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Business

German Economy Loses Competitiveness

Germany is no longer as competitive as it once was. Compared to four years ago, the country’s economic indices have fallen to 15th position in international comparisons.

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Germany's economy is in need of a tune up

With only a few months left to go before Chancellor Gerhard Schröder’s administration runs out, the state of the economy is no better off than when the Social Democrat came into power. In fact, Germany’s leading economic indices show that the country is actually losing its world-wide economic competitiveness. In main categories such as the employment market, finance policy and social security, the country has declined dramatically in international comparisons.

According to a recent report published in the World Competitiveness Yearbook 2002, Germany is ranked number 15 in international economic statistics. The study conducted by the International Institute for Management Development (IMD) in Lucerne, Switzerland, shows that not only is the German economy losing points when compared to other countries, but that the tempo at which it’s worsening is continual. In 2001, Germany was in 12th place; and a year before that it was ranked number 11.

The most direct causes for the decline in Germany’s economic competitiveness are home-grown. Despite what many observers say about the economic downturn following September 11 and its effects on international markets, Germany’s problems are of its own making. And the government’s economic policy is largely to blame.

According to IMD’s report, the governmental efficiency (a compilation of factors from public finance, fiscal policy, institutional framework, business framework and education) dropped from 18th to 26th position.

An inefficient government?

Whereas Hans Eichel’s efforts at reforming the budget received a mediocre 18th ranking, the country’s overall financial policy was rated a catastrophic 44th out of 49 reviewed industrial and emerging economies. The high social security dues (46th highest internationally) certainly played a role in the negative rating as did the company taxes, which were ranked considerably worse than elsewhere. The average rate of tax on a company’s earnings in Germany is the 45th highest in the world.

Even worse than the government’s economic efficiency – or lack thereof – is employment legislation coupled with the high rate of unemployment. The strict governmental regulations placed on employment in Germany are at the absolute bottom of the scale when it comes to promoting economic competitiveness. According to the IMD study, the job market is too inflexible, and there are too few options available for workers. The current unemployment insurance policy offers little incentive to quit welfare and take up a job, the study says. As a result the permanent high unemployment rate ranks 29th in international comparisons.

At the same time, though, companies complain about the difficulty in finding qualified workers. The government’s immigration policy is partially to blame for this by making it hard for many companies to attract the necessary skilled foreign workers. In the employment of foreigners Germany ranks number 39.

All of these points of comparison are issues central to the SPD-led government. At the time of his election four years ago, Gerhard Schröder campaigned on an improvement of the employment situation and the economy in general. Since then, however, unemployment has skyrocketed, and the chancellor is being forced to eat his promises as he watches company after company go bankrupt.

Positive results

Not all is completely gloom and doom for Germany’s economy and the SPD-led government. The IMD study shows that Germany continues to attract a high rate of direct investment. Compared to other countries, the increase in the amount of money entering the economy through direct investment is the greatest, placing Germany in first position here.

The extensive export market with its emphasis on development of new products and markets also continues to remain strong in an international comparison. In this regard Germany ranks number two.

And despite recent criticism of increasing health insurance, overworked and underpaid doctors, and an insufficient national health plan, Germany’s health system is still considered way above international average. The amount of money the government spends on health and medicine is the second highest in the world.

Who’s who

The United States is still the undisputed top-rated country for a healthy business and economic environment. Number two in this context is Finland, where the government is actively involved in creating a competitive business climate for new investors. Number three is Luxembourg and number four is the Netherlands. Both of these European Union countries up-seated Singapore which was in second place last year. On the whole, EU countries faired well in the international comparison, with Denmark, Ireland and Sweden coming in the top 15. Great Britain and France did worse than Germany, coming in at 16th and 21st place respectively.

The World Competitiveness Yearbook is an annual study of 49 industrial and emerging economies. Based on information and data collected from international and regional organizations as well as private institutions, the IMD ranks and analyzes how the world’s most important economies are suitable for sustaining and promoting companies.

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