Term Project

International Economics
Economic Overview:

The German economy is the fifth largest economy in the world. It is part of the European Union
and has adapted the EURO as its currency. It is a developed economy and is a key and crucial
member of the international monetary fund (IMF). It is considered to be the economic leader and
the driving force of the Euro. It is currently encountering problems such as sustained long-term
growth, low fertility rates and low levels of investment.

As the table and the graph shows Germany

has experienced a slow growth in GDP in
the recent years from 2916 billion euros in
2014 to 3135 billion Euros in 2016.
However, Germany has also experienced a
low inflation rate from 0.8% in 2014 to
0.3% in 2016 along with a lower
unemployement rate of 4.6% in 2016, in
the recent years.

As for the trade balance, Germany is

known to have maintained a great trade
surplus in the recent years as compared to
other developed economies. This partly
due to the huge demand of Germanys
high value and high quality export goods
such as motor vehicle parts, chemical
products and electronic goods.Other than
that, Germany is a major importer of oil
and gas and metal goods.
Trade surplus is usually good news for a country however in the case of Germany, it might have
some unusual implications. After Germany achieved a record high trade surplus of 259 billion
Euros in 2016, many fingers were pointed towards the german monetary authorities and the trade
advisor for Donald trump went as far as to say that Germany was using a Grossly undervalued
currency. This has led to tensions between the US and Germany since then however the German
Chancellor Angela Merkel has rejected such claims and stated that the European Central bank is
completely independent to pursue its monetary authorities. Experts have even called out to the
ECB to tighten its monetary policy as they are looking forward to the new US trade policy.

As far as the budget is concerned, Germanys budget suplus has hit a record high during 2017 to
about 18 billion Euros. Due to its surplus, Germany stands out from much of the rest of the
eurozone where many governments run budget deficits that are often higher than the 3 percent
allowed under EU rules. They are critical of Germany's finances, saying it is hoarding money
when it should be spending on infrastructure and projects to boost the eurozone economy. Other
than that, as mentioned before, germany is facing a low investment rate and experts say that an
implication of a budget surplus is that less is being invested than being saved. Economists from
different institutions have urged German officials to Spend the Savings. Various ideas for
spending have been discussed ranging from a reduction of income tax to a huge investment in
infrastructure and education. Trade economists have also recommended Germany to let wages
rise as devaluing the Euro is not an option since it does not control it. By letting wages rise,
people will have more money to spend (preferably on imported goods) which would increase
consumption, leading to a higher GDP growth. However, even this idea has been met with
criticism as some economists claim that Germany has an ageing population which tends to save
for retirement and that increase in income of such a population would not lead to the desired
increase in consumption as people would tend to save more for their retirement.

As for the exchange rate regime, Germany has adapted the Euro as its currency which follows a
free floating exchange rate regime. The European union and the creation of the Euro came in
1957 at the treaty of Rome. Since then, the european union has followed a free floating exchange
rate. In floating exchange rate systems, central banks buy or sell their local currencies to adjust
the exchange rate.This is used for stabilizing a volatile market or achieving a major change in the
rate. Groups of central banks, such as those of the G-7 nations often work together in coordinated
interventions to increase the impact. The history of the european exchange rate in terms of
dollars are given in the graph below.