The German economy is the world's fourth largest and, after the expansion of the EU, accounts for more than one-fifth of European Union GDP. Germany is the United States' largest European trading partner and is the sixth largest market for U.S. exports. Germany’s "social market" economy largely follows free-market principles, but with a considerable degree of government regulation and generous social welfare programs.

Germany is the largest consumer market in the European Union with a population of over 82 million. However, the significance of the German marketplace goes well beyond its borders. An enormous volume of worldwide trade is conducted in Germany at some of the world’s largest trade events, such as MEDICA, Hannover Fair, Automechanika, and the ITB Tourism Show. The volume of trade, number of consumers, and Germany’s geographic location at the heart of a 27-member European Union make it a cornerstone around which many U.S. firms seek to build their European and worldwide expansion strategies.

Market Challenges

In 2009, Germany experienced the sharpest drop in economic activity since the end of World War II with GDP falling by 5%. This was due mainly to plummeting exports (-14.7 percent) and a major drop in capital expenditure (-8.6 percent). Thanks to a government-sponsored reduced working hours program (“Kurzarbeit”) and the government stimulus package of 81 billion euros, domestic consumption remained fairly stable. In December 2009, the Merkel government agreed to tax relief worth 8.5 billion euros to fuel economic recovery despite record high national debt. In 2010, the German economy rebounded strongly with GDP growth of 3.6% and sky-rocketing exports (+14.2%). In addition to exports, growth was increasingly driven by domestic demand. The German government expects economic growth to continue on a solid path in 2011.

In recent years, German governments have implemented several reforms to address structural problems, such as a highly regulated labor market and high taxation, as well as high social insurance costs. These reforms and a series of changes in collective bargaining implemented since the late 90s have strengthened the forces driving economic growth. In 2010, Germany saw its unemployment rate fall to 7.7%, its lowest level in 17 years. While long-term unemployment remains high, it has started to decline, and the outlook for 2011 is even more promising. The eight leading economic think tanks project wages to increase by 2.8% in 2011 and unemployment to drop below the politically sensitive three-million mark during the next 12 months. As a result the jobless rate is expected to fall to an estimated 7.0% in 2011.

Among the reasons behind the surprising resiliency of the labor market – in addition to the widespread use of government-funded short-time work programs and company working-time accounts – is the fact that many companies entered the recession with a capital cushion and deliberately decided to keep highly skilled labor in hopes of riding out the crisis. In addition, parts of the services sector (e.g., health and welfare, education and training) were not adversely affected by the recession and are continuing to create jobs. Moreover, a declining labor force helped to ease the unemployment situation. In 2010, average unemployment was at 3.244 million, down from 3.423 million in 2009, which marked the lowest average annual unemployment since 1992. In eastern Germany, the economic crisis hit the labor market less severely, and unemployment decreased from 13.0% in 2009 to 12.0% in 2010. Unemployment in eastern Germany is still almost twice as high as in the western part of the country (6.6% in 2010). The number of employed persons rose 41.1 million in November 2010 (about 427,000 more than in November 2009), the highest level since Germany’s reunification in 1990.

Germany presents few formal barriers to U.S. trade or investment, although Germany’s participation in the EU’s Common Agricultural Policy and German restrictions on biotech agricultural products represent barriers for some U.S. goods. Germany has pressed the new EU Commission to reduce regulatory burdens and promote innovation to increase EU member states’ competitiveness. The Merkel government has talked about the need for regulatory reform in Germany. In particular, Economics Minister Rainer Bruederle (pro-market Free Democratic Party - FDP) has pushed to reduce bureaucratic costs, since Germany's regulations and bureaucratic procedures can be very complex. While not directly discriminatory, government regulation by virtue of its complexity may offer a degree of protection to established local suppliers. Safety or environmental standards, not inherently discriminatory but sometimes zealously applied, can complicate access to the market for U.S. products. American companies interested in exporting to Germany should make sure they know which standards apply to their product and obtain timely testing and certification. German standards are especially relevant to U.S. exporters because, as EU-wide standards are developed, they are often based on existing German standards.

Market Opportunities

For U.S. companies, the German market - the largest in the EU - continues to be attractive in numerous sectors and remains an important element of any comprehensive export strategy to Europe. While U.S. investors must reckon with a relatively higher cost of doing business in Germany, they can count on high levels of productivity, a highly skilled labor force, quality engineering, a first-class infrastructure, and a location in the heart of Europe.

Market Entry Strategy

The most successful market entrants are those that offer innovative products featuring high quality and modern styling. Germans are responsive to the innovation and high technology evident in U.S. products, such as computers, computer software, electronic components, health care and medical devices, synthetic materials, and automotive technology. Germany boasts one of the highest Internet access rates in the EU and new products in the multi-media, high-tech and service areas offer great potential as increasing numbers of Germans join the Internet generation. Certain agricultural products also represent good export prospects for U.S. producers. Price is not necessarily the determining factor for the German buyer, given the German market’s demand for quality.

The German market is decentralized and diverse, with interests and tastes differing dramatically from one German state to another. Successful market strategies take into account regional differences as part of a strong national market presence. Experienced representation is a major asset to any market strategy, given that the primary competitors for most American products are domestic firms with established presences. U.S. firms can overcome such stiff competition by offering high-quality products, services at competitive prices, and locally based after-sales support. For investors, Germany’s relatively high marginal tax rates and complicated tax laws may constitute an obstacle, although deductions, allowances and write-offs help to move effective tax rates to internationally competitive levels.

Print | Last Updated: 6/21/11 4:26 AM