Macroeconomic Analysis of Germany
EXECUTIVE SUMMARY
The following paper will start by examining the macroeconomic state of Germany by citing real changes in fiscal and monetary policies, exchange rates and international trade. It will then analyze their influences and consequences on the economy and will finally conclude with a general comparison to the US economy and a future outlook for Germany itself. In the beginning of the millennium, Tax Reform 2000 was implemented, the largest tax relief act in Germany’s post-war history. Its goal was to boost the relatively low economy by stimulating people to spend and consume. However, due to a general insecurity in the population and the people’s lack of confidence, consumption failed to amplify, as hoped, despite the increase in disposable income. In addition, despite the Reform, after its implementation, investment also slightly decreased. The lowering of the interest rates by 275 basis points in 2001 increased the money supply and led to a higher consumption, which positively reflected on the GDP growth. However, the lower interest rates were not able to accelerate investment and employment. Nevertheless, the Euro appreciated against the US Dollar, which in turn had a positive influence, as exports and imports maintained their growth. After continuous depreciation of the Euro against the Dollar, up until its all-time low at the end of October 2000, the ECB, along with the US and Japanese monetary authorities, intervened and increased the interest rates twice, both by 0,25%. By doing so they could first avoid a threat of an increase of domestic prices due to inflation and also augment imports due to the appreciation of the Euro. Furthermore, the skyrocketed foreign direct investment in 2000 was reduced by 182,52 billion Euros in 2001. The opening of a single market in 1993 had an overall positive influence on the German economy, especially in the trade sector, where exports increased by 10,6% until 2002, totalling 660,6 billion
The following paper will start by examining the macroeconomic state of Germany by citing real changes in fiscal and monetary policies, exchange rates and international trade. It will then analyze their influences and consequences on the economy and will finally conclude with a general comparison to the US economy and a future outlook for Germany itself. In the beginning of the millennium, Tax Reform 2000 was implemented, the largest tax relief act in Germany’s post-war history. Its goal was to boost the relatively low economy by stimulating people to spend and consume. However, due to a general insecurity in the population and the people’s lack of confidence, consumption failed to amplify, as hoped, despite the increase in disposable income. In addition, despite the Reform, after its implementation, investment also slightly decreased. The lowering of the interest rates by 275 basis points in 2001 increased the money supply and led to a higher consumption, which positively reflected on the GDP growth. However, the lower interest rates were not able to accelerate investment and employment. Nevertheless, the Euro appreciated against the US Dollar, which in turn had a positive influence, as exports and imports maintained their growth. After continuous depreciation of the Euro against the Dollar, up until its all-time low at the end of October 2000, the ECB, along with the US and Japanese monetary authorities, intervened and increased the interest rates twice, both by 0,25%. By doing so they could first avoid a threat of an increase of domestic prices due to inflation and also augment imports due to the appreciation of the Euro. Furthermore, the skyrocketed foreign direct investment in 2000 was reduced by 182,52 billion Euros in 2001. The opening of a single market in 1993 had an overall positive influence on the German economy, especially in the trade sector, where exports increased by 10,6% until 2002, totalling 660,6 billion
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