Germany is among the richest nations in the European region having been ranked position fourteen out of the forty four nations in the region (Petersen, 2012). It embraces a free economy and according to the 2018 Index, it is ranked position 25 world-wide with a score of more than 74.0 in terms of economic freedom. Germany also embraces business and investment freedom with a score of 86.1 and 80.0 respectively although investment has been poor in the country. Germany is the most influential European Union member nation both economically and politically (Alesina, 2010). Germany has generally been doing great in terms of economic performance currently recording a surplus in its current account but still more improvements need to done. The budget surplus in the Germany economy needs to be seriously addressed as it is contributed mainly by some various deficits brought by various government policies. Germany has been witnessing imbalance in its trade and has been accused of devaluation although it does not have a national currency (Chiu, Lee & Sun, 2010). This imbalance in trade which is brought by various deficits in the economy of Germany needs to be solved to foster economic growth in Germany. Germany has been clutching with various nations in the European Union. A good example is the United States which has accused Germany of saving more and spending less (Cohn, 2015). The United States under the leadership of President Donald Trump has threatened to introduce tariffs on the Germany imports which will majorly affect its vehicles which contribute much towards improving the Germany exports. This therefore means that Germany needs to restructure its economic policies and maintain peace coexistence with the other nations in order to eliminate its huge trade imbalance and avoid future collapsing of its economy.
Generally Germany has been doing well in terms of economic performance having improved from the weakest economy in the Europe region to a superpower (Pickhardt & Sardà Pons, 2016). Despite the good performance of the economy of Germany, various trade imbalances in its economy have been witnessed due to various deficits in its sectors of the economy as result of disproportionate economic policies. Some of these deficits are caused by various challenges to the economy which include low rate of wage growth and inflation, Germany budgetary surplus and its aging society and low investment and much saving (Keynes, 2017).
The rate at which the wage for the Germany workers increases has been poor for the last ten years. After the 2008 great recession, the Germany workers were even witnessed accepting low wage rates in order to secure their jobs (Clark, Georgellis & Sanfey, 2012). During those days unemployment rate was high averaging more than 10 percent. Since then the Germany economy has been improving and the unemployment rate has been decreasing. Although the economy has been improving its performance, the wage rates for the Germany workers have still been increasing at a slow pace. The 2018 statistics show that the unemployment rate in Germany has decreased to 3.9 percent. This is a relative low rate of unemployment at which workers should be paid a relatively higher wage rate but still the wage rates for the Germany workers are still low compared to their economic growth. The lower wage rates for the Germany workers have left them with little to spend and as a result they end up spending less on imports (Bonin, Kempe & Schneider, 2012). Due to this there has been an imbalance in trade between Germany and other nations due to deficits in consumer expenditure (Nilsson, 2013).
Due to worker’s low wage rate the inflation growth in Germany has been too much low as compared to the targeted inflation rate by the European Central Bank. This therefore means that the price of goods for the Germany goods has been kept low which is a threat to the European Union nations. As a result Germany exports too much than it imports creating an imbalance in trade due to the deficits in consumer expenditure on imports.
Germany’s economy is doing much better and currently posts a budget surplus. The government has been in a dilemma on how to utilize this chance. Should it invest more to gain long-term benefits in future or save what it has?. The public debt of Germany is rapidly falling and hence it has a room to increase its public expenditure but it’s not doing so (Roubini & Sachs, 2015). Germany has mainly been depending on its exports mainly to the Asian countries and also its auto industry. The Asian countries are currently undergoing industrialization and hence a deficit may result soon from the decline in the Germany’s exports (Drucker, 2014). It’s therefore wise for the government to shift and invest in the digital opportunities of which it’s not doing so. The Germany population is also aging and hence this has increased the health costs for the aged population as well as the pension payments. This has resulted into a deficit in the overall economic growth as the government tends to save more to cater for the aging population. If the government increases its public expenditure and invests wisely on the available opportunities such as digitalism, construction of roads and training programs among others, it is likely to realize more benefits in future. The government has not done so and this has lowered the rate of Germany’s economic growth and increased trade imbalances with other European Union nations (Tufte, 2010). If the government does not act fast and increase its public spending, Germany is likely to experience more deficits in future.
Currently Germany has the highest current account surplus at a level of 8 percent of the gross domestic product. This means that German exports are too much more than its imports. This is due to the fact that citizens of Germany and its domestic companies still prefer saving than investing (De Grauwe & Ji, 2012). This has greatly caused a deficit in the economic growth of Germany and much need to be done to solve the issue as soon as possible. The deficit in the economic growth of Germany can only be eliminated by the government encouraging companies to invest by lowering its higher tax rates and also encouraging more aged citizens to stay in the labor market rather than retiring (Garrett & Mitchell, 2011).
Conclusion
Germany is among the rich nations of the Europe region and is currently having a budget surplus. This is an indication that Germany exports more than it imports. As a result there has been an imbalance in trade between Germany and other European Union nations. The economy of Germany has been facing deficits despite the fact that it is performing better. Some of the challenges which have caused the economy deficits include low rate of wage growth and inflation, Germany budgetary surplus and its aging society and low investment and much saving. The government needs to do much to address these challenges to avoid further deficits in future.
References
Alesina, A. (2010). The political economy of the budget surplus in the United States. Journal of Economic Perspectives, 14(3), 3-19.
Bonin, H., Kempe, W., & Schneider, H. (2012). Household labor supply effects of low-wage subsidies in Germany. Economics, 34(3), 76-84.
Chiu, Y. B., Lee, C. C., & Sun, C. H. (2010). The US trade imbalance and real exchange rate: an application of the heterogeneous panel cointegration method. Economic Modelling, 27(3), 705-716.
Clark, A., Georgellis, Y., & Sanfey, P. (2012). Job satisfaction, wage changes, and quits: Evidence from Germany. In 35th Anniversary Retrospective (pp. 499-525). Emerald Group Publishing Limited.
Cohn, G. (2015). Political Economy in Germany. The Economic Journal, 15(60), 600-608.
De Grauwe, P., & Ji, Y. (2012). What Germany should fear most is its own fear: An analysis of Target2 and current account imbalances, 40(5), 45-54.
Drucker, P. F. (2014). The changed world economy. Foreign Aff., 64, 768.
Garrett, G., & Mitchell, D. (2011). Globalization, government spending and taxation in the OECD. European Journal of Political Research, 39(2), 145-177.
Keynes, J. M. (2017). The economic consequences of the peace. Routledge.
Nilsson, L. (2013). The measurement of intra-industry trade between unequal partners. Review of World Economics, 133(3), 554-565.
Petersen, H. G. (2012). Size of the public sector, economic growth and the informal economy: Development trends in the Federal Republic of Germany. Review of Income and Wealth, 28(2), 191-215.
Pickhardt, M., & Sardà Pons, J. (2016). Size and scope of the underground economy in Germany. Applied Economics, 38(14), 1707-1713.
Roubini, N., & Sachs, J. (2015). Government spending and budget deficits in the industrial countries. Economic policy, 4(8), 99-132.
Tufte, E. R. (2010). Political control of the economy. Princeton University Press, 54(13), 35-47.
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