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Germany's Economy

Germany's economy has suffered major setbacks in recent years. While it remains the world's largest export nation, unemployment is at near record levels. More than five million people are out of work, or 12.6 % of the workforce, the country's worst unemployment since before World War Two. Unemployment is especially high in the former East Germany, where it's climbed above 25% in some areas.

German Chancellor Gerhard Schroeder has proposed new corporate tax cuts and new spending measures in an attempt to curtail his country's economic downturn. He has also called on German businesses to create more jobs and halt the trend of moving industries outside the country to reduce labor costs.

Adam Posen is a senior fellow at the Institute for International Economics, and editor of the forthcoming book, Germany in the World Economy. He says Germany's generous social welfare system creates an enormous financial burden. He notes that Germany's federally-funded health care and almost free tuition for university students, for example, strain the country's budget. And the desire to fund these programs, Mr. Posen says, makes economic growth even more necessary.

According to Mr. Posen, "If you're Germany or France or Sweden or some other European state with a strong welfare state, you've got a bill due every day. You've got to look after all these public institutions, you've got to look after all these millions of college students, you've got to look after all these people who're on your health insurance. You've got to provide, which means you've got to have a big enough economy to take in enough taxes to pay for this." In contrast, Mr. Posen says defense is the major part of the U.S. federal budget.

Olaf Gersemann is Washington correspondent for Wirtschaftswoche, Germany's largest economic and business weekly magazine, and author of the recent book, Cowboy Capitalism: European Myths, American Reality. He says Germany needs further economic reforms, such as more flexibility in hiring and firing employees. "If you look at the labor market, for instance, and the reforms discussed there, I would argue that there would only be very few losers in the long run," says Mr. Gersemann. "And even they could be compensated one way or the other if we, for instance, relaxed our employment protection legislation."

Mr. Gersemann says such protection contributes to German companies being reluctant to hire new workers because it is difficult to fire them. As a result, he says, it is harder for the unemployed in Germany to find new jobs than it is for their counterparts in the U.S.

The Schroeder government has implemented reforms known as "Agenda 2010," which trim unemployment benefits and reduce social welfare. But economist Adam Posen says more adjustments are needed.

Mr. Posen contends, "The Schroeder government has to start reforming things other than just the labor market. This is an economic matter that the labor market reforms alone are not going to be enough to generate demand and jobs. But also politically, it's not going to be sustainable if you only go after the unions, if you only go after labor markets."

The economic uncertainty makes many Germans reluctant to spend money, which in turn hurts the country's economy. Olaf Gersemann of the magazine "Wirtschaftwoche": "This angst factor is really a big, big factor right now in Germany. People are really so scared because they don't want to buy a new car, they don't want to buy houses anymore. This is a big part, right now, of the stagnant economy."

And, according to Olaf Gersemann, another weakness of the German economy is the failure to create new businesses and industries, particularly in high technology. "The companies which dominated Germany in the late 1960s are still dominating Germany, says Mr. Gersemann. "Whereas here [in the U.S.] you have Microsoft, Hewlett-Packard, Cisco, Wal-Mart, you name it. The only German one I can think of is S.A.P, the software company, which is by the way the only IT company which would show up on the IT 100 ranking as done by "BusinessWeek" [magazine].

Most observers note that German efforts to reinvigorate their economy will continue regardless whether Chancellor Schroeder's Social Democrats remain in power. And the extent of economic reform, and its success, most analysts say, will likely determine how Germans will vote in parliamentary elections next year.