Sputtering Engine: Germany's Sluggish Economy

By Kwok, James | Harvard International Review, Fall 2005 | Go to article overview

Sputtering Engine: Germany's Sluggish Economy


Kwok, James, Harvard International Review


Germany continues to suffer from anemic economic growth. In 2004, the German economy grew at disappointing 1.7 percent, and German analysts have forecast 2005 growth at 0.7 percent. This low growth reflects Germany's large structural difficulties hampering its long-term economic expansion. German labor markets must become more flexible, and a weakening corporate sector must be revived. While the end of 2004 saw German union power wane and corporate investment increase, it is up to the German government to foster a more prosperous environment for businesses.

While higher oil prices and a stronger Euro may have lowered Germany's growth, its main barrier to continued growth has been its lagging labor sector. Although a recent Wall Street Journal investigation found a German worker to be more productive by gross domestic product per hour worked than its US counterpart, a staggering 9.6 percent of the German labor force remains unemployed. Economists like LMF European Department head Michael Deppler believe that Germany's problem is its misallocation of productive labor to unprofitable industries. This has been caused by high corporate taxes and rigid labor regulations.

A possible solution would be to institute work hours in firms. Like France, Germany has imposed a statutory maximum on hours worked per year, which equates to roughly 20 days of paid vacations. Civic holidays considered, German workers can take over four weeks' vacation per year. The Bundestag's attempts to reduce holidays have thus far been met with much opposition. A plan by Finance Minister Hans Eichel to eliminate German Reunification Day, October 3rd, was quietly shelved after it was denounced as unpatriotic.

Germany also uses a system of temporary labor employment that is harmful to its economy. These so-called "mini-jobs," which provide a monthly salary of 400 to 800 euros per month, are essentially payroll tax-exempt employment opportunities. While this may be an effective way to bring discouraged workers back into the labor force, German economist Viktor Steiner believes it has a net negative effect on employment. He argues that rather than drawing discouraged workers into partial employment, it has drawn young and old workers--one million and counting--away from full time employment, pulling workers away from the labor force and increasing unemployment. …

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