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Sun 24 Feb 2008 02:00 AM

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Germany returns

The relationship between the UAE and European economic powerhouse Germany is booming.

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.

Germany remains on an impressive expansion course, the economic recovery is making itself felt among the people, and the government reforms are paying off.

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.
After all, current Federal Chancellor Angela Merkel famously said in her government declaration: "I would like to most personally thank Chancellor Schroeder for his bold and courageous determination in opening the door for modernisation of our social system by introducing Agenda 2010."

Its Vorsprung durch Technik all over again

The rubble is cleared, and with the German economy back in full swing, Michael Glos has all reason to smile these days.

The Germans can finally concentrate on what they are best at: high-end engineering, cutting-edge technology, innovation through research and development, and the production of quality goods that are built to last.

In the premium and luxury car segment, German brands are virtually without any serious competitor.

The German economy has returned to the world stage: It's ‘Vorsprung durch Technik' all over again.

German machines, for example, are in high demand across the world. Mechanical engineering accounts for US$202bn of the country's economy; a workforce of more than 850,000 are employed in this sector according to official figures, making Germany the world's number one exporter of machinery and industrial plants.

According to the German Engineering Federation, VDMA, the country is the world market leader in two thirds of the branches of the global engineering industry, and in the power systems and engines sector, Germany accounts for a quarter of the world market total.

In addition to this, electrical engineering generates some US$222.4bn annually, with microelectronics among the fastest-growing sectors in the German industry. The booming Middle East has been gaining importance as a sales market in recent years.

German car engineering: the finest in the world

The car-making industry is thriving, generating revenues of almost US$366bn through some 770,000 employees annually. With its highly renowned manufacturers like Audi, Volkswagen, BMW, Daimler, and Porsche, Germany is a world leader in the automotive industry.

In the premium and luxury car segment, German brands are virtually without any serious competitor. Every year, some six million cars are produced in Germany, in addition to another 4.8 million at production facilities across the globe.

Here again, the Middle East, and particularly the Gulf states, are becoming a target market of increasing significance to the German automotive industry. It was no coincidence that the latest model of Porsche's Cayenne Turbo S was launched in Dubai, not back home in Stuttgart.

Then there is the chemicals industry. With a workforce of some 440,000, Germany is the world's largest exporter of chemicals and is widely regarded as the leading location not only for production, but also research.

There are 80 universities dedicated to chemistry and biochemistry, in addition to dozens of chemical research institutes. Expenditures for research and development - partly private, partly fostered by the German state, totalled US$10.24bn last year alone.

Foreign direct investment in this sector tripled to more than US$36.6bn over the past 15 years. A recent survey by Ernst & Young shows that the high level of education and attention to detail of the German chemicals industry are the leading factors contributing to the industry's success.

Healthcare made in Germany is another model industry. Recently, the German government announced a decision to make available US$1.17bn for R&D (research and development) in medical technologies through 2009.

This is on top of the average 9% of sales revenue that German medical companies spend on R&D themselves. Add to this the countless academic centres of excellence in medical studies across the country, and it becomes clear why Germany leads the global competition in innovative medical solutions and technology.

Over the past few decades, demographic trends that manifest themselves in an increasingly ageing population have made the emergence of a world-class industry a necessity.

Internationally, German healthcare benefits from an excellent reputation, also in the Middle East. At the annual Arab Health Exhibition last January in Dubai, the German pavilion was again the single largest country presentation.

The excellent location of the country at the geographical centre of Europe is probably the key factor in Germany's success as a logistics centre, with 10 neighbouring countries at all four points of the compass.

Since the European Union's eastward enlargement in 2004, the country's significance as a hub for east-west traffic has been soaring to new heights.

The EU's largest logistics industry employs a staggering 2.5 million people and generates an annual turnover of more than US$249bn.

Deutsche Post World Net, which includes DHL, is the world's largest logistics company, with a workforce exceeding 520,000 worldwide.
Last year, the German logistics sector grew by more than 5%, an unmatched rate on a European level. Here again, higher education in the field of logistics and research are key factors contributing to Germany's global dominance.

Logistics knowledge is systematically fostered through 40 universities and 50 colleges of applied science across the country.

Research and development - a key German advantage

The spirit of innovation is arguably Germany's crucial edge in global competition. Take the field of renewable energies.

At the annual Arab Health Exhibition held in Dubai, the German pavilion was again the single largest country presentation.

On the basis of early research, the country quickly developed a legal framework aimed at creating a sustainable, ecologically-friendly industrial policy, for the benefit of protecting the global environment.

The Renewable Energies Act from the year 2000 requires energy companies to purchase power generated from renewable resources at a fixed price over 20 years.

This led to the emergence of the world's leading renewables industry, especially in the sectors of wind and solar energy, photovoltaics, and biofuel production.

As Europe's largest population with 82.5 million inhabitants, Germany benefits from a massive domestic market. Its economic power, however, is mainly derived from the export industry.

Exports make up about a third of the country's GDP and account for 80% of growth since 2000.

And although companies like Siemens, Lufthansa, BMW, Daimler and Bayer are most commonly associated with "Made in Germany," it is the small and medium-sized companies that form the backbone of the economy.

The overwhelming majority of the German world market leaders are actually companies with less than 250 employees.

The UAE and Germany - a strategic partnership for progress

With the Gulf region in a historic boom, and the UAE economy thriving particularly, it comes as no surprise that trade between Germany and the Emirates is reaching unprecedented heights in recent years.

Bilateral relations saw a major boost when in October 2003, then-Chancellor Gerhard Schroeder became the first German head of state ever to conduct a high-profile state visit to the Emirates, meeting with the late HH Sheikh Zayed Bin Sultan Al Nahyan, his sons HH Sheikh Hamdan and HH Sheikh Mohammed Bin Zayed, as well as HH Sheikh Mohammed Bin Rashid Al Maktoum, then the Crown Prince of Dubai.

Impressed with the modernity and dynamism of the UAE, Schroeder assigned his closest advisers to deepen the contact with the Emirates and pursue possibilities of a formal cooperation.

A few months later, in the spring of 2004, the two countries formalised their cooperation with the start of a strategic partnership, a cooperation model to foster bilateral relations on a number of levels, comprising not only economic ties, but also politics, culture and education.

The partnership showed a distinct effect in the coming years.

The UAE has since become Germany's number one trading partner in the Arab world, trailing even Saudi Arabia.

The trade volume between the two countries doubled in the last five years, and recent figures show that German trade with the Emirates total more than US$7.9bn.

Today, there are more than 600 German companies in the UAE, based mostly in Dubai's numerous free zones.

Some 8000 German citizens live and work in the Emirates. The UAE will continue to gain significance as a top trading partner for Germany in the future.

But it's not all sweetness and light between Germany and the UAE. Compared to other countries, such as Britain, for instance, German investors are lagging behind, missing out on the vast opportunities of the booming UAE economy.

And aside from booming relations, there are also challenges and issues between the two countries.

Lufthansa and the looming threat of Emirates Airline

One long-term point of contention has been the question of air rights in Germany. Dubai's Emirates Airline is keen on offering services to Stuttgart and the capital Berlin, in addition to the destinations it already serves: Frankfurt, Munich, Hamburg and Dusseldorf.
So far, Germany has not made any concessions.

Observers accuse the German authorities of protectionism in favour of national carrier Lufthansa, which has already faced heavy competition through Emirates Airline in recent years.

The UAE has since become Germany’s number one trading partner in the Arab world, trailing even Saudi Arabia.

Lufthansa, on the other hand, says that if the Dubai carrier were granted licenses for Berlin and Stuttgart, this would result in the loss of several thousand German jobs.

Problems with visa restrictions affecting Emirati business travellers are an issue that was brought forward personally by UAE Federal Minister of Foreign Trade, HE Sheikha Lubna bint Khaled Al Qassimi, during the last session of the UAE-German Joint Commission.

The German authorities say their hands are tied due to the European visa regulations the country has to abide by, notably the Schengen Agreement.

Nevertheless, after the issue was pointed out at the highest level, a number of measures were taken by the German side to ensure smoother procedures.

The German government has implemented a UAE-wide phone number operating 24/7 for visa information on the Federal republic. Visas are normally granted within two to three working days.

European Union-GCC Free Trade Agreement: what lies ahead

The future of a free trade agreement between the European Union and the GCC countries is still written in the stars.

The UAE and Germany, each considered key driving forces of the GCC and EU economies, would stand to benefit greatly from such an agreement.

But after several years of negotiations, there is still no framework, although both sides continuously reaffirm that an agreement is imminent.

Some observers point out that the EU is imposing too many conditions on the GCC side, thus hampering progress of the negotiations.

Finally, the status of the bilateral UAE-German Agreement on Double Taxation Avoidance (DTA) remains unclear, expiring in August 2008.

The current framework allows German companies to enjoy the tax-free business environment of the Emirates without having to pay tax at home. The same applies to Germans working as salaried employees in the UAE.

These incentives are a key driver for German business activity especially in Dubai, and the continuation of some form of DTA is therefore crucial to the continuation of good business relations between Germany and the UAE.

Belabbes Benkredda is the Chief Editorial Director of Bridge Media News, a Dubai and Cologne-based news agency focusing on relations between Europe and the Middle East. For more details, go to www.bridgemedianews.com.

GERMANY FAST FACTSGermany is the world's third largest economy, after the United States and Japan.

Ahead of China and the US, Germany is the largest export nation in the world.

According to the World Intellectual Property Organisation, four of the world's 10 most innovative companies are German.

Germany accounts for the highest number of patent registrations in Europe and more than the next four countries combined.

Almost 50% of the European Union's expenditures for research and development are spent by Germany.

Germany accounts for more than a third of the Eurozone's economic performance and a fifth of the entire EU-27 economy.

There are about 3.2 million companies registered in Germany.

Germany accounts for just over 1% of the world population but more than 10% of the global trade volume.

The world-famous "Made in Germany" trademark was actually introduced by the English through the Merchandise Marks Act in 1887, with the intention of protecting British business against "inferior" German products. Initially designed as a sanction, the seal became known across the world as a sign of superior quality, durability, and top technology.

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