Germany: Economy

The German economy--the fifth-largest in the world in purchasing power parity (PPP) terms and Europe's largest--is a leading exporter of machinery, vehicles, chemicals, and household equipment and benefits from a highly skilled labor force. Like its Western European neighbors, Germany faces significant demographic challenges to sustained long-term growth. Low fertility rates and declining net immigration are increasing pressure on the country's social welfare system and have compelled the government to undertake structural reforms. The modernization and integration of the eastern German economy--where unemployment can exceed 20% in some municipalities--continues to be a costly and long-term process, with total transfers from west to east amounting to roughly $3 trillion so far.

In 2010, gross domestic product grew by 3.6%, and the German economy experienced its strongest rate of growth since reunification. The country’s export-dependent economy is growing more quickly than the Eurozone average. It is expected to grow by 2.6% in 2011, with exports to emerging markets playing an increasingly important role. Domestic demand is becoming a more prominent driver of growth. The German labor market also showed a strong performance in 2010, with the unemployment rate dropping to 6.7%. Economists attribute the decrease in unemployment to the extensive use of government-sponsored "short-time" (Kurzarbeit) work programs, as well as to structural reforms implemented under the government of former Chancellor Gerhard Schroeder.

The European Union (EU) gave Germany until 2013 to get its consolidated budget deficit below 3% of GDP, and the government’s 4-year fiscal consolidation program worth approximately €80 billion (U.S. $109.6 billion) is intended to meet deficit targets. Germany’s deficit decreased from 3.7% of GDP in 2010, declining to 2.7% of GDP during the first part of 2011. Thanks to a faster than anticipated recovery following 2009's economic contraction, the deficit is expected to be as low as 2.5% of GDP by the end of 2011.

In May 2011, Chancellor Merkel announced Germany’s plan to phase out nuclear energy power by 2022. It is expected that this policy will further accelerate the growth of the renewable energies sector.

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