Germany`s Economic Reforms

Despite the euro crisis, Germany, the largest of the 16 European economies which adopted the euro as their official currency, has shown impressive economic growth. The German economy grew 0.2 percent in the first quarter of the year, its fourth consecutive quarter of positive growth. The second quarter is expected to see higher growth. In contrast to last year’s forecast of a five-percent decline, Germany’s central bank has predicted annual growth of 1.6 percent this year. Greece, which has avoided national bankruptcy and taken austerity measures, will probably envy Germany despite the huge difference in economic scale between both countries.

The secrets of the German economy’s success are soaring exports and capital investment despite declines in construction investment and domestic consumption. The 14.5 percent fall in the euro’s value this year has raised the price competitiveness of German exports. A German car priced at 50,000 euros used to be sold in the U.S. for 71,900 dollars, but now sells for 61,500 dollars. When the global financial crisis swept Germany in 2008, its economy was dealt a heavy blow amid signs of a long-term economic downturn. Its labor market improved and manufacturing production grew, however, resulting in stable economic growth.

The favorable exchange rate is not the only factor behind`s Germany`s resurgence. When the country suffered from high unemployment of more than 10 percent in the early 2000s, Berlin deregulated employment and business establishment procedures and cut welfare benefits. Sectors requiring certificates for starting a business were significantly reduced. After five years of strenuous efforts, the number of jobless in Germany fell from five million to four million and unemployment in April dropped to 7.8 percent. Considering that the combined unemployment rate of the eurozone has exceeded 10 percent for the first time in 11 years, it is no exaggeration to say Germany has achieved a miracle in employment.

Sound finances are another German strength. The country saw its fiscal deficit rise to five percent of GDP, but this is much lower than not only those in European countries suffering from a fiscal crisis but also those in the U.S. and Japan. By announcing a fiscal austerity program to cut 10 billion euros per year, or around three percent of its annual budget, for the next six years starting next year, Germany is leading retrenchment efforts in Europe. Berlin is considering cutting welfare benefits including those for unemployment, and some are recommending tax hikes. This is in a stark contrast to Korea’s situation, where certain candidates for school superintendents are pledging free school meals for all students regardless of financial background. These candidates apparently think rapid economic recovery can provide them with free cash.

Editorial Writer Hong Kwon-hee (konihong@donga.com)