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1994-05-02
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<text>
<title>
Germany: Economic Policy
</title>
<article>
<hdr>
Economic Policy and Trade Practices: Germany
</hdr>
<body>
<p>1. General Policy Framework
</p>
<p> Germany's economy and economic policy are dominated by the
demands of reunification of the eastern and western parts of the
country. Reunification, accompanied by massive transfers from
west to east, unleashed tremendous demand from eastern Germany.
This demand was a primary force behind surging growth (4.5
percent in 1990) in western Germany in 1990 and early 1991, high
government budget deficits, and rapid elimination of Germany's
current account surpluses. Real German interest rates have risen
sharply over the past two years, largely in response to
unification strains, and the German Central Bank has adopted a
vigilant anti-inflationary stance to combat price pressures
emanating from unification.
</p>
<p> Unification, which contributed to strong growth in employment
and output in the western part of the country, led to sharp
declines in employment and output in eastern Germany as it
changed overnight from a command to a market-based economy. Much
of eastern industry, handicapped by antiquated technology, poor
organization, and inadequate infrastructure, was no longer
viable. The first step in the transition to a market economy has
been a jump from virtually no unemployment to an unemployment
rate of more than ten percent. Including short time workers, who
retain their jobs but work fewer hours and receive compensatory
payments of up to 90 percent of full-time pay, the un- and
under-employment rate in eastern Germany is well over 20
percent. It is difficult to accurately measure eastern German
GNP, but industrial production is currently only 60 to 65
percent of the third quarter 1990 level. The eastern German
economy is widely expected to pick up over the next year, with
a growth rate of about ten percent predicted. The massive job
of restructuring will take time to accomplish, however, and
eastern Germany will likely continue to rely on large transfers
from western Germany for many years to come.
</p>
<p> The west German current account was in surplus by roughly DM
100 billion in 1989 and DM 75 billion in 1990, but is expected
to register a deficit of close to DM 30 billion in 1991. The
major factor behind this decline was a sharp increase in imports
as west German demand surged and east Germans rushed to buy
newly available goods from western countries (east German
imports coming through west Germany are counted as west German
imports in balance of payments statistics). West German exports
were flat in 1990, contributing to the current account deficit.
Slow growth in industrial countries and diversion of resources
to eastern Germany both contributed to the export slowdown.
Payments to the United States for the Gulf War also added to the
current account deficit in 1991. Higher growth rates in
Germany's western trading partners in 1992 should help raise
German export levels in 1992, and the current account is
expected to be in near balance as well. Fiscal policy was highly
stimulative in 1990 and early 1991 as transfers to eastern
Germany were financed largely by government borrowing. The
combined public sector deficit (not including the social
security surplus) was 3.5 percent of GNP in 1990 and is
expected to be 4.6 percent of GNP in 1991, up from 1.2 percent
in 1989. Since the early part of 1991, fiscal policy has become
less stimulative as a result of tax increases, but substantial
deficits are expected for the next few years.
</p>
<p> The Bundesbank has maintained a tight monetary policy largely
in response to inflationary pressures arising from unification.
The Lombard rate is currently 9.25 percent and the discount rate
is 7.5 percent. The Bundesbank is particularly concerned about
the potential inflationary effects of strong wage increases in
upcoming wage settlements.
</p>
<p> In recent years a number of changes have been implemented in
money and capital markets in an attempt to enhance the
attractiveness of Germany as an international financial center.
Liberalization, including the elimination of the stock exchange
turnover tax at the beginning of 1991, has contributed to the
development of a German commercial paper market. However,
Germany has yet to develop capital markets commensurate with
its economic size and importance.
</p>
<p>2. Exchange Rate Policies
</p>
<p> The Deutsche mark is a freely convertible currency, and the
government does not maintain exchange controls. Germany
participates in the exchange rate mechanism of the European
Monetary System.
</p>
<p>3. Structural Policies
</p>
<p> The ramifications of German unity dominate the country's
structural policies. Only recently have there been signs of a
turnaround in the economy of the former German Democratic
Republic (GDR). Attention is focused on the privatization of
formerly state-owned firms. As of August 1991, 3,378 (of
approximately 10,000) firms had been privatized. However, a
number of obstacles remain in the way of privatization.
Investors must be careful to check into possible liabilities
associated with firms they are interested in purchasing,
including old debts, warranty obligations, and liability for
environmental damage.
</p>
<p> A major barrier to investment lies in the difficulty in
determining the fair value of formerly state-owned enterprises,
which had never been required to calculate balance sheets. Their
value is set by comparing them to similar western German assets,
a system acknowledged to be imperfect at best. Another problem
is the general requirement that those purchasing an enterprise
promise to preserve a certain number of the enterprise's jobs.
This number is determined in negotiations with the privatizing
agency (Treuhandanstalt).
</p>
<p> One problem largely resolved is that of claims by those
whose property was expropriated by the Communist regime. The
German property law now shields purchasers from the claims of
previous owners (under certain circumstances). Even so, caution
is urged in cases in which claims are pending.
</p>
<p> The German Government is encouraging investment in eastern
Germany in a number of ways, including investment and
accelerated depreciation allowances, tax reductions, regional
investment incentives and numerous loan programs. Other
assistance is available through European Community programs. In
addition, the Treuhandanstalt has generally been willing to
absorb a substantial share of the environmental clean-up costs
of a site. The exact share is determined on a case-by-case
basis. These benefits are available to both German and foreign
firms.
</p>
<p> To further encourage investment, the Government is investing
heavily to improve the infrastructure in eastern Germany,
especially transportation and communication services. As a
result, the construction sector was one of the first to show
signs of recovery.
</p>
<p> Total investment in eastern Germany in 1991 is expected to
be about DM 70 billion. While this is nearly 40 percent of GNP,
much more investment will be needed to complete industrial
restructuring--some estimate as much as DM 2-3 trillion.
Significantly, a number of major investors, e.g., Daimler and
Volkswagen, have opted for "greenfield" plants, which means that
much of the investment in the former G.D.R. will be
state-of-the-art and contribute to higher growth rates in the
future.
</p>
<p>4. Debt Management Policies
</p>
<p> From 1970 to 1990 Germany has enjoyed current account
surpluses in all but three years. As a result, Germany is a
major net creditor.
</p>
<p>5. Significant Barriers to U.S. Exports
</p>
<p> Although trade with Germany is generally open, U.S.
agricultural interests face barriers under the EC's Common
Agricultural Policy (CAP). Import levies apply to most
agricultural commodities, including cereals and rice, milk and
milk products, beef and veal, sugar and olive oil.
</p>
<p> Services Barriers: It is difficult to generalize