COUNTRY ANALYSIS GERMANY

BY Neha dua Sec B Roll no. 89

INTRODUCTION
Germany is Europe's most industrialized and populous country. Famed for its technological achievements, it has also produced some of Europe's most celebrated composers, philosophers and poets. Achieving national unity later than other European nations, Germany quickly caught up economically and militarily, before defeats in World War I and II left the country shattered, facing the difficult legacy of Nazism, and divided between Europe's Cold War blocs. Germany rebounded to become the continent's economic giant, and a prime mover of European cooperation. With the end of the Cold War, the two parts of the country were once again united, although the former east's economy continues to lag behind the former west.

KEY INDICATORS GDP

ACTUAL 0.1% Previous 1.5 % German GDP slowed sharply in the second quarter of 2011. In line with preliminary data, GDP expanded just 0.1% q/q, down from the impressive 1.3% q/q expansion recorded in the first three months of the year. Growth is not expected to rebound substantially in the second half of 2011. Moodys Analytics has revised down the overall growth forecast for this year to 2.9% from 3.3% previously.

EMPLOYEMENT SITUATION Actual 7% Previous 6.9% German unemployment rose for the first time in almost two years in October. The number of people out of work increased by 10,000; while the unemployment rate nudged back up to 7%, reversing the previous month's improvement. Weak economic growth will mute private sector hiring. The purchasing managers' survey for the important manufacturing sector fell into contractionary territory in October.

INDUSTRIAL PRODUCTION Actual -2.7% Previous - -1%

German industrial production dropped 2.4% m/m in September. This follows a 0.4% fall in August. Production will continue to disappoint in the coming months. The purchasing managers' index for manufacturing slipped into contraction territory in October. While domestic demand is expected to ease on subdued household spending and weak economic growth, muted foreign demand will be the main drag on German industry. Many of Germany's key European trade partners are forecast to slip back into recession in the near term.

FOREIGN TRADE Actual: 15.3 bil

Previous: 13.8 bil

The German trade surplus widened to 15.3 billion in September from 13.9 billion a month earlier. Slowing exports will drag on the balance in the coming months as key trade partners in the euro zone and the U.K. fall back into recession. However, slower import growth amid weaker economic growth will help prevent a sharp deterioration in the balance.

The euro zones financial crisis and theres now no other word than crisis for the current trauma is poised to deepen further. Contagion has already begun to spread from the peripheral euro-zone countries, such as Italy and Spain, Greece, Portugal and Ireland, to what might be called the soft core countries such as France and Belgium. As per the recent news, French, Spanish and Belgian 10-year bond yield spreads over German bunds hit new euro-era highs, meaning the extra yield demanded by investors to buy those countries bonds rather than safe-haven Germanys hit the highest levels in modern times. Italian 10-year bond yields also popped back above the 7% crisis level, despite buying by the euro-zones bailout fund. GERMANYS ROLE As concern continues to grow about the deepening financial crisis in Europe, Germany's crucial role in the economy of the region is becoming more and more apparent. While the economies of most European Union countries have been languishing since 2008, Germany's economy has been booming since the country managed to quickly emerge from the global financial crisis that hobbled many others.However, that appears to be changing, according to the latest statistics. This week's economic indicators suggest the German economy is stalling: GDP in the last quarter went up just 0.1 per cent. That backs up reports last week that industry sales had stagnated and foreign demand for German products was falling.To maintain the euro and the monetary union, Germany had to become the eurozone's creditor, a role it took on reluctantly. "The euro is the foundation of our prosperity," Merkel told the media after her summit with Sarkozy.The influential American strategic analysis group Stratfor recently examined the changes in Europe. It argued that Germany has been the chief beneficiary of the eurozone because it was an easy way to make, "Germany matter on a global stage without the sort of military revitalization that would have spawned panic across Europe and the former Soviet Union." Stratfor's analysis concludes that, "Germany is on the verge of once again becoming a great power."

EURO CRISIS

One of the piecemeal steps that the EU has taken to address the debt crisis is the creation of the European Financial Stability Facility, which takes its orders from Germany, its chief creditor, according to Stratfor.

OTHER INFORMATION

Germany has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 47.5 percent (45 percent plus a 5.5 percent solidarity surcharge). The federal corporate tax rate is 15.8 percent (15 percent plus a 5.5 percent solidarity tax), but a 7 percent to 17 percent trade tax raises the effective top rate to roughly 33 percent. Other taxes include a value-added tax (VAT), a flat tax of 25 percent on capital gains income, and a church tax of 8 percent to 9 percent. In the most recent year, overall tax revenue as a percentage of GDP was 40.6 percent.

In the most recent year, total government expenditures, including consumption and transfer payments, held steady at 43.7 percent of GDP. Privatization of the railway company has stalled, and the state remains the largest employer. Germany is a member of the euro zone. Between 2007 and 2009, its weighted average annual rate of inflation was just 0.9 percent. As a participant in the EUs Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also regulates prices for pharmaceuticals, electricity, telecommunications, and other public services. Ten points were deducted from Germanys monetary freedom score to adjust for measures that distort domestic prices. Foreign and domestic investors are treated equally. Certain financial institutions, passenger transport businesses, and real estate agencies require licenses. There are no permanent currency controls on foreign investments and no serious limitations on new projects, except for the sale of defense companies. The legal and regulatory environment is complex but transparent. There are no restrictions on capital transactions or current transfers, real estate purchases, repatriation of profits, or access to foreign exchange. Germanys banking sector has been weakened in recent years. The traditional three-tiered system of private, public, and co-operative banks remains intact. Most of the roughly 2,000 banks are local savings banks and cooperative institutions. The foreign presence is not strong. Regulations are generally transparent and consistent with international norms. All types of capital are available to foreign and domestic businesses, and banks offer a full range of services. Interest rates are market-determined, and foreign investors can access credit freely. The insurance sector and capital markets are open to foreign participation. In response to the global financial turmoil, several financial institutions have received debt guarantees and capital injections from the Financial Market Stabilisation Fund since late 2008. Hypo Real Estate was nationalized in late 2009, as the mortgage bank was considered too economically important to fail. Contractual arrangements are secure, and commercial law and private contracts are respected. All property is protected, and the judiciary and civil

service are highly professional. Separate supreme courts deal with commercial, tax, labor, and constitutional cases.