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Text File | 1994-05-02 | 17KB | 346 lines

<text> <title> Germany: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Germany </hdr> <body> 1. General Policy Framework 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. 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. 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. 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. 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. 2. Exchange Rate Policies 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. 3. Structural Policies 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. 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). 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. 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. 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. 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. 4. Debt Management Policies From 1970 to 1990 Germany has enjoyed current account surpluses in all but three years. As a result, Germany is a major net creditor. 5. Significant Barriers to U.S. Exports 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. Services Barriers: It is difficult to generalize