Germany

Politics:

• Analysis

  Germany politics: Quick View - Party leaders confirmed for election battle

  Event

  The governing centre-right Christian Democratic Union (CDU) confirmed the chancellor, Angela Merkel, as party leader and the main opposition centre-left Social Democratic Party (SPD) officially nominated Peer Steinbrück as its candidate to run against her at the September 2013 general election.

  Analysis

  As the election draws nearer, members of Germany's major parties have rallied behind their respective leaders. Mr Steinbrück was elected with an impressive majority of 93.5% of the vote at a special party conference in Hannover on December 9th. A few days earlier, CDU delegates had backed Ms Merkel with a resounding 97.9% of the vote at a party meeting.

  The results show that although both politicians are sometimes at odds with their respective party mainstream-Ms Merkel is seen as too centrist and pragmatic by many CDU members, while most Social Democrats believe that Mr Steinbrück is too pro-business-each camp is ready to present a united front ahead of a more intensified period of election campaigning in the new year.

  In terms of campaign issues, the crisis in the euro area is unlikely to be a major point of contention. Although leading SPD politicians are critical of the chancellor's austerity policies and some of them have voiced support for some form of debt mutualisation, Mr Steinbrück believes that this will not go down well with a majority of voters who generally believe Ms Merkel is doing a good job.

  Consequently, the SPD is planning to downplay differences in this field. Instead, the party's strategists are hoping to score against the CDU by concentrating on social justice. At the convention in Hannover, Mr Steinbrück called for higher taxes on the wealthy and the introduction of a minimum wage. But he did not subscribe to more radical tax and spend ideas put forward by some party traditionalists. Overall, the SPD platform remains a broadly centrist one, and in terms of substance there will probably not be much of a difference between the two parties.

  The CDU-together with its Bavarian sister party, the Christian Social Union (CSU)-currently enjoys a sizeable lead of 9-10 percentage points over the SPD in national opinion polls (about 39% to 29%) and Ms Merkel is also more popular than Mr Steinbrück. The chancellor's main weakness is her post-election coalition options. The CDU/CSU is unlikely to win enough votes to be able to govern without another party. Their current coalition partner, the liberal Free Democratic Party (FDP), is weak and might not even surpass the 4% vote threshold to make it into the Bundestag (the lower house). Aside from a grand coalition with the SPD, which the Social Democrats would block if they see a chance to snatch the chancellorship, the only other option could be a coalition with the Greens/Alliance 90. The new leadership of the Greens is warming up to such an arrangement, but would probably still prefer a coalition with the SPD if one was arithmetically possible (even if this involved a three-way alliance with the FDP).

  December 14, 2012

• Background

  Germany: Political forces at a glance

  Political outlook: Political forces at a glance

  Germany is a federal democracy, with major powers delegated to the 16 states (Länder). The current coalition of the Christian Democratic Union (CDU), its sister organisation, the Christian Social Union (CSU), and the Free Democratic Party (FDP), under the chancellorship of Angela Merkel (CDU), was formed after the last general election in September 2009. The bicameral parliament comprises the Bundestag (lower house), whose members are elected on a system of modified proportional representation, and the Bundesrat (upper house), which consists of representatives of the 16 state governments. The coalition has a majority in the lower house, but not in the Bundesrat.

  Bundestag election results
  	% share of vote						No. of seats
  	1990	1994	1998	2002	2005	2009	2009
  Christian Democratic Union (CDU)/Christian Social Union (CSU)	43.8	41.4	35.1	38.5	35.2	33.8	239
  Social Democratic Party (SPD)	33.5	36.4	40.9	38.5	34.2	23.0	146
  Free Democratic Party (FDP)	11.0	6.9	6.2	7.4	9.8	14.6	93
  Left Partya	2.5	4.4	5.1	4.0	8.7	11.9	76
  Greens/Alliance 90	3.8	7.3	6.7	8.6	8.1	10.7	68
  Others	5.4	3.6	6.0	3.0	4.0	6.0	0
  Total	100.0	100.0	100.0	100.0	100.0	100.0	622
  a Before the 2005 election, the Party of Democratic Socialist (PDS) merged with a new group, the Election Alliance for Jobs and Social Justice (WASG). The joint party was named the Left Party. Before 2005 the results relate to the PDS alone.
  Sources: Federal Election Officer; Bundestag website.

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  Next elections: The general election is scheduled for September 2013.

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  July 20, 2012

• Structure

  Germany: Political structure

  Official name

  Bundesrepublik Deutschland (Federal Republic of Germany)

  Legal system

  Based on the Grundgesetz (Basic Law) of 1949

  Unification

  The states (Länder) of the former German Democratic Republic (East Germany) acceded to the Federal Republic on October 3rd 1990

  National legislature

  Bicameral parliament. Bundestag (lower house) currently with 613 members (298 directly elected from individual constituencies; 315 elected through party lists in each state, so as to obtain proportional representation). Parties must win at least 5% of the national vote, or three constituency seats, to gain representation. The Bundesrat (upper house) consists of members nominated by the 16 state governments. Regional election defeats in 2011 mean that the governing coalition has a minority in the Bundesrat and must therefore compromise with the opposition on laws that require ratification

  National elections

  September 27th 2009 (Bundestag); the next election must take place by October 2013

  Head of state

  Federal president, elected for a maximum of two five-year terms by the Federal Assembly, consisting of members of the Bundestag and representatives of the state legislatures. Joachim Gauck was elected on March 18th 2012

  State legislature

  Each state has an elected legislature. State governments and parliaments have considerable responsibilities, including education and policing

  National government

  The federal government is led by the chancellor, who is elected by the Bundestag on the nomination of the federal president. The present government, a coalition of the CDU/CSU and FDP, was formed in October 2009 and is headed by the CDU leader, Angela Merkel

  Main political parties

  Christian Democratic Union (CDU); its sister party, the Christian Social Union (CSU); Free Democratic Party (FDP); Social Democratic Party (SPD); Alliance 90/The Greens; Left Party

  Key ministers

  Chancellor: Angela Merkel (CDU)

  Vice-chancellor & economics & technology: Philipp Rösler (FDP)

  Defence: Thomas de Maizière (CDU)

  Economic co-operation & development: Dirk Niebel (FDP)

  Education & research: Annette Schavan (CDU)

  Environment, nature conservation & nuclear safety: Peter Altmaier (CDU)

  Family affairs, senior citizens, women & youth: Kristina Schröder (CDU)

  Finance: Wolfgang Schäuble (CDU)

  Food, agriculture & consumer protection: Ilse Aigner (CSU)

  Foreign affairs: Guido Westerwelle (FDP)

  Health: Daniel Bahr (FDP)

  Interior: Hans Peter Friedrich (CSU)

  Justice: Sabine Leutheusser-Schnarrenberger (FDP)

  Labour & social affairs: Ursula von der Leyen (CDU)

  Transport, building & urban affairs: Peter Ramsauer (CSU)

  President of the central bank

  Jens Weidmann

  December 01, 2012

• Outlook

  Germany: Key developments

  Outlook for 2013-17

  • The protracted euro zone crisis will present the main risk to political, economic and financial stability. As the region's dominant creditor, Germany will have to pursue domestically unpopular policies to preserve the currency union.
  • The German-led crisis response-and its focus on fiscal discipline-could fail to maintain the euro zone in its current form, as austerity measures demanded by Germany in the periphery may prove politically too difficult to implement.
  • The Economist Intelligence Unit expects continued tension in the Christian Democratic Union (CDU)/Christian Social Union (CSU)-Free Democratic Party (FDP) coalition, but that the government will last its term to September 2013.
  • The Greens and the Pirate Party may hold the balance of power in the next parliament, although support for the latter has slipped. The CDU should win the election, but a more fractured six-party system may complicate coalition talks.
  • We expect the European Central Bank (ECB) to cut its policy rate to 0.5% by early 2013. Pressure for more unconventional ECB intervention will grow.
  • Domestic economic policy will focus on fiscal consolidation, legislative reform to strengthen the banking system and some pre-election sweeteners.
  • Economic sentiment is weakening and a modest recession is possible. Against a backdrop of weaker export demand, we forecast real GDP growth of 0.9% in 2012 and 0.8% in 2013, before a modest pick-up to an average of 1.4% in 2014-17.

  Review

  • On November 10th, the opposition Greens elected two new joint party leaders, Katrin Göring-Eckhardt and Jürgen Trittin. Their nominations suggest the party may adopt a more centrist stance in the run-up to the 2013 election.
  • The Eurogroup of euro zone finance ministers agreed a two-year extension (to 2016) for Greece to meet its fiscal adjustment targets, but did not clarify how the additional financing needs of at least EUR30bn (US$38bn) would be met.
  • Germany remains strongly opposed to a write-down of its official Greek debt holdings-so-called official-sector involvement (OSI)-as proposed by the IMF.
  • Viewed by many as a pre-election "sweetener", the government announced an increase in spending on pension payments, subsidies for stay-at-home mothers and the transport budget, while abolishing a quarterly fee for doctor visits.
  • Real GDP continued to expand at a decelerating pace in the third quarter, rising by 0.2% on a quarterly basis and by 0.9% year on year. Net exports were the main driver, while business investment contracted.
  • Business surveys and new orders data revealed a marked deterioration in sentiment and activity at the beginning of the fourth quarter.

  December 01, 2012

Economy:

• Background

  Germany: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	81.7	Population growth	-0.2
  GDP (US$ bn; market exchange rate)	3,608.1b	Real GDP growth	1.2
  GDP (US$ bn; purchasing power parity)	3,232.7	Real domestic demand growth	1.1
  GDP per head (US$; market exchange rate)	44,179	Inflation	1.8
  GDP per head (US$; purchasing power parity)	39,581	Current-account balance (% of GDP)	6.3
  Exchange rate (av) €:US$	0.72b	FDI inflows (% of GDP)	1.2
  a Economist Intelligence Unit estimates. b Actual.

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  Background: The modern German state was founded in 1871. After the second world war (1939-45), Germany was divided into two parts: a liberal parliamentary democracy in the west and a totalitarian communist regime in the east. Germany was reunified on October 3rd 1990 after the end of the Soviet Union's hegemony in central and eastern Europe.

  Political structure: Germany is a federation of 16 states or Länder, all of which have their own constitutions, governments and parliaments. The states are primarily responsible for policing and education. The federal parliament comprises a directly elected lower house (Bundestag) and an upper house (Bundesrat) of representatives of the state governments. Although the incumbent government has a majority in the Bundestag, it does not have one in the Bundesrat. The federal chancellor, the head of the executive, is elected by the Bundestag and can only be brought down by the election of a successor. The centre-right coalition of the Christian Democratic Union (CDU), its sister party, the Christian Social Union (CSU), and the Free Democratic Party (FDP) formed in October 2009. The next federal election is due in September 2013.

  Policy issues: The government's agenda will continue to be dominated by the euro crisis. German leadership will be crucial to resolving the crisis, but the government will have to overcome not only growing resistance among the electorate to putting ever more German taxpayer funds at risk, but also increasing acrimony among euro countries over the crisis strategy being adopted. The government has two broad domestic priorities. The first is to bring the fiscal deficit close to balance over four years, while continuing to provide good public services. The second is to restore the financial sector to health, over a period in which there is a significant risk of renewed losses. German banks are highly leveraged and have significant exposure to euro zone debt. The government also aims to raise the effective retirement age and increase female participation. A gradual phase-out of nuclear energy production in Germany is scheduled over the next decade.

  Taxation: The federal corporation tax rate was cut from 25% to 15% in 2008. The effective corporate tax rate, including a municipal trade tax and a solidarity tax, is about 30-33%. The top marginal personal income tax rate is 45%. Social security contributions are shared equally between employers and employees. The main value-added tax (VAT) rate is 19%.

  Foreign trade: Exports fell from US$1.5trn in 2008 to US$1.17trn in 2009, but recovered to US$1.55trn in 2011. After falling below US$1trn in 2009, imports rose to US$1.33trn in 2011. The current-account surplus totalled US$204.3bn in 2011 (5.7% of GDP).

  Major exports 2011	% of total	Major imports 2011	% of total
  Machinery & transport equipment	47.1	Machinery & transport equipment	33.3
  Chemicals & related products	15.1	Mineral fuels, lubricants & related materials	13.2
  Food, drinks & tobacco	5.1	Chemicals & related products	12.8
  Mineral fuels, lubricants & related materials	2.5	Food, drinks & tobacco	6.7
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  France	9.6	Netherlands	13.8
  Netherlands	6.6	France	7.6
  UK	6.2	China	7.0
  Italy	5.9	Belgium	6.3
  Austria	5.5	Italy	5.4

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  December 01, 2012

• Structure

  Germany: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 01, 2012

• Outlook

  Germany: Country outlook

  Germany: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The governing coalition of the Christian Democratic Union (CDU), its sister party in Bavaria, the Christian Social Union (CSU), and the Free Democratic Party (FDP) has weathered defeats in regional elections and weakness in national polls. Yet, whereas the FDP has seen its approval ratings flirt with the 5% threshold for parliamentary representation, the CDU/CSU continues to retain solid support, underpinned by popular backing of the CDU chancellor, Angela Merkel, despite signs of growing public unease over her euro crisis strategy. Strained relations between the parties will continue to test coalition cohesion, but it would be a gamble for either to trigger an early vote. The CDU/CSU holds a healthy lead in national polls, but has no obvious coalition partner for a third term. For the FDP, an early trip to the ballot box could spell electoral disaster and cause the party to abandon the political stage. The Economist Intelligence Unit thus expects the government to remain in office until the scheduled election in September 2013.

  ELECTION WATCH: The voting calendar is fairly quiet ahead of the next general election, scheduled for September 2013. Euro zone tensions mean that a snap vote cannot be ruled out, but our baseline forecast is that the coalition holds together until the end of its term. The CDU retains a firm lead of 7-10 percentage points over the main opposition Social Democratic Party (SPD) in national polls (about 38% to 29%). After earlier solid performances at regional level, support for the Pirate Party has fallen back close to the 5% threshold for parliamentary representation, amid a lack of policy clarity. The party emerged as a potential serious challenger in 2011 on the back of rising public cynicism about mainstream politics. With the euro crisis--and voter concern over the bail-out strategy--set to persist, support for the Pirates may yet recover ahead of the election. But it is more likely that the Greens (on 11-13%) will hold the balance of power after the vote.

  INTERNATIONAL RELATIONS: Despite rising international pressure, the government's stance remains clear: any acceptance of significant risk-sharing by Germany via the pooling of euro zone liabilities (sovereign and banking) can occur only once far-reaching steps towards much deeper fiscal and political union, and financial oversight, have been agreed by member states and legitimised by democratising EU institutions. In theory, this seems a reasonable position given the scale of implied burden-sharing. However, it is arguable how realistic a stance it is in practice. Such profound reforms will require significant policy harmonisation and clear ceding of national sovereignty, both of which will be highly contentious for voters and politicians in Germany and across Europe. The difficulty in reaching an agreement among 17 disparate countries on such controversial matters, amid economic weakness, implies at best only gradual progress towards a credible resolution. For as long as the overriding message from the euro zone is one of collective responsibility, rather than visible burden-sharing, investors will continue to doubt the full commitment of stronger members to the single currency, thus accentuating financial tensions. Irrespective of whether the bloc holds together or breaks up, Germany faces the prospect of having to put considerably more of its sovereign balance sheet at risk. The SPD chancellor candidate, Peer Steinbrück, like his party, is more pro-European than Ms Merkel, but has also been critical of proposals such as debt mutualisation across the euro zone. His broader foreign policy views are largely unknown.

  POLICY TRENDS: The second objective is to restore the financial sector to health, at a time when the risk of renewed losses remains significant. Regulatory reform is under way: a key element is legislation to strengthen the framework for dealing with insolvency of systemically important banks. This includes a levy on bank balance sheets to finance a EUR70bn fund to support the sector in future crises. Cross-party support exists for some form of financial transactions tax. The weakness of Germany's banking sector remains a concern, given its high leverage, low profitability, dependence on wholesale funding and exposure to euro zone debt. Modest progress will be made in liberalising the services sector, many areas of which retain protective regulation. A long-term objective is the phase-out of nuclear power production by 2022. Along with increased electricity production from natural gas, this will necessitate a further shift to renewable energy, on which recent progress has disappointed.

  ECONOMIC GROWTH: Germany's economy remains more resilient than the rest of the euro zone, but activity has weakened gradually through 2012, particularly in the large industrial sector. External demand has continued to support output growth, but real GDP is forecast to contract slightly in the final quarter in response to weaker export orders and still subdued private-sector sentiment. A healthy labour market has underpinned a more durable level of household spending, but activity will nevertheless be constrained by consumer and business caution. After rising by 3.1% in 2011, real GDP growth is estimated at 0.9% in 2012. We forecast another year of subdued growth in 2013, of 0.8%, before activity strengthens moderately to average 1.4% per year in 2014-17. The risks next year lie on the downside. The forecast assumes that the euro crisis is reasonably contained--should countries leave the single currency, an outcome to which we assign a 40% probability, there is a significant risk that Germany would experience a deep recession.

  INFLATION: Inflation (EU harmonised measure) averaged 2.5% in 2011. The headline rate has eased back gradually in 2012, to 2.1% in October, despite resilient commodity prices, particularly for energy. Based on market fundamentals, we assume a moderate softening of commodity prices into 2013, resulting in a gradual fall in inflation, given favourable base effects. Real wage growth has accelerated on the back of a robust labour market, but a period of weaker economic activity and the uncertain outlook at home and abroad will constrain inflationary pressure. Average annual inflation is estimated at 2.2% in 2012, with rates of around 2% forecast in 2013-17.

  EXCHANGE RATES: Although not our central forecast, there is a high risk that several countries will exit the euro zone during the next two years. Such fears have contributed to a flight from euro assets and partly explain the volatility of the currency, which has fluctuated in a range between US$1.20:EUR1 and US$1.35:EUR1 during 2012. The euro strengthened moderately in September-October in response to central bank intervention and stood at US$1.27:EUR1 in mid-November. Even assuming that it survives in its present form, the euro will remain volatile because of shifting risk appetite, protracted economic weakness and lower reserve accumulation by China. We forecast average exchange rates of US$1.26:EUR1 in 2013 and US$1.25:EUR1 in 2014-17, but sharp movements in either direction remain a significant risk.

  EXTERNAL SECTOR: The large current-account surplus has narrowed slightly in recent years, from a peak of 7.5% of GDP in 2007 to 5.7% in 2011. A modest rise is expected in 2012, reflecting earlier resilient export growth, but we expect the surplus to decline gradually from 2013, initially in response to more subdued export demand but also because of a partial shift to domestic demand-led output growth.

  December 01, 2012

• Forecast

  Germany: Country forecast summary

  Country forecast overview: Highlights

  • The euro zone crisis represents a serious risk to the economy and a major political challenge to the government. As the region's principal creditor, Germany will have to pursue domestically unpopular policies to preserve the currency union. There is still a broad cross-party pro-European stance, but decisions on euro crisis management are becoming increasingly problematic for the German government. Its negotiating position at EU level is constrained by the growing unpopularity of bail-outs in Germany and the aversion of much domestic public opinion to using the European Central Bank (ECB) balance sheet to backstop sovereign and bank balance sheets.
  • The government's policy stance remains clear: any acceptance of significant risk-sharing by Germany via the pooling of euro zone liabilities (sovereign and banking) can occur only once far-reaching steps towards fiscal and political union have been agreed and legitimised by democratising EU institutions. But the implied ceding of national sovereignty raises questions as to how realistic a goal this is in practice. Without a step-change in euro zone crisis management, the problem of overindebtedness in a growing number of member states, and related demands for austerity, will spur heightened opposition and discontent across the region. The temptation to abandon the project will be real, but Germany's interests, and thus its policy approach, are expected to remain aligned with the euro.
  • The coalition of the Christian Democratic Union/Christian Social Union (CDU/CSU) and the Free Democratic Party (FDP) has a mandate in the Bundestag (the lower house) to September 2013. Relations will remain strained in the run-up to the election, but an early poll would be a gamble for either party.
  • The balance of power after the election is likely to lie with the left-leaning Greens and possibly the pro-Internet freedom Pirate Party, although support for the latter has fallen back. The CDU, led by Angela Merkel, should win the election, but a prospective six-party system could complicate coalition formation. Another CDU/CSU-Social Democrats (SPD) grand coalition is possible, as is a CDU/CSU-Greens or SPD-Greens government, and an unprecedented three-party coalition.
  • Although still comparing favourably with the rest of the euro zone, the German economy is slowing sharply and output growth will remain weak in 2013. Subdued external demand, continued euro zone tensions and resilient commodity prices will constrain activity, with real GDP forecast to expand by a modest 0.8%. Growth is projected to accelerate gradually to average 1.4% per year in 2014-17, with inflation around 2%. Official interest rates will remain low.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	0.9	0.8	1.6	1.2	1.3	1.4
  Consumer price inflation (av, %; EU harmonised measure)	2.2	1.9	2.0	2.1	1.9	2.0
  Budget balance (% of GDP)	-0.2	-0.5	-0.1	0.2	0.5	0.9
  Current-account balance (% of GDP)	6.1	5.8	5.5	4.7	4.5	4.1
  Short-term interest rate (av; %)	0.6	0.2	0.6	1.1	1.8	1.8
  Exchange rate US$:€ (av)	1.28	1.26	1.25	1.24	1.26	1.26
  Exchange rate US$:€ (year-end)	1.29	1.26	1.24	1.26	1.26	1.26
  Exchange rate ¥:€ (av)	101.9	104.3	108.6	110.1	116.1	115.1

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  December 01, 2012

View detailed map

Country Briefing

Land area

356,970 sq km, of which 55% is agricultural land and 29% forest

Population

82.7m (2008)

Main cities

Population in '000 (2008)

Berlin (capital): 3,432

Hamburg: 1,772

Munich (München): 1,327

Cologne (Köln): 995

Frankfurt am Main: 665

Stuttgart: 600

Climate

Temperate

Weather in Frankfurt (altitude 125 metres)

Hottest month, July, 15-20°C (average daily minimum and maximum); coldest month, January, minus 1-3°C; driest month, February, 40 mm (average monthly rainfall); wettest month, June, 70 mm

Language

German

Weights and measures

Metric system

Currency

Euro (€ = 100 cents); average exchange rate in 2009: US$1.39:€1

Time

1 hour ahead of GMT in winter, 2 hours ahead in summer

Fiscal year

January-December

Public holidays

January 1st, Good Friday, Easter Monday, May 1st, Ascension Day, Whit Monday, Corpus Christi, October 3rd (Reunification Day), December 25th and 26th; additional public holidays apply for various states

March 01, 2012