Economy

Germany is one of the world's most highly developed market economies. It is the world's third largest economy in USD exchange-rate terms, the fifth largest by purchasing power parity (PPP), and the largest economy in Europe.

Recent performance has not been dynamic, however, and the German economy is marked by vulnerability to external shocks, domestic structural problems, and continued difficulties in fuelling formerly communist East Germany.

The German economy is heavily export-oriented, with exports accounting for more than one-third of national output. As a result, exports traditionally have been a key element in German macroeconomic expansion. Germany is a strong advocate of closer European economic integration, and its economic and commercial policies are increasingly determined by agreements among European Union (EU) members. Germany uses the common European currency, the Euro, and its Monetary policy of central banks monetary policy is set by the European Central Bank in Frankfurt, Germany.

Despite this external vulnerability, most foreign and German experts consider domestic structural problems to be mainly responsible for recent sluggish performance. They note that an inflexible labour market is a main cause of persistently high unemployment. The same is true for high non-wage labour costs and heavy bureaucratic regulations burden many businesses and the process of starting new businesses.

Nevertheless, the export oriented economy is doing well exports doubled between 1995 and 2001. The main problem is a weak home market, in part due to a low consumer confidence. Therefore, some experts believe that Germany's current trouble doesn't result from domestic structural problems, but from stagnating wages over more than a decade. Germany finances its reunification to a large extent by social insurance contributions, forcing up non-wage labour costs. To conserve the competitiveness of German workers, unions have abandoned high wage demands since the mid-1990s. According to the Federal Statistical Office Germany, the average net income after deduction of consumer price rises declined by 2% between 1991 and 2005.

Primary Sectors

Agriculture

In 2006 agriculture, forestry, and mining accounted for only 0.9% of Germany's gross domestic product (GDP) and employed only 2.8% of the population, down from 4% in 1991. Much of the reduction in employment occurred in the eastern states, where the number of agricultural workers declined by as much as 75% following reunification. However, agriculture is extremely productive, and Germany is able to cover 90% of its nutritional needs with domestic production. In fact, Germany is the third largest agricultural producer in the European Union (EU) after France and Italy. Germany's principal agricultural products are potatoes, wheat, barley, sugar beets, fruit and cabbages. Despite Germany's high level of industrialization, roughly one-third of its territory is covered by forest. The forestry industry provides for about two-thirds of domestic consumption of wood and wood products, so Germany is a net importer of these items.

Industry

Industry and construction accounted for 29.1% of gross domestic product (GDP) in 2006, a comparatively large share even without taking into account related services. The sector employed 33.4% of the workforce. Germany excels in the production of automobiles, machine tools and chemicals. With the manufacture of 5.5 million vehicles in 2003, Germany was the world's third largest producer of automobiles after the United States and Japan, although the People's Republic of China was threatening to displace Germany in the world rankings as early as 2005. In 2004 Germany enjoyed the largest world market share in machine tools (19.3%). German-based multinationals such as Daimler-Chrysler, BMW, Bosch, BASF, Bayer, and Siemens are brand names throughout the world.

Mining and Minerals

Coal is Germany's most important energy resource, although government policy is to reduce subsidies for coal extraction. Coal production has declined since 1989 as a result of environmental policy and the closing of inefficient mines in the former East Germany. The two main grades of coal in Germany are "hard coal" and lignite, which is also called "brown coal." Despite its considerable reserves, environmental restrictions have led Germany to become a net importer of coal. Also as of January 2005, proven natural gas reserves were 279.1 billion cu m, the third largest in the EU. Nearly 90% of Germany's natural gas production takes place in the state of Lower Saxony. In 2004, Germany imported 90.11 billion cu m of natural gas, or 88% of its requirements. The most important source of natural gas imports is Russia, with a 40.8% share, followed by Norway at 31.5%, and the Netherlands at 22.3%.

Energy

In 2002, Germany was the world's fifth largest consumer of energy, and two-thirds of its primary energy was imported. In the same year, Germany was Europe's largest consumer of electricity; electricity consumption that year totalled 512.9 billion kilowatt-hours.

Government policy emphasises conservation and the development of renewable energy sources, such as solar, wind, biomass, hydro, and geothermal. As a result of energy-saving measures, energy efficiency (the amount of energy required to produce a unit of gross domestic product) has been improving since the beginning of the 1970s. The government has set the goal of meeting half the country's energy demands from renewable sources by 2050. In 2000 the government and the German nuclear power industry agreed to phase out all nuclear power plants by 2021. However, renewables currently play a more modest role in energy consumption. In 2002, energy consumption was met by the following sources: oil (40%), coal (23%), natural gas (22%), nuclear (11%), hydro (2%), and other renewables (2%).

Services

In 2006, services constituted 70% of gross domestic product (GDP), and the sector employed 63.8% of the workforce. The subcomponents of services are financial, renting, and business activities (30.5%); trade, hotels and restaurants, and transport (18%); and other service activities (21.7%).

Domestic and international tourism generates about 8% of gross domestic product (GDP) and 2.8 million jobs. Following commerce, tourism is the second largest component of the services sector. In 2004, Germany registered 45 million overnight stays by international tourists, 9% higher than in the previous year and an all-time record. Two-thirds of all major trade fairs are held in Germany, and each year they attract 9 to 10 million business travellers, about 20% of whom are foreigners. The four most important trade fairs take place in Hanover, Frankfurt, Cologne and Düsseldorf. Germany's hosting of the FIFA World Cup in 2006 presented an opportunity for the tourism sector.

Financial Services

By tradition, Germany's financial system is bank-oriented rather than stock market-oriented. The process of disintermediation, whereby businesses and individuals arrange financing by directly accessing the financial markets versus seeking loans from banks acting as intermediaries, has not fully taken hold in Germany. One of the reasons that banks are so important in German finance is that they have never been subject to a legal separation of commercial and investment banking. Instead, under a system known as universal banking, banks have offered a wide range of services from lending to securities trading to insurance. Another reason for the strong influence of banks is that there is no prohibition of interlocking ownership between banks and their client companies. However, in January 2002 the government moved to discourage this practice and promote more rational capital allocation by eliminating the capital gains tax on the sale of corporate holdings from one company to another.

At the end of 2000, 2,713 out of 2,931 German financial institutions (92.6%) were universal banks, including 354 commercial banks, 1,798 credit cooperatives and 561 savings banks. The non-universal banks specialised in such activities as mortgage banking and investments. The list of the six largest German banks illustrates the diversity of bank structure and ownership. Of the top six banks, ranked by total assets as of year-end 2002, four are private, but the fifth largest is public, and the sixth largest is a cooperative.

Despite the central role of banks in finance, stock markets are competing for influence. The Deutsche Börse (German stock exchange), a private corporation, is responsible for managing Germany's eight stock markets, by far the largest of which is the Frankfurt Stock Exchange, which handles 90% of all securities trading in Germany. The leading stock index on the Frankfurt exchange is the DAX, which, like the New York Stock Exchange's Dow Jones Industrial Average, is composed of 30 blue-chip companies. The other German stock exchanges are located in Berlin, Bremen, Düsseldorf, Hamburg, Hanover, Munich, and Stuttgart. Xetra is Germany's electronic trading platform. As of the end of 2004, the total market capitalization of the German stock markets was nearly US$1.1 trillion, representing about 45% of gross domestic product (GDP). The shares of some 684 companies trade on the exchanges.

Trade

In 2003, Germany conducted slightly more than half of its trade within the then 15-member EU, followed by, in order of volume, developing countries, Eastern Europe (including countries like Poland that subsequently joined the EU), the United States and Canada, non-EU Europe (Switzerland, Norway, Liechtenstein, and Iceland), and Japan. Increasing emphasis is being placed on trade with Russia and the People's Republic of China. The 2005 Hanover trade fair devoted much of its attention to Germany's growing economic and trade ties to Russia, particularly in the area of energy. Germany is Russia's top trade partner. In 2002, the People's Republic of China overtook Japan as Germany's top trade partner in Asia, and Germany is investing heavily in that rapidly rising economic power.

German trade is consistent with the policy of the European Union (EU) to expand trade among the 25 member states and also with the goal of global trade liberalization through the latest Doha Round of the World Trade Organization (WTO).

In 2006, Germany's main import partners were Netherlands (11.7%), (France 8.7%), Belgium (7.6%), UK (5.9%), China (5.9%), Italy (5.5%), US (5.1%), Austria (4.3%) and Russia (4%). Its main imports were:

• Machinery
• Vehicles
• Chemicals
• Foodstuffs
• Textiles
• Metals

In 2006, Germany's main export partners were France (9.7%), US (8.6%), UK (7.3%), Italy (6.7%), Netherlands (6.2%), Belgium (5.5%), Austria (5.5%) and Spain (4.7%). Its main imports were:

• Machinery
• Vehicles
• Chemicals
• Metals and Manufactures
• Foodstuffs
• Textiles

Balance of Payments

In 2003 the current account balance was a positive US$54.9 billion, or 2.2% of gross domestic product. In 2003 Germany posted a merchandise trade surplus of US$147 billion. In 2002, total public debt was about US$1.5 trillion, or 60.8% of gross domestic product. This rose to ^^.8% of GDP in 2006.

Currency

Germany's currency is the Euro. Because Germany has adopted the Euro, the Bundesbank, which had been responsible for conducting monetary policy and maintaining a stable German mark, has ceded much of its previous influence to the European Central Bank.

Foreign Investment

In 2003 net foreign direct investment was inbound US$11 billion. Germany follows a liberal policy toward foreign investment. During the period 1998-99, France was the largest source of direct investment, followed by the United Kingdom and the United States (18%). From 1995 to 1999, annual average flows of U.S. direct investment in Germany were $3.4 billion, while those of German investors in the United States reached $21 billion. In terms of cumulative position (historical cost basis), German investment in the United States was valued at $111 billion in 1999, having more than doubled since 1995, while U.S. investment in Germany was worth just under $50 billion, having grown 12% since 1995.

Labour Force

The distribution of Germany's workforce by sector is very similar to the relative output of each sector. In 2006, the workforce was distributed as follows: agriculture, 2.8%; industry, 33.4%; and services, 63.8%. Participants in the workforce totalled 43.66 million. In March 2006, Germany's seasonally adjusted national unemployment rate decreased to 10.8% from 2005's post-war high of 12% (5.2 million people).

Germany's national unemployment rate is only partially comparable to unemployment rates in the United Kingdom or United States, because it includes a significant share of part-timers, who work less than 15 hours a week. Everyone working less than 15 hours a week, who is seeking and available for a job with full social security insurance (normally full-time job or part-time above 15 hours a week), can be registered as unemployed. Around one quarter of Germany's national unemployment are underemployed part-timers.

Additionally the percentage of so called "long-term sick" in Germany is significantly lower than in the United Kingdom, Sweden or the United States, countries with very low official unemployment rates. Financial support for sickness in these countries normally lasts longer, is easier to reach or is higher than aid for unemployment. Most of these people in Germany are registered as unemployed.