Summary about economic and political reforms accomplished in Germany during 90's. Demographic and Economic repercusions

1. Economic EnvironmentGroup E – F2 IE Business School
Germany
- Group E

2. Economic EnvironmentGroup E – F2 IE Business School
Agenda
Coffee Market
in Italy
5 8
22 43
76
Country
Overview
Internal
Context
International
Context
Period of
Analysis
Timeline Objectives Policies Analysis
1

3. Economic EnvironmentGroup E – F2 IE Business School
GERMANY IN 2000 - 2007
Period Overview Context Objectives Policies Analysis
EURO ZONE
POLITICAL
CHANGE
DOTCOM
BUBBLE
STRUCTURAL
REFORMS
HIGH
UNEMPLOYMENT

4. Economic EnvironmentGroup E – F2 IE Business School
Country Overview Germany in 2000
• Capital: Berlin
• Inhabitants: 82.25 mn (1st in Europe, 16th worldwide)
• Area: ~360,000 km² (5th in Europe, 63rd worldwide)
• Segmentation: 16 federal states (3 city states)
• GDP: € 2.114 bn (1st in Europe, 4th worldwide)
Period Overview Context Objectives Policies Analysis

5. Economic EnvironmentGroup E – F2 IE Business School
Country Overview Germany in 2000
• Capital: Berlin
• Inhabitants: 82.25 mn (1st in Europe, 16th worldwide)
• Area: ~360,000 km² (5th in Europe, 63rd worldwide)
• Segmentation: 16 federal states (3 city states)
• GDP: € 2.114 bn (1st in Europe, 4th worldwide)
• GDP per capita: € 25,708
• Unemployment: 7.7%
• Government: Federal parliamentary constitutional republic
• President: Johannes Rau (SPD)
• Chancellor: Gerhard Schröder (SPD)
• Legislature: - Bundestag (Upper House)
- Bundesrat (Lower House)
• Formation: - 01 January 1958 (Federal Republic)
- 03 October 1990 (Reunification)
• HDI: 0.854 (8th worldwide)
• Gini: 28.3
Period Overview Context Objectives Policies Analysis

6. Economic EnvironmentGroup E – F2 IE Business School
Internal Context
Period Overview Context Objectives Policies Analysis
Germany in 2000
• After a short economical boom due to the reunification of eastern and
western Germany, the 1990s were shaped by
- low economical dynamic
- mass unemployment (between 8%-11.5%, in 2000  7.9%)
-“Reformstau”, the public perception of missing political or
structural reforms; this was mostly due to the “blockade policies” of
the opposition parties
• Despite the “Aufbau Ost”, the development of the eastern German
(former DDR) states did not gather momentum as intended (“blühende
Landschaften”)
• In October 1998, Gerhard Schröder (SPD) succeeded Helmut Kohl (CDU)
after an 18 years governance period
• His red/green cabinet promised drastic changes in the social, pension and
health sectors

7. Economic EnvironmentGroup E – F2 IE Business School
Political change
Period Overview Context Objectives Policies Analysis
1982-1998
1998-2005
Helmut Kohl
Gerhard Schröder

8. Economic EnvironmentGroup E – F2 IE Business School
October 1998
Gerhard Schröder
becomes new
chancellor
January 1999
Introduction of EURO as
accounting currency
March 2000
Enacting of
Lisbon-Strategy
January 2002
Introduction of EURO as
physical currency
February 2002 - 2006
implementation of
HARTZ-REFORMS
March 2003
AGENDA 2010
November 2005
Merkel succeeds
Schröder after call for
vote of confidence
June 2006
FIFA World
Cup 2006
Period Overview Context Objectives Policies Analysis

9. Economic EnvironmentGroup E – F2 IE Business School
Agenda 2010
Period Overview Context Objectives Policies Analysis
• Special EU summit in 2000 enacted the “Lisbon-Strategy”
with the goal to make Europe the world’s most competitive
dynamic and knowledge-based economical area
• Reasoning: neither directives nor governmental
investments will permanently improve employment;
instead, the state has to give incentives for private
investments
• Measures included:
- New regulatory of exemptions and introduction of
“Arbeitslosengeld II” for the labor market
- 25% increase in spendings on educational sector
- Renewal of the Health Insurance legislature
- Pension insurance caps for current contributors
- Tax incentives for family and children care

10. Economic EnvironmentGroup E – F2 IE Business School
Hartz Concept
Period Overview Context Objectives Policies Analysis
• Main goals were a more efficient labor market policy and the
reformation of the public employment agency services
• Reason for the Hartz concept was the “Vermittlungsskandal”, a huge
scandal in which the “Bundesagentur für Arbeit” was accused of
blatant mistakes and manipulations in the employment service
statistics
• The reforms of the committee were implemented in four steps (Hartz
I-IV) between January 2003 and January 2005
• Measures included:
- Raise of social acceptance for temporary employment (Hartz I)
- Introduction of “Minijobs”, Setup of Jobcenters, “Ich-AG”
(Hartz II)
- Restructuring of “Arbeitsamt” into “Bundesagentur für Arbeit”
(Hartz III)
-Pooling of “Arbeitslosenhilfe” and “Sozialhilfe” into “Areitslosen-
geld II” (Hartz IV)

11. Economic EnvironmentGroup E – F2 IE Business School
Fiscal Reform
Period Overview Context Objectives Policies Analysis
• The “Steuerreform 2000” has been declared by the Bundestag in July
2000 combined with the “Steuersenkungsgesetz”
• Reduction of marginal income tax rate from 25.9% to 15%
• Reduction of top income tax rate from 53% to 42%
• Increase of the “Grundfreibetrag
• Reduction of corporation tax rate from 40%/30% to generally 25%
• Main goal was the increase of competitiveness of the German
economy by tax reliefs for employees, families and corporations
• Facilitation of growth and employment
• Transparency and fairness of taxation
• Planning reliability in the taxation system
• Implementation of the reform caused a lot of critique, since the
government “bought” the approval of several federal states by
promising them financial incentives

12. Economic EnvironmentGroup E – F2 IE Business School
Importance of Potential Growth
Period Overview Context Objectives Policies Analysis
TECH CRASH
In late 1990’s Europe
experienced strong
growth
Tech crash in 2000/2001
showed that this growth
was cyclical
No restrictive fiscal
policies  believe in
higher potential growth

13. Economic EnvironmentGroup E – F2 IE Business School
Y = total production
L = labor input
K = capital input
A = total factor productivity
Production Function Potential growth can be boosted by:
𝒀 = 𝑨 𝑳 𝜷
𝑲 𝜶 Labor
productivity
Intensity &
Efficiency
of Capital
Employment
Rate
# hours
worked
Labor
Input
Period Overview Context Objectives Policies Analysis

14. Economic EnvironmentGroup E – F2 IE Business School
Structural Problems
• Negative
contribution of
labor input to
growth.
• Negative
labor
productivity.
Period Overview Context Objectives Policies Analysis

15. Economic EnvironmentGroup E – F2 IE Business School
Demographics: Aging of the Population
This problem is hard to solve in
both short and medium term
Period Overview Context Objectives Policies Analysis

16. Economic EnvironmentGroup E – F2 IE Business School
Assuming no policy change, this could lower
government revenue and increase age-related
expenditure.
Challenges for
Potential Growth
Potential growth for EU ≈ 2%
Germany ≈ 1,5%.
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
2000 2001 2002 2003 2004 2005 2006 2007
GDP Growth, %
Period Overview Context Objectives Policies Analysis

17. Economic EnvironmentGroup E – F2 IE Business School
Period Overview Context Objectives Policies Analysis

18. Economic EnvironmentGroup E – F2 IE Business School
2000-2007: Supply-Side Reforms
After entering euro-zone,
Germany low inflation
resulted in having the highest
real interest rates in Europe
No ability to engage in
monetary policy
+ fiscal policy constrained
by the Stability Pact
Need to internally
devalue
Tough supply-side
reforms to drive up
its international
competitiveness
Period Overview Context Objectives Policies Analysis

19. Economic EnvironmentGroup E – F2 IE Business School
• Make labor market more flexible
– 12 months as a maximun time for unemployment benefits
– Easier to fire and hire
• Increase consumer expenditure
– Reduction of progressive tax rate
– Financing by slashing federal subsidies and privatizing
government-held properties
TG
2000-2007: Supply-Side Reforms
Period Overview Context Objectives Policies Analysis

20. Economic EnvironmentGroup E – F2 IE Business School
Results of Supply Side Policies
Decreased unemployment
Increased export
Quicker recovery from
“shocks”
World Leader:
• #1 in Trade Account
• #2 in Export
Period Overview Context Objectives Policies Analysis

21. Economic EnvironmentGroup E – F2 IE Business School
THE OTHER SIDE OF THE COIN
• Creation of “alternative employment” mini-jobs led to decreased total
hours worked
• Benefits cut accelerated social inequality
Period Overview Context Objectives Policies Analysis

22. Economic EnvironmentGroup E – F2 IE Business School
THE OTHER SIDE OF THE COIN
• The Gini coefficient increased up to 0,3 during the 2000’s
• The increase on wages concentrated on already high wages
Period Overview Context Objectives Policies Analysis

23. Economic EnvironmentGroup E – F2 IE Business School
FUTURE PRODUCTIVITY
What about CAPITAL INPUT?
𝒀 = 𝑨 𝑳 𝜷
𝑲 𝜶
An ageing society needs to invest domestically to make its workers more productive,
because these workers will need to support pensioners in the future.
Period Overview Context Objectives Policies Analysis

24. Economic EnvironmentGroup E – F2 IE Business School
Savings VS Investment
Period Overview Context Objectives Policies Analysis

25. Economic EnvironmentGroup E – F2 IE Business School
Investment in software, R&D and know-how is low
compared to countries like the US that have similar levels of investment in equipment
Period Overview Context Objectives Policies Analysis

26. Economic EnvironmentGroup E – F2 IE Business School
German public investment in education is very low
as a share of GDP
Period Overview Context Objectives Policies Analysis

27. Economic EnvironmentGroup E – F2 IE Business School
Recommendations
Period Overview Context Objectives Policies Analysis

28. Economic EnvironmentGroup E – F2 IE Business School
Danke für eure
Aufmerksamkeit

29. Economic EnvironmentGroup E – F2 IE Business School
Daria Aleshina
Jesús Monzó
Nicole Pagnoni
Joaquín A. Ramirez Mongil
Ramón Schmitt