topic

Recession

Key Words

Economic Growth, Unemployment, and Recession

News Story

Six cooperating economic institutions have cut their forecasts for German economic growth in half. Their report on the German economy revised the economic growth rate downward from 1.5 percent to only .7 percent for the coming year.

In their semi-annual report, the six institutes stated, “Almost no other country in the European Union has had a development in recent years that was so unfavorable. Obviously, the German economy is suffering from fundamental weakness.”

Based on recent experience and this new forecast, economists are suggesting that Europe’s largest economy could fall into a recession, defined as two consecutive quarters of decline in economic output. “Trend growth in Germany is now so low that you can easily meet the technical definition of recession,” said Thomas Mayer, Chief European economist at Deutsche Bank in London.

The impact of a recession will affect much more than just the domestic economy. The German economy drives much of the continent’s economic activity, so the recessionary disease is likely to spread throughout Europe.

Job growth contributes to economic growth, and presently Germany has not been able to produce new jobs. Lack of job growth quickly becomes a political issue that could affect Chancellor Gerhard Schroder’s political future. Germany’s current 12 percent unemployment rate is a post-World War II record. “We had hoped that domestic growth would pick up, but there is no sign of that happening,” said Bert Rurup, head of Mr. Schroder’s council of economic advisers.

Mr. Rurup said Germany needs to grow the economy by 1.5 to 2.0 percent a year in order to significantly create new jobs. In the face of slow economic growth, the German government has begun to overhaul the labor market through a package of measures known as the Hartz reforms. These reforms provide job training, promote new business start-ups, and create so-called “mini-jobs”, actual government jobs that provide minimum compensation to the unemployed.

Critics of the reforms call them only half steps—the Hartz programs will be helpful, but will not attack the job-protection rules that make it hard to lay off workers. These job-protection rules create inflexibility in the German economy—an issue that Mr. Rurup and others cite as the reason that Germany cannot create jobs with the slower economic growth rate it faces.

“They need to face down the unions,” said the Deutsche Bank’s Mr. Mayer, “But they won’t--neither the government nor the opposition.” The mounting evidence suggests that the German economy is on the brink of recession.

Questions

1.	State the technical definition of recession.
2.	Discuss how vocational training provided by government can increase employment.
3.	Discuss how work-protection rules add inflexibility in the labor market and how such rules could cause or contribute to recession.

Source

Mark Lander, “Fears Mount That Germany Faces Recession”, The New York Times Online, April 27, 2005.