Germany: A Miracle Economy
An analysis of macro-economic variables of Germany:
This article aims to recognise and analyse the macroeconomic variables of the Federal Republic of Germany’s economy. The paper intends to study the exports and imports of Germany with the global economy. It will also focus on the economic and social variable of unemployment and the trends between the macroeconomic variables, with a glimpse of the German economy’s future.
Economic Growth:
The economic growth of a country refers to the increase in the production of goods and services in a given time period. There are numerous ways to measure the economic growth of a nation. However, GDP is the best method to calculate the economic growth of a country. Even more specifically, Real GDP is the accurate indicator, as the effects of inflation are adjusted already. and since GDP Growth rates use the Real GDP data, below figure 1 depicts the GDP Growth Rate percentage (Annual) of Germany from 1990 to 2019. The German economy has experienced GDP growth as high as 5.3% and as low as -5.7% in 1990 and 2009.
The German economy went through various ups and downs; figure 1 shows the downward sloping trend, with the most significant drop in the 2009 financial crisis. Germany’s geo-strategic position in Europe is often called the ‘anchor of stability in Europe.’ Though 2009 was a recession period for Germany, the economy boosted back soon; however, by 2012; the GDP stooped again to 0.4%. The German economy’s main driving force was foreign trade; however, it slowed down the development in 2009. Apart from foreign trade, capital formation in machinery, as well as exports, fell dejectedly.
Inflation:
Inflation refers to the sudden increase in the money supply or the price level in the economy. The standard measurement of inflation is the CPI- Consumer Price Index. Relationship between inflation and economic output (GDP) is a delicacy in an economy, and thus both macroeconomic variables are a central theme of macroeconomic policy. There is no clear relationship between inflation and economic growth; hence it depends on the country and its economic condition. Various studies and theories about their relationship have shown different insights: — There might be no relationship between the two variables (Sidrauski, 1967), there might be a positive relation (Mallik and Chowdhury, 2001) or a negative relation (Fisher, 1993).
Figure 2 compares the two macroeconomic variables- inflation and growth rate with numerous high points and low points. The highest inflation recorded between 1990–2019 in Germany was 5.05% in the year 1992. At the same time, the lowest inflation steeped down to 0.31% in the year 2009. Both the cases of 1992 and 2009, shows a different relation between GDP and Inflation. Even in the consecutive year 1993, the GDP stooped very low -1.00% even though inflation did not fall much. Looking back at Germany’s history, significant events like the reunification of Germany: west and east Germany covers the 1990s. The process and system through which the reunification occurred imposed an enormous price on Germany.
In 2009, Germany’s financial crisis resulted in the fall in exports and machinery, therefore, caused a stoop CGPA. As mentioned above, Germany’s main economy booster was the foreign trade and exports, which fell and caused the GDP to fell.
Unemployment:
In the early 1960s, Professor Arthur Okun proposed Okun’s Law which looks into the statistical relationship between the two macroeconomic variables of a country’s economic growth and unemployment. The law aims to tell how much GDP falls if the unemployment rate is above its natural rate. (minimum unemployment rate).
The output depends on the labour force appointed for the production process, larger labour force more output; therefore, they have a positive relationship. And, Labour force — Unemployed = total employment
Therefore, less labour force leads to more unemployment, resulting in an inverse relationship. (depending upon the labour force). The law has evolved with the evolving economic structures. Figure 3 shows how unemployment rose from 6.32% to 7.67% in 1993, leading to a decline in GDP. Similarly, in 2003 the GDP was -0.7% while unemployment rose from 8.48% to 9.77%. Though in 2009, unemployment did rise a little.
Economist A.W. Phillips presented the unique idea of the Phillips curve, which shows the special relationship between inflation and the unemployment level in a country’s economy. It shows how both the variables move in the opposite direction. There will be inflation in a fully employed economy; on the other hand; unemployment will increase or persist with low inflation rates. Therefore, in fig 3, in 2005 the unemployment was at its peak of 11.16% whereas the inflation rate was 1.54%. Similarly, inflation dropped to 0.31% in 2009, with a high unemployment rate; 7.74%.
Exports of goods and services:
German economy depends heavily on the exports of goods and services. According to the world bank, Germany’s exports of goods and services have a 47.42% share of its GDP. In 2009, the economy faced a crisis where the GDP declined rigorously. In comparison to other euro economies, Germany was affected the most due to its dependency on exports. As figure 4 depicts, the exports started declining after 2006, to -14.27% in 2009. Even after a considerable dip, the economy recovered quickly leading to a V-shaped recession.
Comparatively, the unemployment level did not fell by large numbers due to Innovative corporatist functioning and management, which involved the government, employers, trade unions etc. turning Germany into a miracle economy once again by 2011.
Chancellor Angela Merkel planned and executed reforms during the crisis period like investments in infrastructure, reductions in health care and bonuses for families with children. Apart from this, Merkel also signed an economic stimulus package which is worth up to 50 billion euros, with a parallel aim of underpinning economic growth.
Comparison of GDP Growth Rates:
European Unions’ economy is the second-largest economy in the world (nominal) following the United States. However, it comprises some powerful economies like Germany, France and the United Kingdom etc. it still had to endure ups and downs.
Figure 5 depicts the GDP Growth Rate of Germany, France and the United Kingdom, which shows the hard-hit crisis of 2009.
The United Kingdom, the third-largest economy in Europe is a hub of natural resources and advance agriculture, is a net importer of energy. Services play a crucial role in the GDP growth rate of the UK.
The financial crisis severely hit the UK’s economy, leading to a drop in GDP to -4.24%. The economy slowed down while being pushed into a recession. After several reforms and measures for the stabilization of the economy, the GDP growth rate increased.
In Germany’s case, the unification of west and east Germany in the 1990s upheaval the German economy. Still, they managed to maintain their GDP growth rate as high as 5.10% in 1991. However, due to the net exports going negative, the country in 2009 faced a fall of GDP to -5.70%. Though as a miracle economy, it bounced back in no time to a 4.20% GDP Growth Rate with the aid of reforms and measures taken up by the government.
The French economy is rather a capitalistic economy with a diversified share in every sector. Even though it is a capitalistic economy, the government still holds a substantial presence in some sectors of the economy. Like the UK and Germany, the French economy suffered from the crisis with GDP growth rate going to -2.87%. Though the fall in France’s GDP was comparatively less than the other two countries, the GDP rose to 2.19% by 2012.
Conclusion
A robust economy of Germany in the European Union is an export centric and investment centric economic model.
Even in the 2009 crisis, Angela Merkel introduced tax cuts, resulting in an increase in the total budget deficit by 4.1% in 2010. However, increased revenues and less spending decreased the budget deficit in 2011, which later in 2017 increased as a budget surplus with 0.7%.
The government also plans to switch to renewable energy sources to cut down their gross consumption by a considerable margin.
Currently, amidst the pandemic, Germany’s GDP fell by 5%, causing an end to a ten-year old-growth period. Even though Covid-19 caused a 5% drop in GDP, the recession of 2009 still remains one of the most significant dark periods for Germany.
