Investigating the Causes and Effects of Economic Deficits in Germany

This report provides an in-depth analysis of the economic deficits in Germany, exploring the multifaceted challenges the nation faces. The study identifies key contributing factors, including the slow rate of wage growth and inflation, the country's budgetary surplus, its aging population, and low levels of investment coupled with high savings rates. The report examines the effects of these issues on Germany's trade balance, particularly its surplus, and the implications for its relationships with other European Union nations and the United States. It also discusses the potential impacts of these deficits on the future economic growth of Germany and suggests possible solutions, such as encouraging investment, addressing the needs of the aging population, and promoting more balanced trade relations. Overall, the report underscores the need for Germany to restructure its economic policies to maintain its economic strength and foster sustainable growth.

Running Head: CAUSES OF DEFICITS IN THE GERMAN ECONOMY 1
CAUSES OF DEFICITS IN THE GERMAN ECONOMY
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CAUSES OF DEFICITS IN THE GERMAN ECONOMY 2
Introduction
Germany is among the richest nations in the European region having been ranked
position fourteen out of the forty four nations in the region (Petersen, 2012). It embraces a free
economy and according to the 2018 Index, it is ranked position 25 world-wide with a score of
more than 74.0 in terms of economic freedom. Germany also embraces business and investment
freedom with a score of 86.1 and 80.0 respectively although investment has been poor in the
country. Germany is the most influential European Union member nation both economically and
politically (Alesina, 2010). Germany has generally been doing great in terms of economic
performance currently recording a surplus in its current account but still more improvements
need to done. The budget surplus in the Germany economy needs to be seriously addressed as it
is contributed mainly by some various deficits brought by various government policies. Germany
has been witnessing imbalance in its trade and has been accused of devaluation although it does
not have a national currency (Chiu, Lee & Sun, 2010). This imbalance in trade which is brought
by various deficits in the economy of Germany needs to be solved to foster economic growth in
Germany. Germany has been clutching with various nations in the European Union. A good
example is the United States which has accused Germany of saving more and spending less
(Cohn, 2015). The United States under the leadership of President Donald Trump has threatened
to introduce tariffs on the Germany imports which will majorly affect its vehicles which
contribute much towards improving the Germany exports. This therefore means that Germany
needs to restructure its economic policies and maintain peace coexistence with the other nations
in order to eliminate its huge trade imbalance and avoid future collapsing of its economy.
Discussion

CAUSES OF DEFICITS IN THE GERMAN ECONOMY 3
Generally Germany has been doing well in terms of economic performance having
improved from the weakest economy in the Europe region to a superpower (Pickhardt & Sardà
Pons, 2016). Despite the good performance of the economy of Germany, various trade
imbalances in its economy have been witnessed due to various deficits in its sectors of the
economy as result of disproportionate economic policies. Some of these deficits are caused by
various challenges to the economy which include low rate of wage growth and inflation,
Germany budgetary surplus and its aging society and low investment and much saving (Keynes,
2017).
a. Low rate of wage growth and inflation
The rate at which the wage for the Germany workers increases has been poor for the last
ten years. After the 2008 great recession, the Germany workers were even witnessed accepting
low wage rates in order to secure their jobs (Clark, Georgellis & Sanfey, 2012). During those
days unemployment rate was high averaging more than 10 percent. Since then the Germany
economy has been improving and the unemployment rate has been decreasing. Although the
economy has been improving its performance, the wage rates for the Germany workers have still
been increasing at a slow pace. The 2018 statistics show that the unemployment rate in Germany
has decreased to 3.9 percent. This is a relative low rate of unemployment at which workers
should be paid a relatively higher wage rate but still the wage rates for the Germany workers are
still low compared to their economic growth. The lower wage rates for the Germany workers
have left them with little to spend and as a result they end up spending less on imports (Bonin,
Kempe & Schneider, 2012). Due to this there has been an imbalance in trade between Germany
and other nations due to deficits in consumer expenditure (Nilsson, 2013).

CAUSES OF DEFICITS IN THE GERMAN ECONOMY 4
Due to worker’s low wage rate the inflation growth in Germany has been too much low
as compared to the targeted inflation rate by the European Central Bank. This therefore means
that the price of goods for the Germany goods has been kept low which is a threat to the
European Union nations. As a result Germany exports too much than it imports creating an
imbalance in trade due to the deficits in consumer expenditure on imports.
b. Germany budgetary surplus and its aging society
Germany’s economy is doing much better and currently posts a budget surplus. The
government has been in a dilemma on how to utilize this chance. Should it invest more to gain
long-term benefits in future or save what it has?. The public debt of Germany is rapidly falling
and hence it has a room to increase its public expenditure but it’s not doing so (Roubini & Sachs,
2015). Germany has mainly been depending on its exports mainly to the Asian countries and also
its auto industry. The Asian countries are currently undergoing industrialization and hence a
deficit may result soon from the decline in the Germany’s exports (Drucker, 2014). It’s therefore
wise for the government to shift and invest in the digital opportunities of which it’s not doing so.
The Germany population is also aging and hence this has increased the health costs for the aged
population as well as the pension payments. This has resulted into a deficit in the overall
economic growth as the government tends to save more to cater for the aging population. If the
government increases its public expenditure and invests wisely on the available opportunities
such as digitalism, construction of roads and training programs among others, it is likely to
realize more benefits in future. The government has not done so and this has lowered the rate of
Germany’s economic growth and increased trade imbalances with other European Union nations

CAUSES OF DEFICITS IN THE GERMAN ECONOMY 5
(Tufte, 2010). If the government does not act fast and increase its public spending, Germany is
likely to experience more deficits in future.
c. Low investment and much saving
Currently Germany has the highest current account surplus at a level of 8 percent of the
gross domestic product. This means that German exports are too much more than its imports.
This is due to the fact that citizens of Germany and its domestic companies still prefer saving
than investing (De Grauwe & Ji, 2012). This has greatly caused a deficit in the economic growth
of Germany and much need to be done to solve the issue as soon as possible. The deficit in the
economic growth of Germany can only be eliminated by the government encouraging companies
to invest by lowering its higher tax rates and also encouraging more aged citizens to stay in the
labor market rather than retiring (Garrett & Mitchell, 2011).
Conclusion
Germany is among the rich nations of the Europe region and is currently having a budget
surplus. This is an indication that Germany exports more than it imports. As a result there has
been an imbalance in trade between Germany and other European Union nations. The economy
of Germany has been facing deficits despite the fact that it is performing better. Some of the
challenges which have caused the economy deficits include low rate of wage growth and
inflation, Germany budgetary surplus and its aging society and low investment and much saving.
The government needs to do much to address these challenges to avoid further deficits in future.
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