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Macroeconomic Analysis of Germany Essay

The following paper will start by examining the macroeconomic state of Germany by citing real changes in fiscal and monetary policies, exchange rates and international trade. It will then analyze their influences and consequences on the economy and will finally conclude with a general comparison to the US economy and a future outlook for Germany itself. In the beginning of the millennium, Tax Reform 2000 was implemented, the largest tax relief act in Germany’s post-war history.

Its goal was to boost the relatively low economy by stimulating people to spend and consume. However, due to a general insecurity in the population and the people’s lack of confidence, consumption failed to amplify, as hoped, despite the increase in disposable income. In addition, despite the Reform, after its implementation, investment also slightly decreased. The lowering of the interest rates by 275 basis points in 2001 increased the money supply and led to a higher consumption, which positively reflected on the GAP growth.

However, the lower interest rates were not able to accelerate investment and employment. Nevertheless, the Euro appreciated against the US Dollar, which in turn ad a positive influence, as exports and imports maintained their growth. After continuous depreciation of the Euro against

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the Dollar, up until its all-time low at the end of October 2000, the CB, along with the US and Japanese monetary authorities, intervened and increased the interest rates twice, both by 0,25%.

By doing so they could first avoid a threat of an increase of domestic prices due to inflation and also augment imports due to the appreciation of the Euro. Furthermore, the skyrocketed foreign direct investment in 2000 was reduced by 182,52 billion Euros in 2001. The opening of a single market in 1993 had an overall positive influence on the German economy, especially in the trade sector, where exports increased by 10,6% until 2002, totaling 660,6 billion Euros.

Other areas however, such as consumption and employment, saw no positive influence through the market opening, and increased slowly. Both the GAP of the EX.-25 and the US continued to grow in 2004. Nevertheless the EX.-25 lagged behind with an increase of 2, 1% compared to the US growth of The same was the case in employment, where the EX.-25 had an employment rate of 63% compared to the relatively high rate in the US of 76%.

All in all, the German economy seems to have recovered from its weak period and generally business confidence has picked up, which will stimulate the demand and increase consumption, resulting in what should be a positive influence on employment. However, while the outlook may look positive, investment will remain rather weak.

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