	Overview

With a population of 82 million and a GDP of $3.6 trillion, Germany is the world's fifth largest economy (after the United States, China, Japan, and India) and the largest in Europe, accounting for about one-fifth of the gross domestic production (GDP) of the European Union (EU). The health and functioning of the German economy, as well as policy approaches adopted by the government, are not only of bilateral and regional importance, but also of global importance to the United States. The United States is Germany's largest trading partner outside of Europe. Mutually profitable, growing, and beneficial U.S.-German commercial ties historically have been facilitated by a strong German economy. By most standards, West Germany registered an impressive economic performance in the 1950s and 1960s, the first decades of its existence. But beginning in the mid-1990s, the German economy has been on a much lower growth path, averaging around 1.5% GDP growth per year (as compared to an OECD average growth rate of 2.7%). These trends, have been exacerbated by a 5% decline in German GDP growth in 2009, raise questions about the long-term vitality and strength of this European powerhouse. These include the heavy and continuing costs of reunification with East Germany in 1990, escalating costs associated with generous social security and welfare programs, rigid labor market laws and perceived over-regulation, and an economy more geared towards exporting than consumption. Some believe that Chancellor Angela Merkel's (CDU) September 2009 reelection in coalition with the pro-business Free Democratic Party (FDP) could increase the likelihood of market-friendly reforms being enacted, but any radical restructuring of Germany's social market economy is considered unlikely. This resource crunch arguably has limited Germany's flexibility to maneuver domestically and appears to have been a factor in the evolution of somewhat more assertive German international economic policies. With dwindling economic and financial resources, Germany arguably has become less capable of compromising on matters of potential economic advantage. This has affected not only the trade and economic leadership role that Germany has traditionally played in Europe and the world economy, but also its position on issues that directly affect U.S. interests. In short, a prosperous German state remains critical to both the U.S. and European economies. Difficulties Germany may have in regaining a stronger growth pattern are an important concern, affecting the U.S.-German partnership in addressing a range of bilateral, regional, and multilateral challenges. This report elaborates on these themes in three parts: the first part examines Germany's economic performance in historical perspective and assesses some of the domestic factors that may be contributing to Germany's less than optimal growth pattern in recent years. The second section discusses the reform challenges facing German political leaders. The third section evaluates selected U.S.-German economic policy differences and strains that may be influenced by Germany's economic situation. A number of factors help explain Germany's declining growth record. One factor has been the high costs of integrating the formerly communist East German economy into the Federal Republic. A second factor is Germany's generous social welfare provisions which may undercut incentives for work and entrepreneurship. In this regard, Germany's domestic economic challenges could limit its policymaking flexibility. Germany has traditionally been reluctant to use economic sanctions, despite U.S. urgings.
Germany is the world's fifth largest economy and the largest in Europe, accounting for about one-fifth of the European Union's (EU) GDP. Germany is also the largest European trade and investment partner of the United States. Mutually profitable and growing U.S.-German commercial ties historically have been facilitated by a strong German economy. The health and functioning of the German economy, as well as its approaches to international economic policy issues, thus, are of considerable importance to the United States as well as to the rest of Europe.
By most standards, post-war West Germany registered impressive economic performance in the first decades of its existence. But beginning in the mid-1990s, the German economy has been on a much lower growth path, averaging about 1.5% of GDP per year. Unemployment has also risen steadily. These trends, which have been exacerbated by a steep 5% decline in German GDP growth in 2009, raise questions about the long-term vitality and strength of the German economy.
A number of factors help explain Germany's declining growth rate. One factor has been the high cost associated with integrating the formerly communist East German economy into the Federal Republic since reunification in 1990. A second has been the growing cost of Germany's generous social security and welfare programs and associated regulations which some believe may undercut incentives for work and entrepreneurship. A third is an economy that is more geared towards exporting than domestic investment and consumption.
With few exceptions, German governments have generally been reluctant to advance what many economists consider necessary but unpopular economic policy reforms, including cut-backs in welfare programs and labor market protections. Some believe that Chancellor Angela Merkel's September 2009 reelection in coalition with the pro-business Free Democratic Party (FDP) could increase the likelihood of market-friendly reforms being enacted, but any radical restructuring of Germany's social market economy is considered unlikely.
With declining economic growth and rising expenditures on social protections, Germany faces significant budgetary and resource constraints. This resource crunch could limit Germany's flexibility in pursuing domestic and international policy goals, arguably making Germany less capable of compromise on matters of potential economic advantage. In this regard, Germany's domestic economic challenges could limit its policymaking flexibility. This has affected not only the economic and trade leadership role Germany has traditionally played in Europe, but also its position on issues that directly affect U.S. interests such as the global economic downturn and economic sanctions.
A prosperous German state remains critical to both the U.S. and European economies. Difficulties Germany may have in regaining a stronger economic position are important concerns, affecting the U.S.-German partnership's ability to mutually address and manage a range of bilateral, regional, and global challenges. This report elaborates on these themes in three parts: the first section examines Germany's economic performance in historical perspective and assesses some of the domestic factors that may be contributing to Germany's less than optimal performance; the second discusses the reform challenges facing Germany's political leaders; and the third section evaluates a few salient U.S.-German economic policy differences and strains that seem to be influenced by Germany's weakened economic situation.