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TITLE:  GERMANY ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE


                             GERMANY

                     Key Economic Indicators
             (Billions of DM unless otherwise noted)

                                  1991      1992      1993  /4
                                  All       All       All   
                                  Germany   Germany   Germany
Income, Production,
 and Employment

Real GDP/1
 (1985 prices)                    2,635.0   2,676.0   2,622.5
Real GDP Growth Rate/1              4.5       1.6      -2.0
GDP by Sector (1991 prices)
 Agric., Forestry, Fishing           33.8      36.4     n/a
 Manufacturing, Mining,
  and Construction                1,005.8   1,002.1     n/a
 Trade and Transportation           376.8     376.9     n/a
 Services                           791.2     826.6     n/a
 General Government/Households      335.7     342.5     n/a

Real GDP Per Capita /1            41,124    41,255    39,916
Civilian Labor Force (mil.) /1    30.7      30.9      31.2
Unemployment Rate /1/2
 (annual average pct.)              5.7       5.9       7.3


Money and Prices

Money Supply (M3) /3              1,597.7   1,718.7   1,739.9
Commercial Interest rate           11.31     12.0      10.0
Personal Savings Rate /1 /5        14.5      13.9      13.3
Retail Inflation
 (1985 = 100) /1                  107.1     109.8     112.0
CPI, (1985 = 100) /1              110.7     115.1     119.7
WPI, (1985 = 100) /1               96.7      96.8      95.7
Exchange Rate (ann. avg. DM/$)    1.6612    1.5595    1.65


Trade and Balance of Payments

Total Exports (FOB)                 665.8     671.2     590.0
 Total Exports to U.S.               41.7      42.6     n/a
Total Imports (CIF)                 643.9     637.5     545.0
 Total Imports from U.S.             42.2      42.4     n/a
Gold and FOREX Reserves/3            69.1      99.5      84.2
Trade Balance                        21.9      33.7      45.0
 Balance with U.S.                   -0.5       0.2     n/a



Notes:

1/  Western Germany only; all German GDP data are incomplete.
2/  Percent of civilian labor force.
3/  1993: latest available data.
4/  Estimates based on latest available data.
5/  Bundesbank definition.


1.  General Policy Framework

    German fiscal policy continues to be driven by the
financial demands of reunification.  Following unification the
German government extended its generous social welfare system
to eastern Germany and committed itself to quickly raise
eastern German production potential via public investment and
subsidies for private investment.  The budget cost of these
policies was increased by the decision to rapidly raise eastern
German wages to western German levels, which raised
unemployment levels, increased the costs of unemployment
compensation and of labor costs in government-owned firms being
prepared for privatization, and necessitated more generous
subsidies to attract investment in the east.  As a result,
western Germany has had to transfer vast sums to eastern
Germany, estimated at about DM 152 billion annually or 5.0
percent of all-German GDP in 1992.  These transfers accounted
for the dramatic ballooning of public sector borrowing.

    The current recession in Germany has further contributed to
the widening fiscal deficit as tax revenues weakened and
anti-cyclical expenditures rose.  Despite the recession the
German government has sought to narrow the federal budget
deficit through a variety of tax and fee increases, public
spending restraint, and more recently, cuts in certain social
benefit levels.  Nonetheless, inflated by the sluggish economy,
the overall public sector borrowing requirement (including all
levels of government and major "off-budget" funds and agencies)
was DM 170 billion in 1992 and is expected to be about DM 230
billion in 1993.

    Unification also fueled inflation as eastern German demand,
financed by transfers from the west and by conversion of east
German currency into DM at a highly favorable rate of exchange
for easterners, strained western production capacities.  High
wage increases in Germany in 1991 and 1992 added to
inflationary pressures.  Inflation was particularly pronounced
in services, less so in manufactured goods, which could be
imported from other countries with slowing economies and spare
capacity.  The German central bank (Bundesbank) responded to
rising inflation by hiking short-term interest rates, which
peaked in July 1992 at post-war highs.  Partly in response to
external pressures and strains in the European Exchange Rate
Mechanism (ERM), the Bundesbank started upon a course of
gradual and cautious easing in September 1992.  Since then
short-term official rates have declined by 3.0 percentage
points, with the most recent cut in October 1993.  However,
pressure continued on the European Monetary System's exchange
rate mechanism in the absence of appropriate realignment of the
exchange rate parities.  As certain other ERM currencies fell
through the lower limits permitted by the existing fluctuation
bands linking the ERM currencies, some EU governments were
forced to remove their currencies from the system and EMS
governments eventually opted to widen the fluctuation bands.

    The Bundesbank places overriding importance on price
stability.  Recent relatively high rates of inflation (the CPI
rose 4.0 percent in 1992) and money growth, as well as concern
over wage developments and fiscal deficits, led it to ease
interest rates less rapidly than desired by other ERM 
countries, in particular France.  It is widely accepted that
given the lack of a fundamental exchange rate realignment, the
Bundesbank's reluctance to ease more quickly has contributed to
the current recession in other European countries.  Even though
inflation in other ERM countries is subdued and they regard
lower short-term interest rate cuts as appropriate for their
economies, they were constrained to follow the Bundesbank lead
to protect their currencies.

    The Bundesbank follows policies it judges appropriate for
the German economy, denying a role as "central bank for Europe"
even though the discipline of the EMS/ERM meant that the
Bundesbank effectively sets interest rates for other ERM
countries.  The widening of the fluctuation bands has provided
increased exchange rate flexibility for EMS/ERM members but
most have opted to pursue monetary easing only very
cautiously.  Consumer price inflation and monetary growth in
Germany have moderated somewhat in recent months and are widely
expected to continue to do so in the near future.  Therefore it
is expected that the Bundesbank will continue its reductions of
interest rates, contributing to an eventual easing of monetary
conditions and renewed growth in Europe.

    The government's public sector deficits are financed
primarily through sales of government bonds, the maximum
maturity of which is ten years.  Bundesbank monetary policy
tools include minimum reserve requirements and two official
interest rates, the Discount rate (as of October 21 at 5.75
percent) and the Lombard rate (as of October 21 at 6.75
percent).  It also steers short-term interest rates through
providing liquidity to the banking system, primarily via
repurchase operations.


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 coming into effect of the single European market,
January 1, 1993, failed to propel the economy out of its
current recession.  Rather, the EU-mandated increase in the
value-added-tax (VAT) from 14 percent to 15 percent, only
helped fuel inflation.  On the other hand, German government
efforts to improve competitiveness have led to plans for
structural changes in the telecommunications and energy
sectors.  The federal government announced its intention to
privatize the state-owned telephone company, DBP Telekom.  The
German anti-trust agency is also actively trying to break up
existing monopolies in the energy sector and has recently taken
legal action against several German electricity and natural gas
suppliers to void contracts it considers anti-competitive.

    Liberalization and deregulation efforts have opened up
German markets to U.S. firms in these sectors for the first
time.  For example, cost pressure on DBP Telekom resulting from
its heavy investment commitments both in east and in west
Germany have forced it to become more competitive in its
tendering procedures.  U.S. firms have benefitted from this new
openness.  U.S. suppliers of telecommunication goods and
services have also successfully entered the mobile telephone
sector, both as equipment providers and investors.  Further
liberalization in the telecommunications sector is likely to
continue as the EU has mandated that all telephone monopolies
be eliminated by 1998.

    While Health Minister Seehofer's 1992 health reform is
considered to have successfully curtailed health care
expenditures, it has had a negative impact on the health care
industry.  The reform, which includes a freeze of the statutory
health insurance companies' drug budgets at the 1991 level, has
dealt an especially hard blow to the pharmaceutical industry. 
However, while the demand for new drugs declined by up to 30
percent, the demand for generics increased dramatically.  The
reform is sure to lead to structural changes within the
pharmaceutical industry.

    The Treuhand's privatization effort is slowly coming to an
end.  Of the 13,260 businesses that were in the Treuhand's
portfolio, only 401 businesses are left as of October 18. 
American companies have been among the most active foreign
investors in east Germany, with more than 200 currently doing
business in the new federal states.  These firms have made an
investment commitment of some DM 7 billion and have created or
preserved more than 42,000 jobs.  GM-Opel and Esso AG have made
substantial green-field investments.  The pending purchase, of
the power generation/coal mining conglomerate MIBRAG, by a
U.S./U.K. consortium, which is currently in its final stage,
would boost overall U.S. investment by nearly DM 1 billion. 
These U.S. investments in the east may provide additional
opportunities for U.S. firms exporting to Germany.

    A new U.S.-FRG civil aviation agreement is nearing
signature and should provide further opportunities for U.S.
airlines to expand in this market.


4.  Debt Management Policies

    Due to large current account surpluses from the 1970's to
1990, Germany is a net foreign creditor.


5.  Significant Barriers to U.S. Exports

    Germany is one of the world's strongest economies, and -
refreshingly - one which poses virtually no formal barriers to
U.S. trade or investment interests.  It is possible to identify
some pitfalls, especially for the newcomer to the German
market, but on the whole the Federal Republic of Germany is an
excellent place for U.S. companies to do business.

    Import licenses:  The FRG makes virtually no demands for
import licenses, having abolished almost all national import
quotas.  Germany is subject, however, to the import-license
requirements imposed on some products by the European 
Community.  An example is the recent imposition of a quota for
"dollar" bananas under the EU's banana import regime.

    Services Barriers:  Conditions of access vary considerably,
but the Embassy has heard very few complaints.  Progress
appears to have been made in participation of foreign companies
in banking and other financial services, although the insurance
market is still a tough one to crack.  Telecommunications
services are being increasingly deregulated.  This is not
always the case in transport services.

    Standards, Testing, Labeling, and Certification:  Germany's
regulations and bureaucratic procedures can prove a baffling
maze, blunting the enthusiasm of U.S. exporters.  While not
"protectionist" in the classic sense, government regulation
does offer a degree of protection to German suppliers.  Safety
standards, not normally discriminatory but sometimes zealously
applied, and exemplified by the testing and licensing
procedures of the Technischer Ueberwachungsverein e.V. (TUV, or
technical inspection association), complicate access to the
market for many U.S. products.

    Government Procurement Practices:  Selling to German
government entities is not always an easy process.  As a broad
statement, German government procurement is non-discriminatory
and appears to comply with the General Agreement on Tariffs and
Trade (GATT) Agreement on Government Procurement as well as the
terms of the U.S.-FRG Treaty of Friendship, Commerce and
Navigation.  That said, it is undeniably difficult to compete
head to head with major German suppliers who have long-term
ties to German government purchasing entities.  Those areas
which fall outside of GATT agreement coverage, such as some
military procurement, purchases by the Transport Ministry, or
procurement of services, are the most susceptible to these
problems.

    Investment Barriers:  The German investment climate is very
open, but some of the concerns mentioned above, such as access
to services markets and standards and procurement questions,
also apply to investment.  In addition, there is a lack of
transparency in negotiating contracts for privatization of
firms formerly belonging to the communist regime of the GDR.

    Customs Procedures:  To the best of our knowledge, customs
procedures at German ports-of-entry are relatively innocuous.


6.  Export Subsidy Policy

    Germany does not directly subsidize exports outside the EU
framework of export subsidies for agricultural goods. 
Government or quasi-government entities do provide export
finance, but Germany subscribes to the OECD guidelines that
restrict the terms and conditions of export finance.  An
earlier policy that provided exchange rate guarantees to the
German Airbus partner has been terminated, largely as a result
of U.S. pressure and a GATT finding against this program.


7.  Protection of U.S. Intellectual Property

    Germany is a member of the World Intellectual Property
Organization and party to the Bern Convention for the
Protection of Literary and Artistic Works, the Paris Convention
for the Protection of Industrial Property, the Universal
Copyright Convention, the Geneva Phonograms Convention, the
Patent Cooperation Treaty, and the Brussels Satellite
Convention.

    Intellectual property is generally well protected in
Germany.  The German Patent Bureau, Verwertungsgesellschaft
(which handles printed material), and GEMA (the German
rough-equivalent to the American Society of Composers, Authors
and Publishers) are the agencies responsible for intellectual
property protection.  U.S. citizens and firms are entitled to
national treatment in Germany.  U.S. audio-visual companies are
concerned, however, that national treatment does not extend to
the distribution of funds raised through levies on blank
recording tapes and rentals.

    Legislation to transpose the EU software copyright
directive into national law was passed in June 1993.  It is
expected that this new law will meet U.S. concerns about
intellectual property rights protection for computer software
by lowering the standards of originality which had undermined
the level of protection for many business application programs.

    Under the Seehofer reform (see section 3), a reference
price scheme for pharmaceuticals sets a maximum reimbursement
price for statutory health funds and mandates that patients pay
the difference for drugs that exceed this price.  This has led
to a de facto price regime for medication and will eventually
place 70 to 80 percent of all drugs on the German market into
three categories, two of which can include patent protected
drugs.  The pharmaceutical industry is concerned that this will
lead to an erosion of patent protection for drugs.  According
to current provisions, all new and innovative drugs are
excluded from the reference price system.  However, if a group
of patent protected drugs have comparable therapeutic
substances or comparable therapeutic effects they will only be
exempted from the reference price system as long as all of the
original patents are in effect.  Thus, once the first patent in
a group expires, all other drugs in the group will be subject
to the reference price system regardless of whether or not they
are still under patent protection.

8.  Workers' Rights

    a.   Right of Association

    The constitution guarantees full freedom of association
(Article 9).  The workers' rights to strike and the lock-out
are also legally protected activities.  These rights have been
developed further by jurisdiction.

    b.   Right to Organize and Bargain Collectively

    The German industrial relations system consists of a series
of statutory mechanisms for sharing power over certain
activities within firms, coupled and overlapping with an 
autonomous private collective bargaining system developed
between the unions and employers organizations.  The system of
co-determination and worker participation (Mitbestimmung) is
regulated at different levels by various laws enacted between
1951 and 1989.  They cover two basic spheres: day-to-day
social, personnel, and economic matters, which are handled by
elected works councils; and basic business decisions at the
enterprise level, made by supervisory or management boards,
which include members elected by the workers.  Wages, salaries
and working conditions are determined either by collective
bargaining agreements or individual contracts.  Collective
bargaining agreements are legally binding and can be enforced
through the courts.  Under certain circumstances, a collective
bargaining agreement can be declared "generally binding" by the
Government which means that all employers in the industry
covered by the agreement must abide by its provisions,
regardless of whether or not they are members of the
association that signed the agreement.

    c.   Prohibition of Forced or Compulsory Labor

    The German constitution guarantees every German the right
to choose his own occupation and prohibits forced labor.

    d.   Minimum Age for Employment of Children

    German legislation in general bars child labor under age
15.  There are limited exemptions for children employed in
family farms, delivering newspapers or magazines, or involved
in theater or sporting events.

    e.   Acceptable Conditions of Work

    German labor and social legislation is comprehensive and,
in general, imposes strict occupational safety and health
standards.  The legislation and regulations may be supplemented
by collective agreements which cover entire industries or
regions.  The resulting standards are widely considered to be
among the very highest in the European Union, and thus the
world.  There is also a mandatory occupational accident and
health insurance system for all employed persons.

    f.   Rights in Sectors with U.S. Investment

    The enforcement of German labor and social legislation is
strict, and applies to all firms and activities, including
those in which U.S. capital is invested.  Employers are
required to contribute to the various mandatory social
insurance programs.


         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (millions of U.S. dollars)

Category                                    Amount

Petroleum                                              2,111
Total Manufacturing                                   20,951
    Food & Kindred Products                  1,686
    Chemicals and Allied Products            4,020
    Metals, Primary & Fabricated               995
    Machinery, except Electrical             4,960
    Electric & Electronic Equipment          1,084
    Transportation Equipment                 5,065
    Other Manufacturing                      3,142
Wholesale Trade                                        3,328
Banking                                                2,001
Finance and Insurance                                  4,666
Services                                                 790
Other Industries                                       1,545

TOTAL ALL INDUSTRIES                                  35,393


Source:  U.S. Department of Commerce, Bureau of Economic
Analysis.

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