ACADEMY OF ECONOMIC STUDIES OF MOLDOVA

FACULTY OF INTERNATIONAL ECONOMIC RELATIONS

DEPARTMENT OF INTERNATIONAL ECONOMIC RELATIONS

Germany's business environment

Elaborated by:
Ratcov Alexandra
Chirita Tatiana
Roibu Stela

CHISINAU 2016

CONTENTS

1
INTRODUCTION..3

CHAPTER I: Germanys economic performance .............................4

1.1. General
overview.................................................................................................................4
1.2. Economic system.........
........................................6
1.3. Germanys place in World
Economy....................................................................................9

CHAPTER II: Analysis of business environment.......................9

2.1. German economico -investment characteristics.....................................................15

2.2. Business climate in Germany.........................................................................................19

2.3. Business sectors for foreign investors................................................................................25

CONCLUSION..29

BIBLIOGRAPHY ........31

2
 Introduction

Germany has a social market economy with a highly skilled labour force, a large capital stock,
and a high level of innovation. It is the world's third largest exporter of goods, and has the largest
national economy in Europe which is also the world's fourth largest by nominal GDP and the fifth
one by PPP ( purchasing power parity ).

Being home to the modern car, the automotive industry in Germany is regarded as one of the
most competitive and innovative in the world, and is the fourth largest by production. The top 10
exports of Germany are vehicles, machinery, chemical goods, electronic products, electrical
equipments, pharmaceuticals, transport equipments, basic metals, food products, and rubber and
plastics.

The scope and objectives of this paper is to analyze Germany, its business environment, its
trade, economy, investments and its business climate. But this is not only to analyze Germany, but
also to understand the economic development of Germany, also what influence has Germany in
World Economy. The purpose of this research is also to point out the major influence of Germany in
economy and business.

Due to that, this study is divided into 2 main chapters:

Chapter 1 is Germanys economic performance that shows the peculiarities of German

economy, its development and role, and also the evolution of Germany in the economic way. During
this chapter we will understand the way how Germany achieved its major place in the world arena.

Chapter 2 is

The subject of this analyses is Germanys business environment . The object of the study is
Germany, one of the most influent country from Europe.

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 CHAPTER I: Germanys economic performance

1.1 General overview

Despite the challenging economic environment within the European Union,

Germany continues to be one of the worlds most powerful and dynamic
economies. Business freedom and investment freedom are strong. Long-
term competitiveness and entrepreneurial growth are supported by openness
to global commerce, well-protected property rights, and a sound business
regulatory environment.

The German economy has gradually emerged from the effects of the global
financial crisis, which had an acute negative impact both on Germanys
public finances and on its economic growth. Actions required to hold the
eurozone together have taken a toll, and the more recent migrant crisis has
had huge political, economic, and societal impacts within the country.

Rule of law

German law fully protects the property rights of German citizens and foreigners alike. Secured
interests in property, both chattel and real, are recognized and enforced. Germany boasts a robust
regime for the protection of intellectual property rights. The judiciary is independent, and the rule of
law prevails. Corrupt acts by public officials are vigorously prosecuted and punished.

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 Government size
The top personal income tax rate is 45 percent. The federal corporate tax rate is 15.8 percent, but
other taxes, including a solidarity tax, make the effective rate more than 30 percent. The overall tax
burden equals 36.1 percent of total domestic income. Government spending has amounted to 44.2
percent of total output (GDP) over the past three years, and budget surpluses have averaged 0.4
percent of GDP. Public debt is equivalent to 71.0 percent of GDP.

Regulatory efficiency

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 The efficient regulatory framework strongly facilitates entrepreneurial activity, allowing
business operation to be as dynamic in Germany as anywhere else in the world. A nationwide
statutory minimum wage was introduced in 2015. Monetary stability is well maintained, but
electricity costs are among the highest in Europe because of the governments commitment to
renewable energy.

Open markets

Trade is important to Germanys economy; the value of exports and imports taken together
equals 86 percent of GDP. The average applied tariff rate is 1.5 percent. Barriers to foreign
investment are low, but state-owned enterprises distort the economy. The well-functioning and
modern financial sector offers a full range of services. The banking sector consists of the traditional
three-tiered system of private, public, and cooperative banks.

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 1.2 Economic system

The country of Germany operates under a "soziale Marktwirtschaft," which translates into
English as a social market economy. The system was adopted after World War II and reflects the
principles of a free enterprise market as well as an economy where all members of society benefit.

Germany today is the 4th largest economy in the world after the US, China and Japan.
However, immediately after World War II, the German economy was in ruins and the society had to
be rebuilt from scratch.

Despite the fact that much of its capital stock and infrastructure were destroyed during or after
the war, what Germany had in its favor was a skilled workforce and a high technological level.
Beginning with 1948, the German economy soon embarked on a lasting period of low inflation and
rapid industrial growth known as Wirtschaftswunder or economic miracle in German.

An enduring element of the economic miracle has been its social market economy system or
soziale Marktwirtschaft. Introduced by then Minister of Economics Ludwig Erhard, who went
down in history as the "father of the German economic miracle, soziale Marktwirstschaft rested on
three main principles:

- Individual freedom rested on the liberal ideal of individuality.

- Solidarity meaning that an individual is part of a larger society consisting of mutual

dependencies

- Subsidiary being a role of the state to shape the relation between individuality and solidarity.
It should give the highest priority to individual rights and ensure that what can be done on the part of
the individual should be done by it and not by the state.

Under sozial Marktwirtschaft, the state provided subsidies and controls few segments of the
economy, with free enterprise and the rule of the market promoted as a part of governmental
policy.

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 Current Economic Situation

As of 2013, Germany is the third largest exporter and importer in the world, producing the largest
trade surplus as a national economy. While the unified German economy grew well during the
1990s, it experienced a virtual stagnation beginning in the 2000s. With chronically high rates of
unemployment and relatively flat growth figures of only about one to one and a half percent, the
German welfare system came under considerable strain. By the end of 2000s, the economy followed
a global trend toward growth thanks to its large export economy. Unfortunately, it also suffered an
economic contraction after the global recession in 2009.

Thanks to swift economic reforms, Germany exited the recession almost as quickly as it entered it,
achieving recovery thanks to an ambitious economic recovery plan by the end of 2009. Growth
continued through 2012 at a rate higher than its local neighboring nations. By 2014, Germany
recorded the highest trade surplus in the world.

Today, Germany's economy is largely made up of a service sector (around 70 percent of the total
GDP), a robust industry (29.1 percent of GDP), and a small but notable agricultural sector (0.9
percent of GDP). The nation's national output derives from exports (41 percent): including vehicles,
machinery, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport
equipment, metal, food products, rubber, and plastics.

In 2016, Germany has kept some good macroeconomic fundamentals. For a third year in a row,
the country has a budget surplus and the public debt, higher than the 60% GDP limit imposed by the
EU, has continued to fall (68% of GDP). The Government is on the right path to succeed in its goal
of reducing it to 60% of GDP by 2024. Despite a slight downturn, the current account remains
largely in surplus thanks to a massive trade balance surplus. The attacks of which 1,200 women
were victim in Cologne on New Year's Eve 2015/6, as well as the terrorist attack perpetrated by a
lorry in a Christmas market in the heart of Berlin in December 2016, have put into question German
openness and multiculturalism, due to a rise in feelings of insecurity. Criticised, chancelor Angela
Merkel broke with her previous immigration policy and worked for the signature of an EU
agreement with Turkey aiming to reduce the refugee influx into Europe. From January 2015 to June
2016, over one million asylum seekers arrived in Germany, essentially from Syria, Iraq and
Afghanistan. In the context of the future legislative elections of September 2016, Angela Merkel
promised EUR 6 billion tax cuts in 2017 and 2018, as well as a hike in investment spending.
Germany faces many challenges, such as an ageing population, a lack of engineers and researchers,
the need to finance a transition from 25 to 80% of sustainable energy from now until 2050, the exit
from the use of nuclear energy in 2022 and the modernization of coal plants, as well as the lack of
investment.

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 The German unemployment rate has dipped below 5%, the lowest level in the past 25 years. The
country counts over 43 million salaried workers, the highest number ever recorded. However, the
challenges of refugee integration and maintaining social cohesion persist. Criticism of migrants and
refugees have persisted, especially in the former East Germany, where unemployment remains
higher than the rest of the country (9%). Additionally, Germany has one of the highest levels of
inequality in the EU.

Main Sectors of Industry

The agricultural sector amounts to less than 1% of GDP and employs 1.3% of the German
workforce. The agricultural sector has benefited greatly from state subsidies. The main agricultural
products include milk, pork, livestock, sugar beets and cereals. German consumers tend to prefer
organic agriculture. The country is going through a deindustrialization process of the food sector.

The industrial sector amounts to about 30% of GDP - a dramatic decline from 51% of GDP in
1970. The automotive industry is one of the countrys largest industrial sectors, but the German
economy also retains other specialized sectors, including electric and electronic equipment,
mechanical engineering and chemical products. The decision to abandon civil nuclear energy by
2022 is likely to change the industrial landscape in the near and distant future.

The service sector amounts to about 70% of GDP and provides work for 70% of the German
workforce. The German economic model relies heavily on a dense network of small and medium-
sized enterprises (SMEs): more than 3.6 million SMEs employ 68% of salaried workers in Germany.

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 1.3 Germanys place in World Economy

Along with the United States and Japan, Germany has one of the worlds biggest economies
and most dominant central banks. Of the three, Germany has the smallest and most vulnerable
economy. Germanys GDP is less than one-third of United States GDP and less than one-half of
Japans. Despite Germanys relatively small size, it has consistently exerted a powerful influence on
the world economy. Since the end of World War II, the Federal Republic has played a key role in
beginning, managing, or ending each crisis and each phase experienced by the global monetary
system.

In 2014, Germany recorded the highest trade surplus in the world worth $285 billion, making
it the biggest capital exporter globally. Germany is the third largest exporter in the world with 1.13
trillion euros ($1.28 trillion) in goods and services exported in 2014. The service sector contributes
around 70% of the total GDP, industry 29.1%, and agriculture 0.9%. Exports account for 41% of
national output. The top 10 exports of Germany are vehicles, machineries, chemical goods,
electronic products, electrical equipments, pharmaceuticals, transport equipments, basic metals, food
products, and rubber and plastics.

Germany is rich in timber, iron ore, potash, salt, uranium, nickel, copper and natural gas.
Energy in Germany is sourced predominantly by fossil fuels (50%), followed by nuclear power
second, then gas, wind, biomass (wood and biofuels), hydro and solar. Germany is the first major
industrialized nation to commit to the renewable energy transition called Energiewende. Germany is
the leading producer of wind turbines in the world. Renewables now produce over 27% of electricity
consumed in Germany.

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 99 percent of all German companies belong to the German "Mittelstand," small and medium-
sized enterprises, which are mostly family-owned. Of the world's 2000 largest publicly listed
companies measured by revenue, the Fortune Global 2000, 53 are headquartered in Germany, with
the Top 10 being Volkswagen, Allianz, Daimler, BMW, Siemens, BASF, Munich Re,E.ON, Bayer,
and RWE.

Germany is the world's top location for trade fairs. Around two thirds of the world's leading
trade fairs take place in Germany. The largest annual international trade fairs and congresses are
held in several German cities such as Hanover,Frankfurt, Cologne and Dsseldorf.

Germany as a federation is a polycentric country and does not have a single economic center.
The stock exchange is located in Frankfurt am Main, the largest Media company (Bertelsmann AG)
is headquartered in Gtersloh; the largest car manufacturers are in Wolfsburg,Stuttgart and Munich.

Germany is an advocate of closer European economic and political integration. Its commercial
policies are increasingly determined by agreements among European Union (EU) members and
EU single market legislation. Germany introduced the common European currency, the euro on 1
January 1999. Its monetary policy is set by the European Central Bank in Frankfurt.

Germanys macroeconomic indicators:

2011 2012 2013 2014 2015

GDP per capita (EUR) 33,599 34,228 34,980 36,003 37,156

GDP (EUR bn) 2,699 2,756 2,825 2,920 3,023

Economic Growth (GDP, annual variation in %) 3.7 0.4 0.3 1.6 1.7

Domestic Demand (annual variation in %) 2.9 -1.0 0.8 1.3 1.6

Consumption (annual variation in %) 1.3 1.0 0.6 0.9 1.9

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 2011 2012 2013 2014 2015

Investment (annual variation in %) 7.2 -0.4 -1.3 3.5 2.2

Exports (G&S, annual variation in %) 8.3 2.7 1.6 4.1 5.4

Imports (G&S, annual variation in %) 7.0 -0.4 3.1 3.7 5.8

Industrial Production (annual variation in %) 7.3 -0.4 0.1 1.5 0.5

Retail Sales (annual variation in %) 1.1 0.1 0.1 1.2 3.0

Unemployment Rate 7.1 6.8 6.9 6.7 6.4

Fiscal Balance (% of GDP) -1.0 -0.1 -0.1 0.3 0.6

Public Debt (% of GDP) 78.3 79.6 77.2 74.7 71.2

Inflation Rate (CPI, annual variation in %, eop) 2.0 2.0 1.4 0.2 0.3

Inflation Rate (CPI, annual variation in %) 2.1 2.0 1.5 0.9 0.2

Inflation (PPI, annual variation in %) 3.5 1.4 -0.5 -1.7 -2.3

Policy Interest Rate (%) 1.00 0.75 0.25 0.05 0.05

Stock Market (annual variation in %) -14.7 29.1 25.5 2.7 9.6

Exchange Rate (vs USD) 1.30 1.32 1.38 1.21 1.09

Exchange Rate (vs USD, aop) 1.39 1.29 1.33 1.33 1.11

Current Account (% of GDP) 6.0 7.1 6.8 7.3 8.4

Current Account Balance (EUR bn) 165 194 190 213 257

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 2011 2012 2013 2014 2015

Trade Balance (EUR billion) 156 194 200 215 246

Germany is the third largest exporter and importer in the world, accounting for more than half
of the European Unions international trade. Since January 1 1995, Germany has been a part of the
World Trade Organisation, existing both as an individual nation and as part of the EU (known
officially as the European Communities in the WTO until 30 November 2009).

Much of Germanys exports focuses on industrially produced goods and services. In particular
German mechanical engineering products, vehicles, and chemicals are highly valued internationally.
Around one euro in four is earned from exports and more than every fifth job depends directly or
indirectly on foreign trade.

Exports of goods and services also made up about 52 percent of its GDP. Significantly, EU
integration has greatly intensified intra-European trade, with about 69 percent of German exports
shipped to European countries and 58.2 percent delivered to member states of the EU.
Within the EU itself, Germany's most important trading partner continues to be France (9.5
percent of total exports). Meanwhile 7.9 percent of German exports went to the US in 2012 and 6.6
percent to the UK.

Most of the goods imported to Germany originated from the Netherlands. Germany imported
goods worth 86.6 billion euro from the Netherlands (9.5 percent of total German imports), with
China and France accounting for the next highest imports.

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 Conclusion

Europe's leaders will soon return from summer vacation, and when they do, they will be
forced to confront problems that persisted in their absence namely, high unemployment and a
looming consumer credit crisis. Some have expressed optimism over recent improvements in the
European crisis, but German leaders may be less assured. More than anyone else, they understand
that the debate over whether the European Union should integrate further is unavoidable; further
integration may be one of the only ways the bloc can outlive its current problems. They understand
this because Germany's own unification was such an arduous process. It took decades of war, major
technological shifts and extraordinary leadership for the various German mini-states to unify.
Ultimately, they came together for one reason: survival. Now Germany must once again measure the

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risks and rewards associated with integration, only this time for the sake of preserving the whole of
Europe. But there is a limit to how much Berlin is willing to sacrifice for a group of nations that
innately distrusts German power. The problem is that their attempts began with bloodshed and ended
in chaos. Though it is not a perfect analogy for the formation of the European Union, Germany in
the 19th century is perhaps the best example in modern history of a successful unification. Unlike
Europe, Germany was the product of polities with common ethno-linguistic roots. Nonetheless, its
composite parts were an assortment of competing mini-states whose sacrifices helped build a
prosperous nation. German history could inform Europe's understanding of the true costs of
unification. For its part, Berlin should bear in mind the lessons of unification as it is forging a true
European Union, should it choose to do so. More often than not, new political systems are rooted in
the ashes of war. The European Union and Germany share this tradition. Theirs is a legacy of birth
marked by conflict so severe that it destroyed the old system and gave way to unorthodox solutions
previously unthinkable. Germany remained politically fragmented, unable to join this revolution or
embrace an industrialized economic model. Prior to the Industrial Revolution, political
fragmentation was only modestly restrictive; most of the Continent relied on agriculture, not
industry. But the development of high-productivity manufacturing required large amounts of
unevenly distributed mineral resources and free access to large amounts of consumers, conditions
that put the various fragmented German mini-states at a serious disadvantage. Products
manufactured in Prussia had to be inspected and taxed as many as a dozen times before reaching
Wallonia, where coal and steel had to undergo the same ordeal in the opposite direction. Many see
no reason to give Brussels control over their military or energy budgets, for example.Moreover, the
European Union also lacks an internal leader that is willing and able to act decisively. From the very
beginning, Prussia shaped the unification of the German nation. It had gained some 500,000 subjects
and 10,000 square kilometers (nearly 4,000 square miles) of land after the Napoleonic Wars and had
the best land army in Europe. Like Prussia, modern Germany is the wealthiest and most powerful
member of its respective trading bloc, yet it has continuously balked at assuming leadership of the
European Union. In a telling anecdote, when financial markets were reeling from uncertainty over a
string of bailouts, Poland's foreign minister famously said in 2012 that for the first time in history
his country feared German inaction more than German action. Germany's reluctance to be Europe's
leader is perfectly rational for Berlin. In fact, its reluctance highlights another key difference
between Chancellor Angela Merkel's situation and that of her most illustrious predecessor, Otto von

15
Bismarck. The original design of a united post-war Europe was foreign-made. Today it is
unthinkable to imagine Merkel delivering a "blood and iron" speech at the European Parliament.
However, building nations from several composite parts necessarily requires redistributing wealth
and power, an approach that runs counter to the sovereignty of the constituent entities. At some
point, nations must be coerced, though military coercion is by no means the only available option.
This is where the analogy between the European Union and 19th century Germany ends. It is
increasingly unlikely that a true fiscal and political union in Europe can be achieved by aligning the
interests of the constituent nations. However, there does not seem to be any pressure on Germany to
force other nations into a more integrated union.

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