U.S. Department of Commerce, Survey of Current Business * Section 8 is an abridged version of Section 6 of the France country report included in the Department of State's Country Reports on Human Rights Practices for 1990, submitted to the Congress January 31, 1991. For a comprehensive discussion of worker rights, please refer to that report. 1/ Total public sector debt service payments for external and domestic debts; adjusted for double counting among different levels of government. 2/ December, for credits over DM 1 million and under DM 5 million. 3/ As of August. 1. General Policy Framework GERMANY The East and West Germany became one on October 3, 1990. uncertainties which surround the unification of Germany and the conversion of east Germany into a market economy abound across the economic spectrum. What, for instance, will be: (1) the reaction of east German consumers and their spending/savings habits; (2) the full extent of public financing and the claims on the All-German budget; (3) the direction of the wage formation process in the East and the duration of the real wage gap between East and West; (4) the quantity of German and foreign investment in the former GDR; (5) the impact on capital markets of German government borrowing, private investment needs, and privatization requirements; and (6) the effect on Germany's external accounts? It should be noted, however, that the German economy has never been better prepared to deal with what the OECD calls the "unification shock". West German GNP, employment, and trade surpluses have been up, and inflation has been moderate to low. The employment outlook in western Germany is generally good; indeed, labor shortages exist in certain sectors. All the same, some analysts fear that unemployment in eastern Germany in the short run could reach as high as thirty percent if so-called "short-time" workers are included in the statistics. In western Germany, the strong showing of GNP growth in the first half of 1990 (up 3.9 percent y/y) reflects increases in both investment and private consumption. Exports, the engine of German economic expansion for the last two years, will play a smaller role in GNP growth in 1990. As expected, private consumption, long one of the slowest growth factors in German GNP, has been spurred on by the DM 25 billion final phase of the 3-step tax reform plan which came into effect in January 1990. Disposable income received a boost from both the tax break and higher negotiated wages in 1990. Net wages rose 3.6 percent in 1989, 0.8 percent over inflation, and are expected to continue their upward trend in 1990. Both construction and equipment investment are experiencing an immediate boost from the economic integration of the two Germanys. Indeed, construction investment could see a boom well into the next decade, as construction demand picks up in the eastern Germany to replace its antiquated infrastructure and housing stock. Inflation, while watched closely by the Bundesbank, will inch higher in 1990 and 1991. Inflation will rise in response to excess demand from the former GDR (to the extent not met by import growth) and from the effects of higher oil prices. While the mid-term effects of the Gulf crisis and unification are still uncertain, German experts believe that inflation levels in the range of 2.5 to 4 percent may be sustained over the 1990-91 period. After two years of record growth, Germany's trade surplus appears to be shrinking in 1990. It is expected that this trend will continue as high demand in eastern Germany pulls in imports and diverts western German exports. Imports grew by 7.1 percent in the first eight months of 1990 over the same GERMANY period in 1989. Export growth declined further, rising by only 3.2 percent in January-August 1990 over the same period in 1989. The Bundesbank has maintained its relatively tight monetary policy, with both short and long-term real interest rates at high levels (5.5 6.0 percent), and Lombard and discount rates remaining steady at 8 and 6 percent respectively. Money supply growth, targeted at between four and six percent for 1990, was right on track in the first nine months of 1990, averaging seasonally adjusted growth of 5.0 percent over the average of the last quarter of 1989. Although the western German deficit (administrative basis) sank to DM 20 billion in 1989, its lowest level in over a decade, much higher budget deficits loom on the horizon. All-German public sector borrowing as a result of unification (including FRG and former GDR public sector debt, the German Unity Fund, and Trust Fund borrowing) is estimated at roughly DM 110 billion for 1990 and DM 135 billion for 1991. In recent years a number of changes have been implemented in the money and capital markets in an attempt to enhance the attractiveness of Germany as an international financial center. Nevertheless, the development of a money market and a deeper equities market have been stifled by a securities transactions tax. However, effective January 1, 1991, both the transactions tax and the Gesellschaftsteuer, or company tax - a tax on firms' new securities issues will be abolished. 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 July 2, 1990 economic and monetary unification and subsequent political unification of the two German states set the stage for the integration of economies which have pursued independent ideological and structural paths for the past 45 years. Privatization has thus far proceeded slower than originally anticipated fewer than 500 of the GDR's 8000 state-owned enterprises will have been transferred to private ownership by the end of 1990. Many potential investors have been reluctant to commit themselves until the issues of property claims and liability for existing environmental damage have been resolved. Legislation passed by the GDR prior to unification also prevents new owners of existing firms from undertaking substantial personnel reductions in the first year of operation. Because many individuals engaged in various ancillary activities were nominally employed by the state-owned enterprises, investors cannot always be certain how many employees of the former state-owned firms will be entitled to employment after transfer of ownership. GERMANY State-owned enterprises in eastern Germany were also required to issue a balance sheet in Deutsche marks. Thus far, many firms have not yet accurately stated their assets and liabilities, identified existing contractual obligations, or valued inventories, etc. The Treuhandanstalt, or Trust Agency, responsible for privatization, cannot therefore determine a price for many of these firms and prospective investors cannot make rational investment decisions until all of these facts are known. Investment in eastern Germany is being promoted via a number of regional development programs similar to the FRG's Border Zone Promotion and Regional Development programs. Investors in eastern Germany are now entitled to a combination of tax credits and tax deductions and accelerated depreciation which can effectively reduce the cost of investment by one-third. These incentives are available to both foreign and domestic investors. Germany has placed a high priority on rebuilding the industrial infrastructure of the former GDR. Many prospective investors must wait until decisions for upgrading the transportation, telecommunications, and public utilities systems are made. The economy of the former GDR has not yet bottomed out unemployment is still increasing and production in August 1990 was 51 percent of the August 1989 level. Total investment in the GDR this year has been approximately DM 50 billion, while various estimates place the amount of capital ultimately required to rehabilitate the economy of the former-GDR area at between DM 2-3 trillion. Significantly, however, a number of the more conspicuous investors, e.g., Daimler and VW, have opted for 'greenfield' plants - that means that much of the investment in the former GDR will be state-of-the art and contribute to higher growth rates in the future. 4. Debt Management Policies Except for 1979, 1980, and 1981, the FRG has had a positive current account balance in every year since 1970. Thus the FRG is a major net creditor. 5. Significant Barriers to U.S. Exports Germany is one of the world's strongest economies, and refreshingly one which poses few 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 Germany is an excellent place for U.S. companies to do business. Services Barriers: Conditions of access vary considerably and few complaints are to be found. 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. |