Germany returns

Arabian Business examines the booming relationship between the UAE and European economic powerhouse Germany.

After many years of stagnation, the world's leading export economy is back in full swing. Earlier this month, a UAE delegation led by Prime Minister and Dubai Ruler HH Sheikh Mohammed Bin Rashid Al Maktoum visited Berlin to woo German investors and boost bilateral relations with the UAE.

But it's not all sweetness and light between the two countries.

When Michael Glos presented Germany's Annual Economic Report 2008 in late January, the economy minister had all reason for optimism: Germany remains on an impressive expansion course, the economic recovery is making itself felt among the people, and the government reforms are finally paying off.

Instead of the 1.8% growth predicted in the 2007 report, the economy grew by 2.5%, and unemployment is now down to 9% - the lowest level since 1995. Compared to previous phases of recovery, unemployment is falling significantly faster.

Consumer confidence increased substantially, and private disposable income is expected to grow by 2.7% faster than consumer prices in 2008.

Even the almost two-decade old government budget deficit could be consolidated, with Glos announcing the first balanced state budget since 1989 thanks to massive tax yields on the back of robust growth.

Germany also held its ground as the world's largest export nation, followed by China and the United States.

The recovery was not without a price, however. Dubbed for many years as the "Sick man of Europe," Germany's economic growth since the early 1990's was slower in comparison to any major industrialised nation, steadily decreasing to a devastating 0.8% in 2005.

Unemployment reached 13% in the same year -the highest level since World War II. Experts were quick to point to the reasons behind the demise of thonce-powerful motor, the driving gear of the European economy: profuse bureaucracy, an inflexible domestic labour market paralysed by excessive regulation, and abundant government spending on social security.

In addition, more than other industrialised nations, the German industry suffered heavily from emerging low-wage countries in Asia and Eastern Europe that were suddenly in a position to produce at a much more competitive cost.

As a consequence, many productions sites - including those of German companies themselves - were moved abroad, leaving several hundred thousands in unemployment.

The German unification and its effects

Perhaps more than anything else, the German economy was strangled by the integration of former Communist East Germany.

When the iron curtain fell, the Federal republic faced the historic challenge of harmonising two economies that could barely be any more different: The Federal Republic of Germany, on the one hand, was a free market economy successfully following its own - more or less - capitalist model.

The communist German Democratic Republic, on the other, was in a disastrous economic state and deeply plunged in debt. The process of harmonisation the Germans then embarked on continues to this day.

Almost 20 years after unification, about 4.5% of former West Germany's economic performance is still being transferred to the new ‘Laender' in the East.

The total cost of unification in the form of subsidies has to date exceeded US$2.19 trillion - roughly double the annual GDP of all GCC countries combined.

Two years before the German economy reached its historic deadlock, it was the government of former Federal Chancellor Gerhard Schroeder that eventually initiated a comprehensive programme called "Agenda 2010" - a set of far-reaching reforms to boost the ailing German economy.

Hugely unpopular among many Germans, Agenda 2010 was aimed at saving the social security system from bankruptcy, fostering employment, and modernising the state.

Among many other measures, retirement pensions were lowered substantially, a national healthcare reform was initiated, and unemployment benefits were cut down to a bare minimum.

At the same time, to stimulate growth, top income taxes were lowered from 53 to 42%. Schroeder also introduced a range of benefits and subsidies for those seeking to set up a new business.

Eventually, Schroeder had to pay his own price for the unpopular reforms and was ousted in the 2005 elections. It was the new German government that reaped the fruits of his reforms.

From the West to the Middle East
German companies are making a splash in key sectors in the UAE, and across the Gulf.