Germany Economic and Financial Policy During the First years of the 21st Century


Germany was forced to give an incisive response to the growing difficulties of the internal market, made manifest by the decline in production, the reduction in demand and the worrying rise in unemployment. The economic policy implemented by the government in office initially collided with the obligations of safeguarding and consolidating the macroeconomic framework that had been signed at the same time as accession to the European Union; obligations which required the competent authorities to undertake a commitment to ensure price stability and a sound budgetary policy. In fact, already in 2001 the country did not reach the target announced in its stability program, and starting from 2002 recorded an incidence of the public deficit on GDP above the permitted reference value of 3 %. Starting in 2004, the German economy showed timid signs of exiting stagnation. To the dynamism of the world market was added the ever increasing competitiveness of national exporting industries, which helped to reverse the trend. The economic policy adopted in those years was mainly aimed at favoring the quantitative increase as well as the qualitative improvement of employment. In addition, some important structural reforms were launched aimed at ensuring the sustainability of public finances through the rationalization and containment of public spending.

On the labor market, the negative effects of contained economic growth were exacerbated by the high level of cost of production factors – largely attributable to the burden of contributions – and by the structural rigidity of the market. Furthermore, once the reunification process had begun, the eastern regions worked to ensure that working conditions – both in terms of collective wage agreements and social benefits – were recognized in the western territories. As a result of this equalization, the cost of labor rose, without simultaneously recording a greater productivity of labor. This caused a reduction in the demand for workers by companies in an area of ​​the country already heavily burdened by high unemployment rates. This the latter mainly affected the occupational categories considered most vulnerable (young people, unskilled workers, etc.). Therefore, in agreement with the main trade union and business organizations, measures aimed at creating employment were approved. In particular, greater flexibility on the market was promoted and the early exit of older workers was discouraged. The federal government, in agreement with some private sector companies, made a commitment, starting from early exit of older workers. The federal government, in agreement with some private sector companies, made a commitment, starting from early exit of older workers. The federal government, in agreement with some private sector companies, made a commitment, starting from 2005, to offer any young person under 25 who requests a professional training internship, a training course or an occasional job. Territorial mobility was favored with a law promulgated in 2003 and the deregulation of temporary work was promoted in 2004. The legislation relating to the termination of the employment relationship was made less burdensome for companies with more than ten employees, also through the reduction of legal costs. The numerous privileges granted to the unemployed since the 1970s were partly removed. In fact, the state progressively reduced the period during which an unemployed person could take advantage of state contributions, up to 18 months for those over 54 and 12 months for the youngest. At the same time, a series of measures was launched aimed at favoring the integration of elderly people into the world of work. It was also started, again from 2005,the rationalization of state support for people seeking employment, according to a scheme that provided for the merger of social and unemployment contributions. The system governing placement was reformed and the establishment of job centers promoted throughout the national territory in order to reduce the time required for an efficient meeting between demand and supply of labor. In the face of the numerous constraints that still undermined the flexibility of the labor market, various hypotheses for solutions were put forward. In a country that remained highly unionized, despite the gradual decline in previous years in the number of workers protected by various forms of collective bargaining, the first forms of individual bargaining were introduced, albeit limited to some aspects of the employment contract, and extended flexibility in the field of working time regulation.

From 1999 to 2005 the State launched a series of measures aimed at ensuring the progressive reduction of the huge tax burden and restoring dynamism both to manufacturing companies and to consumption by families. Tax policy was also used as a tool for protecting the environment and limiting energy consumption. In the wake of a slow process of fiscal consolidation, the state implemented important structural measures to reform the health and social security systems. The call for greater control of spending by both users and health service providers (hospitals and doctors), the widening of the possibility of selective negotiations between public health structures and insurance funds, the reduction of the range of services offered entirely by the state had the objective of reducing public spending without however undermining the efficiency and modernity of the sector. The reform of the social security system started in 2004 ensured a slowdown in the growth of pensions also in the face of the progressive aging of the population. Already in 2002 the government had launched a set of rules aimed at promoting the creation of private pension funds, which nevertheless found limited consensus among savers. The process of gradual raising of the retirement age from 60 to 63 by 2008 was initiated, while in the calculation of the amount of the pension a parameter was inserted that linked the growth of pensioners’ income also to the demographic structure of the population (see tab.).

Some significant steps were also taken to strengthen competition and create new businesses, so as to preserve the innovative capacity of the economy and ensure dynamism on the internal market. In particular, the federal government began a close collaboration with the business world, research institutions and trade unions in order to promote innovation and raise the technological level of companies. Privileged financing conditions were offered to small and medium-sized enterprises, the bureaucratic practices to which the enterprises were subject were simplified and made more transparent. The government authorities also launched some measures to liberalize and open up the energy sector to competition. In the sector of

Despite having a consolidated experience in fiscal federalism, Germany had to face the problem of the difficult coordination between the various institutions involved in the choice and implementation of fiscal policy measures. An important answer to this problem was given by the Internal Stability Pact, promulgated in 2002, which provided for the attribution of greater responsibility to federal and regional bodies in the process of fiscal consolidation. The local authorities also carried out significant interventions of autonomy towards the central administration, such as the differentiation in the salaries paid and in the social security benefits for public employees. However, the existence of a co-financing system for central and local bodies prevented the full achievement of total and transparent autonomy in the decentralized management of funds.

Germany Economic and Financial Policy During the First years of the 21st Century

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