June 10, 2013Germanyby EW World Economy Team

Germany Economy

Germany has the largest national economy in Europe, the fourth largest by nominal GDP in the world, and the fifth largest GDP per capita based on purchasing power parity (PPP), and is a founding member of both the European Union and the Eurozone. Germany has a social market economy that combines capitalism with social policies favoring social insurance.

Germany is rich in a number of natural resources, including timber, iron ore, potash, salt, uranium, nickel, copper, and natural gas. Although most energy in Germany comes from fossil fuels, it is leading the way in renewable energy development and use with about 27 percent of its electricity derived from renewable sources. Examples include biomass (wood and biofuels), wind, hydro, solar, and nuclear power. Germany was the first major industrialized nation to commit to the renewable energy agreement called Energiewende, and it has become the leading producer of wind turbines in the world.

Almost 100 percent of all German companies are considered small and medium-sized enterprises and are mostly family-owned. Germany serves as host to the headquarters of 50 of the Fortune 500 global companies.

Economic History

Germany was historically, a tribal area, a part of the Holy Roman Empire, a part of the Prussian Empire, a confederation of states, and a republic. By the 19th century, however, Germany was in control of several nations, as well as a few autonomous states, and the region was poised to take advantage of the Industrial Revolution in ways many other parts of the world could not. This was thanks to its abundant resources, many of which would be required for the manufacture of equipment and goods. Germany entered the industrial age a little after other nations like Great Britain, but quickly leaped to the front of the pack thanks to its Customs Union (Deutscher Zollverein) and its impressive railway system. Between 1835 and 1870, Germany constructed thousands of miles of railway and several companies made locomotives domestically.

The creation of a rail system across Germany, coupled with a free trade environment, led to incredible economic development and opened new markets and new ways of doing business. A unified monetary system, the deutsche mark, further aided local economic development with its introduction and adoption in 1871. Prior to that, silver coins had been the preferred currency of trade, and they remained in favor until 1907.

The German Empire was born in 1871, after the defeat of Napoleon and the French army. The newly formed German state benefited greatly from the influence of French economic principles. Nonetheless, political decisions about the economy remained concentrated in the hands of a relatively small group of agricultural and business interests.

Chancellor Otto von Bismarck took power between 1881 and 1889 and introduced laws that provided social insurance, welfare, and improved working conditions. Bismarck's programs included universal health care, compulsory education, sickness insurance, accident insurance, disability insurance, and a retirement pension. The compulsory education program led to a world leading 99 percent literacy rate, and created a culture that produced some of the greatest minds of the 20th century.

By 1900, Germany produced more steel than either Great Britain or the United States. Industry accounted for 60 percent of the German GDP in 1913, and, by 1914, Germany was the world's leading producer of chemicals and electrical equipment.

Unfortunately, that prosperity could not last. Germany was heavily involved in the First World War, and found its economy significantly damaged after the war. Out of control inflation, skyrocketing unemployment, and debts related to the payment of reparations left the economy ripe for political unrest and turmoil

This was the perfect breeding ground for radical ideas, and thus, the Nazi party rose to power. The Nazis took control of the government during some of the highest rates of unemployment in German history, but they achieved full employment in just a few years thanks to massive public works programs. When Germany began rearming (in contravention of the Treaty of Versailles), the expenditure father bolstered the economy and the popularity of the Nazi party.

The Nazis wished to attain self-sufficiency but lacked the resources to support their large population. This was part of the motivation for invasion of neighboring Poland and other parts of Europe. The Nazis also disfavored trade unions and abolished them in 1933.

After the war, Germany was split into two countries, East and West. West Germany developed a democratically driven social capitalist economy similar to what exists today, while East Germany became a part of the Eastern Bloc of Soviet Communist States. The two nations evolved very differently, with West experiencing exports of $323 billion in 1988 while East only managed $30.7 billion.

The former Soviet Bloc countries toppled in 1989, with the wall separating East and West Germany knocked down as a practical and symbolic representation of removing the division between the two countries and unifying their ideologies.

Current Economic Situation

As of 2013, Germany is the third largest exporter and importer in the world, producing the largest trade surplus as a national economy. While the unified German economy grew well during the 1990s, it experienced a virtual stagnation beginning in the 2000s. With chronically high rates of unemployment and relatively flat growth figures of only about one to one and a half percent, the German welfare system came under considerable strain. By the end of 2000s, the economy followed a global trend toward growth thanks to its large export economy. Unfortunately, it also suffered an economic contraction after the global recession in 2009.

Thanks to swift economic reforms, Germany exited the recession almost as quickly as it entered it, achieving recovery thanks to an ambitious economic recovery plan by the end of 2009. Growth continued through 2012 at a rate higher than its local neighboring nations. By 2014, Germany recorded the highest trade surplus in the world.

Today, Germany's economy is largely made up of a service sector (around 70 percent of the total GDP), a robust industry (29.1 percent of GDP), and a small but notable agricultural sector (0.9 percent of GDP). The nation's national output derives from exports (41 percent): including vehicles, machinery, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport equipment, metal, food products, rubber, and plastics.

Economic Forecast

Germany had a solid year for growth in 2014, driven largely by private consumption. The economy has experienced a few bumps in the road in 2015, but overall it appears to still be on steady footing. Consumer confidence reached a 13-year high in May, and the German government allocated €13.5 billion for infrastructure improvements and investment through 2018. Low international oil prices and a strong labor market with higher wages argue well for domestic consumption, while exports will likely increase on the back of a weak euro. As a result, the German economy is expected to grow by 1.9 percent in 2015 and remain there for 2016.

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