Determinants of Germany’s Economic Robustness

DETERMINANTS OF GERMANY’S ECONOMIC ROBUSTNESS: UNDERSTANDING THE SECRET BEHIND THE GERMAN ECONOMIC SUCCESS – A DESCRIPTIVE STUDY Germany is the largest national economy in Europe, the fourth-largest by nominal GDP in the world, and fifth by GDP (PPP) (2008). Since the age of industrialisation, the country has been a driver, innovator, and beneficiary of an ever more globalised economy. Germany is the world's third largest exporter with $1. 408 trillion exported in 2011 (Eurozone countries are included).Exports account for more than one-third of national output and the Germany’s strong export performance in goods or merchandise is also denoted by the term Exportweltmeister (world champion exporter). However, analysis of German’s economic history demonstrates that the country did not face constant growth throughout the years. It also had to face moments of recession just like other countries and its own past (reunification) appeared to have been a cause of G erman’s slow growth at times. Following are figures of German’s GDP throughout the last 3 decades which will help us to emphasise our statement.While the decrease in the year 1990s can be associated with the unification and the costs involved, that of 2010-2011, can be associated to the global recession that the world experienced then. Yet, even in the recession marred years, the German economy managed to stay stable as the world sixth largest country in terms of GDP (2009. ) Now, against the background of fragile global recovery and the intensification of the eurozone crisis, Germany has recorded strong GDP growth and a declining trend in unemployment. What's the secret of such a robust economy?Referring to Germany, British Prime Minister Margaret Thatcher said in December 1989 at a Strasbourg summit â€Å"We defeated the Germans twice! And now they're back†. Although this statement was related to politics, it appears to be relevant in the economic context as w ell. As such, our study will consist of analysing more in details the secret behind this particular success or consistency and will also involve comparison of countries which also have more or less the same pattern of Germany but still cannot reach their level of development to underline what are those parameters which make Germany so unique. Current SituationGermany's economy is holding up better than expected amid the Eurozone's debt crisis, as robust demand from outside of Europe has helped offset weak activity on the continent. Several other factors contribute to Germany's solid macroeconomic position. Germany is the only major advanced economy which had lower unemployment rate in 2012 than it had in 2007. The level of German GDP has increased by a cumulative 5. 8% since the beginning of 2010, compared to 2. 3% for the eurozone. The monetary conditions set for the entire eurozone by the ECB are accommodative for Germany given the strong cyclical position of its economy.As a cons equence of safe-haven capital inflows, yields are also at extremely low levels. Furthermore, Germany has a strong net external creditor position and a large, albeit gradually declining, current account surplus. The German financial sector has stabilised since 2009 and liquidity is abundant in the current environment. However, meeting Basel III requirements will remain a challenge for German banks in light of modest profitability and still a high leverage. Since mid-2008, German banks have cut their total eurozone exposure by â‚ ¬332bn, a 30% fall, of which â‚ ¬187bn was withdrawn from Greece, Italy, Spain and Portugal, a fall of 44%.Despite this fast pace of deleveraging, the quality of the remaining assets may well deteriorate further as the recession deepens in the periphery. In its semi-annual economic outlook, the German central bank raised its forecast for domestic GDP growth this year to 1. 0% from 0. 6% in the December outlook due to better-than-expected first quarter g rowth that was largely the result of strong exports to emerging markets. The upward revision brings economic activity near its potential growth rate of 1. 25. Growth in 2013 is seen at 1. 6%, down 0. point from December's forecast due to a statistical correction resulting from the revisions for this year. The Eurozone crisis â€Å"may have left its mark, but the good structural condition of Germany's economy and the robust global economy have maintained the upper hand,† Still, the outlook remains â€Å"highly uncertain,† with risks stemming â€Å"overwhelmingly† from external factors. While weak Eurozone growth in the debt crisis has already been factored in to the forecasts, Germany's export-driven economy would be vulnerable to a â€Å"noticeable weakening† of conditions outside of Europe. Germany remains exposed to the systemic component of the crisis.A significantly deeper recession of its large eurozone trading partners could also push Germany into r ecession with negative repercussions for the fiscal stance as well. Furthermore, additional sizeable contribution to eurozone bail-out funds, on top of the EFSF guarantees, could push German debt level above 90% of GDP, close to the upper limit Fitch generally considers consistent with a ‘AAA' rating. Materialisation of these risks would put downward pressure on the rating. Germany has all the ingredients of a declining public debt path. The economy is growing, budget deficit is moderate and nominal interest rates reached record low levels.Nevertheless the longer track record serves as a warning sign. Despite the fiscal rules of the eurozone, the debt/GDP ratio had increased to 83% by 2010 from 55% in 1995. During the 13 years of monetary union, the German debt ratio declined in only five years and has been above the 60% reference value since 2003. PROBLEM STATEMENT The problem that leads us to undertake this research is simple. Observing the amazing performance of Germany in the international market even in the period of recession, one wonder how this can be achieved by them while the others are still struggling.It becomes apparent that there must be some particular reasons behind this success. Research Question/Hypothesis H1: There is something unique that make Germany successful in the international market. H2: There is a relationship between the implementation of new economic policies with the economic performance of Germany H0: There is nothing unique about Germany’s success. They work on the same policies as other countries. OBJECTIVES AND AIMS OVERALL OBJECTIVE By this study, we hope to underline the policies that led Germany to success and from this knowledge, have a better understanding of the strengths and weakness of a business environment.Overall, we aim to have clear knowledge about impact of business environment on performance of business undertakings. In the long term, we can use the technique used in this research to analyse any bu siness environment before setting up of any business firm. Also, we can advice other developing countries about implementing those policies which could benefit them considering their own business environment and also be on their path of development just like Germany. This research can be considered as a tool to determine business opportunities as well. SPECIFIC AIMS Understand the parameters that made the economy very strong in the market How is that amidst the gloom Germany continues to be the engine that drives the Eurozone economies, and also helping to bail out a few? How does the robust, high-tech manufacturing sector continue to be the export champion? What role do the academic system and â€Å"Deutsche Tugenden† play in the success? What is the special Trade School training system that creates highly skilled technical workforce? Take into considerations other macroeconomic indicators particular to Germany Understand how one can take advantage of the strengths and weakn ess prevailing in its environment * Have valuable and actual knowledge of economic concepts BACKGROUND AND SIGNIFICANCE 1. (Raymond J. Ahearn and Paul Belkin; the German Economy and U. S. -German Economic Relations 2010) By most standards, post-war West Germany registered impressive economic performance in the first decades of its existence. But beginning in the mid-1990s, the German economy has been on a much lower growth path, averaging about 1. 5% of GDP per year. Unemployment has also risen steadily.These trends, which have been exacerbated by a steep 5% decline in German GDP growth in 2009, raise questions about the long-term vitality and strength of the German economy. A number of factors help explain Germany’s declining growth rate. One factor has been the high cost associated with integrating the formerly communist East German economy into the Federal Republic since reunification in 1990. A second has been the growing cost of Germany’s generous social security and welfare programs and associated regulations which some believe may undercut incentives for work and entrepreneurship.A third is an economy that is more geared towards exporting than domestic investment and consumption. With declining economic growth and rising expenditures on social protections, Germany faces significant budgetary and resource constraints. A prosperous German state remains critical to both the U. S. and European economies. Difficulties Germany may have in regaining a stronger economic position are important concerns, affecting the U. S. -German partnership’s ability to mutually address and manage a range of bilateral, regional, and global challenges.The report therefore elaborates on these themes in three parts: the first section examines Germany’s economic performance in historical perspective and assesses some of the domestic factors that may be contributing to Germany’s less than optimal performance; the second discusses the reform challe nges facing Germany’s political leaders; and the third section evaluates a few salient U. S. -German economic policy differences and strains that seem to be influenced by Germany’s weakened economic situation. 2.Financial System Stability Assessment, report prepared by the Monetary and Capital Markets and European Departments and approved by Jose Vinals and Antonio Borges, June 20, 2011; results in the following main findings: The main findings of the FSAP are: * The German financial system is recovering from the global crisis, yet low profitability hampers many banks’ ability to build stronger buffers against the shocks that could hit the global economy and especially Europe; * Structural reforms are overdue.The Landesbanken require thorough restructuring and probably downsizing, but the imperative to loosen constraints and strengthen banks’ commercial orientation is more general; * The standard of financial sector regulation and supervision is high. The crisis showed that more timely information, additional on-site supervision, and follow up through forward-looking supervisory action are needed; and * The framework to manage financial crises has been enhanced significantly, particularly with the introduction of a new bank resolution regime.Deposit protection schemes need to be rationalized, and Germany should actively help efforts to develop mechanisms to deal with cross-border crises. Very interesting report, but emphasises on the financial sector of the country and its current scenario only. 3. Talking about articles with reference to the German’s secret for economic robustness, there are various available were the authors aim to point out these parameters which made Germany so powerful in today’s market. As such, an article from www. guardian. co. k goes on saying: â€Å"Germany invested heavily in its Bavarian science and technology base, identifying future growth sectors and building clusters of excellence to a ttract investment†¦ it's still â€Å"making stuff†Ã¢â‚¬ ¦ While the British focused on becoming lawyers and money men, Germany continued to respect engineering and making things (not just money)†. Mr James Dyson, Author of Ingenious Britain, did not agree that this parameter was the cause behind the German success and responded to this statement by saying â€Å"In your coverage of the German success story, not a word has been printed on the German â€Å"housing market†.It is as if this were detached from the overall economic and cultural formula. Is it not a fact that Germany has a large, affordable rented sector with secure tenancies that deters a quick- housing-buck mentality? Does this housing culture not sustain investment in proper wealth creation (ie manufacturing) and thereby reduce the cycles of property boom and bust? † Well, Mr Olaf Plotner the dean of executive education at the European School of Management and Technology (ESMT) in Berlin a nd author of Counter Strategies in Global Markets in his post in Forbes magazine also shares his views about the reasons to justify the German’s success.He goes on saying: â€Å"cooperation between unions and employers plays a major role in the success of German industry. But that’s just one part of a much bigger picture†¦ German businesses have been able to avoid the focus on the short-term shareholder that dogs so many large companies elsewhere because of an ownership structure that seems unique to Germany†¦ the companies give importance to uniting ownership and management. † As of now, we have already different views from different people as they all try to explain the German success. Well, these views are not the only one.According to Mr Richard Anderson Business reporter for BBC News, â€Å"Germany is a country whose inhabitants work fewer hours than almost any others, whose workforce is not particularly productive and whose children spend less t ime at school than most of its neighbours. But still, the German economy is so powerful†¦why? † Mr Anderson structured is study under three main headings. Euro bliss †¦. Germany has benefited greatly from the euro; Germany adopted a much weaker currency than would otherwise have been the case†¦ This has provided a terrific boost to German exports, which are cheaper to overseas consumers as a result†¦.Just as important are the relatively low levels of private debt†¦ German companies and individuals refused to spend beyond their means†¦ Germans are uncomfortable with the concept of borrowing money and prefer to live within their own means. â€Å"In German, borrowing is ‘schulden', [the same word for guilt. ] There is an attitude that if you have to borrow, there is something wrong with you,† Labour reforms †¦the Social Democratic government was able to use its close ties with labour unions to push for moderation in wage inflation.T he reforms laid the foundation for a stable and flexible labour market. While unemployment across Europe and the US soared during the global downturn, remarkably the jobless number in Germany barely flickered. German workers were simply willing to work fewer hours, knowing that they would keep their jobs because of it. Job skills And in Germany, there is fewer stigmas attached to vocational training and technical colleges than in many countries. Research Gap The read reports do not seem to treat with the actual factors behind the success, hence we believe into scope for our research.Since in these articles, the German economic history I study but then related to other topics just like in the case of US-German relationship or the study of the German financial markets. True that these reports will help us in our study and can be used as a basis, they surely permit us to look at the German’s economy from a different point of view. Most of reports seem to elaborate a lot on the n egative features of the economy, not that we intend to ignore the negative features but what we are trying to do here is to explain how despite these features, Germany is able to hold such a position in the global market.Specifically we want to pinpoint the special policies which allow this achievement and propose economic models to other developing countries in order to permit them to also achieve such a miracle. Thus, reading the articles, we can see there are already numerous parameters that each of authors believed to be the one behind the success of Germany. Our study will therefore constitute in analysing these factors and comparing the performance of Germany with that of other countries which also have this factor.We will also try to analyse the impact that the implementation the each factor had on the economy of the country. To emphasize on the relevance of this research, we can another article by in the New York Times which states: â€Å"Germany had the formula right all a long. † Hence, our study will be directed towards analysing all the various aspects that made the formula right and try to make it right in our business environment as well! RESEARCH DESIGN AND METHODS Overview The research is a diagnosis research.In fact, a diagnosis research is one which is directed towards discovering what is happening, why it is happening and what can and is to be done about it. It aims at identifying the causes and helping to arrive at possible solutions. Diagnostic research probes into the reasons `why? and goes beyond the problems. Our research is directed towards giving us in-depth knowledge about the reasons which made Germany successful today and we are interested in knowing which of these can be used by other nations as well. Our study will be divided into the following chapters:Chapter 1: here we will deal with the introduction to the study and the aim and purpose of the same. The subject background will also be studied in this step. We intend to t race the economic history of Germany in this section from World War II till today; macro and micro economic variables will be explained and we can propose an elaboration on the economy theory that is followed by the country. Chapter 2: will be dealing with review of books, articles, research papers and journals published with respect to the topic and identification of the research gap.Chapter 3: will elaborate on the research design. Here the parameters that we aim to use in our research will also be defined. As such, the parameters that we wish to study are as follows: 1. GDP, 2. Debt to GDP ratio, 3. Unemployment, 4. Household debt, 5. Inflation, 6. Commodity price swings 7. Foreign trade – imports/exports, net surplus, 8. Social spending, 9. Education, 10. Healthcare, 11. Pension funds, 12. Manufacturing vs. agrosectors, 13. Private & Public undertakings, 14. Patents 15. Innovation, 16. Mittelstand 17. Housing prices, 18. Real estate, 19.New firms reg. 20. Firms winding up , 21. New investments, 22. Banking, 23. M & As abroad, 24. Fuel prices Chapter 4: the data collected will be analysed and interpreted I this chapter Chapter 5: appropriate findings can be drawn from the data processed and conlusion will follow Population and Study Sample Our study will require interaction with economic experts and other industry-related experts who will give us insight and information about the various policies that are prevailing in Germany and their impact on the economy. Sample Size and Selection of SampleHere, we can select purposive sample and we will require snowballing as a technique as well since our study is very particular and one expert might put us into contact with another of his colleagues. Sources of Data The main sources of data will be secondary but experts’ insights in terms of interviews will constitute our primary data also. Collection of Data The secondary data will collected by visiting websites, reading books, analysing research papers, articles and other thesis. The primary data is collected by mean of interview. Data Analysis StrategiesThey will be use of regression analyse the percentage change that the implementation that each parameters did on the economy They will also be use of correlation to analyse the data from other countries which implemented each particular parameter. First, we will have to analyse each of these parameters in the German environment and then compare the German performance with other countries’ which have the same potentiality. STRENGTHS AND WEAKNESSES OF THE STUDY STRENGTHS * There is important number of secondary data available for the research making the researcher job simpler. The study of this topic will lead to actual application of various economic concept hence, better understanding of economics as a subject. * Study of business environment being the first step for any project development, this project has important scope for the researcher. WEAKNESSES * The study being s omehow dependent on secondary data, there is chances that these might not be relevant leading to false conclusions. * There might be a possibility that these policies which made Germany so successful cannot be transferred to any other country. In which case, our