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Diplomacy in Action

2009 Investment Climate Statement - Germany


2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report
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Openness to Foreign Investment

The German government and industry actively encourage foreign investment in Germany, and German law provides foreign investors national treatment. Under German law, foreign-owned companies registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) are treated no differently from German-owned companies. Germany also treats foreigners equally in privatizations. There are no special nationality requirements on directors or shareholders, nor do investors need to register investment intent with any government entity except in the case of acquiring a significant stake in a firm in the defense or encryption industries. The investment-related problems foreign companies do face are generally the same as for domestic firms, for example high marginal income tax rates and labor laws that impede hiring and dismissals. The German government has begun to address many of these problem areas through its reform programs. German courts have a good record in upholding the sanctity of contracts.

The 1956 U.S.-FRG Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the U.S. and Germany. Germany subscribes to the OECD Committee on Investment and Multinational Enterprises' (CIME) National Treatment Instrument and the OECD Code on Capital Movements and Invisible Transactions (CMIT). While Germany's foreign economic law contains a provision permitting restrictions on private direct investment flows in either direction for reasons of foreign policy, foreign exchange, or national security, no such restrictions have been imposed in practice. In such general cases, the federal government would first consult with the Bundesbank and the governments of the federal states. Specific legislation requiring government screening of foreign equity acquisitions of 25% or more of German armaments companies took effect in July 2004. Under the 2004 law, foreign entities that wish to purchase more than 25% equity in German manufacturers of armaments or cryptographic equipment are required to notify the Federal Economics and Technology Ministry, which then has one month in which to veto the sale. The transaction is regarded as approved if the Economics and Technology Ministry does not react in that time. A new law currently in draft and under review is expected to broaden these rules and establish a procedure similar to the U.S. CFIUS. Industrial policy considerations and lobbying by business interests have occasionally delayed decision-making on investment.

Conversion and Transfer Policies

As a result of European Economic and Monetary Union (EMU), the Deutsche Mark (DM) was phased out on January 1, 2002, and replaced by the euro, which is a freely traded currency with no restrictions on transfer or conversion and which is the unit of currency in Germany and 20 other European countries. There is no difficulty in obtaining foreign exchange. There are also no restrictions on inflows and outflows of funds for remittances of profits or other purposes.

Expropriation and Compensation

German law provides that private property can be expropriated for public purposes only in a non-discriminatory manner and in accordance with established principles of constitutional and international law. There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate and effective compensation.

Dispute Settlement

Investment disputes concerning U.S. or other foreign investors and Germany are rare. Germany is a member of the International Center for the Settlement of Investment Disputes (ICSID), as well as a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. German courts are fully available for foreign investors in the event of investment disputes. The government does not interfere in the court system and accepts binding arbitration.

Performance Requirements and Incentives

European Union, federal and state authorities offer a broad range of incentive programs for investors in Germany. Cash Grants under the Joint Agreement for the Improvement of Regional Economic Structures is one available instrument for improving the infrastructure of regional economies and the economy as a whole – a primary objective of the German federal and state governments.

A comprehensive package of federal and state investment incentives, including cash, labor-related, and R&D incentives, interest-reduced loans, and public guarantees is available to domestic and foreign investors. In some cases, there may be performance requirements tied to the incentive, such as employment creation and maintaining a certain level of employment for a prescribed length of time. There are no requirements for local sourcing, export percentage, or local national ownership. Offsets have been a part of procurements by some state and local governments and by the federal government for some defense procurement, but they are infrequently used at present. Germany is in compliance with its WTO TRIMS notification.

The government has emphasized investment promotion in the states of the former East Germany and offers several programs only in these regions. The major program is the Investment Allowance Act, which provides tax incentives for investments in the eastern states in the form of tax-free cash payments or tax credits. With the beginning of the new budgetary period of the EU, which starts in January 2007 (and runs through 2013), Germany is going to receive a total of EUR 26.3 billion. The accession of new EU member countries in 2004 reduced subsidy levels for Germany beginning in 2007. The German states located in former East Germany receive the majority of the EU subsidies allocated to Germany, EUR 15.1 billion, for the budget period of 2007-2013.

Foreign investors are generally subject to the same eligibility conditions as German investors for incentive programs.
Programs in Germany:

  • Investment grants: Cash incentives in the form of non-repayable grants usually based on investment costs or assumed wage costs. Incentives vary according to the economic development level of the region and the overall investment costs, with up to 30 percent of eligible expenditures channelled to large enterprises, 40 percent to medium-sized enterprises and 50 percent to small enterprises.
  • Credit Programs: loans at below-market interest rates from the Bank for Reconstruction, the European Recovery Program, and other programs for small technology firms and environmental demonstration projects.
  • Public guarantees: Public guarantees for companies which do not have the securities private banks ordinarily require.
  • Labor incentives: Recruitment support from 800 local job centers, including of free services, training support, wage subsidies, and on-the-job training.

Firms from the United States and other countries may also participate in government and/or subsidized research and development programs, provided that:

  • * The company is legally established in Germany;
  • * The activity is a long-term operation with significant R&D capacities;
  • * The firm can exploit intellectual property rights independent from a parent company;
  • * Preference is given to locating manufacturing facilities in Germany for any production resulting from the research;
  • * The project engages in sponsored research entirely performed in Germany.

American business representatives generally report that these formal requirements and the administration of the programs by German authorities do not constitute barriers for access to R&D funding.
Foreign investors can obtain more information on investment conditions and incentives from:

Germany Trade and Invest
The inward investment promotion agency of the Federal Republic of Germany
Friedrichstraße 60
10117 Berlin, Germany
Telephone: [49][30] 2000 99 0
Telefax: [49][30] 2000 99 111
www.gtai.com
Germany Trade and Invest
1776 I Street, N.W.
Suite 1000
Washington D.C. 20006
Telephone: 202 347 7471
Telefax: 202 347 7473
www.gtai.com

Germany Trade and Invest
401 N. Michigan Ave, Suite 3330
Chicago, IL 60611-4212
Telephone: 312 377 6131
Telefax: 312 377 6134
www.gtai.com

Germany Trade and Invest
201 California St., Suite 450
San Francisco, CA 94111
Telephone: 415 248 1246
Telefax: 415 627 9169
www.gtai.com
Germany Trade and Invest
75 Broad Street, 21st Floor
New York, NY 10004
Telephone: 212 584 9715
Telefax: 212 262 6449
www.gtai.com

Germany Trade and Invest is the new foreign trade and investment agency of the Federal Republic of Germany, formed by the merger of Invest in Germany with the German Office for Foreign Trade in January 2009.

American companies can, with effort, generally obtain the resident and spouse work permit visas they need to do business in Germany, but the relevant laws are quite broad and considerable administrative discretion is exercised in their application. A number of U.S. states have not yet concluded reciprocal agreements with the German government to recognize one another’s driver's licenses. As a result, licenses from those states are not usable in Germany for longer than six months, whereas licenses from states that have signed agreements can be converted to German licenses after six months.

Right to Private Ownership and Establishment

Foreign and domestic entities have the right to establish and own business enterprises, engage in all forms of remunerative activity, and acquire and dispose of interests in business enterprises.

Privatization of state-owned utilities has promoted competition and led to falling prices in some sectors. Following deregulation of the telecommunications sector in 1998, scores of foreign and domestic companies invested vast sums in that sector. Since then, former state monopoly Deutsche Telekom (DT) has lost more than 49% of the fixed-line market to competitors (while at the same time profiting from the latter who must lease the last mile from the incumbent), although it still controls 86% of DSL broadband connections. The 2003 introduction of call-by-call and pre-selection in the local loop allowed competitors to increase their share of the local call market to an estimated 49% by mid-2006. In June 2004, a new telecommunications law to implement EU directives entered into force. The law mandates less regulation in some areas while giving the regulator new powers to address abuse of market dominance and ensure competitors’ access to services. A second amendment to the telecommunications law became effective in early 2007. Aimed to strengthen consumer rights it also includes a controversial component, entitling the incumbent to a regulatory holiday in return for a sizeable investment in a VDSL network, providing the investment creates a "new market”. The regulator determines the definition of "new markets" and can subsequently rule on the entitlement to a regulation-free timeframe. The German government continues to hold a 38% share in DT, although it has expressed its desire to sell these shares eventually.

Some competition has come to the gas and electricity markets since 1998 as well, but until recently competitors have had enormous difficulty gaining access to the incumbents' networks. In July 2005, RegTP became the Federal Networks Agency and took over responsibility for gas and electricity network prices and access. In summer 2006, it began issuing orders to incumbents to cut prices. Faced with rising energy prices and rising profits in the energy sector, consumer and political pressure on the industry to contain prices has increased. However, the severe economic downturn could potentially decrease the demand for energy and the upward pressure on energy prices. The EU has withdrawn plans to bring charges of price fixing and territorial demarcation against leading German energy utilities after two major German utilities agreed to sell their long-distance power or gas transmission lines, thereby submitting to the EU’s unbundling demands. At least one other major German energy utility is expected to follow suit shortly. Legislation to force utilities to accept new competing power stations into their nets went into force in 2007; legislation increasing the authority of the Bundeskartellamt in this sector came into force in 2008. It has used this authority already to force approximately 30 gas suppliers to lower their prices and in many cases to repay customers. As consumers begin to change their suppliers in the electricity market in particular, courts are also increasingly supporting consumers against energy suppliers, especially gas providers. After years of competitive stagnation, some new foreign competitors have entered the power market in recent years and are beginning to move into the gas market.

The government partially privatized Deutsche Post (DP) in November 2000 and is slowly divesting its remaining shares. After successive rounds of liberalization, DP's monopoly on letter delivery expired on December 31, 2007; full competition now exists in the German postal sector. A new minimum wage law in the postal sector was regarded by some competitors, however, as favoring Deutsche Post (DP) and as leading to the demise of several major competitors. Germany's Cartel Office, which enjoys an excellent international reputation, and Germany's other regulatory agencies address problems and settle complaints brought forward by foreign market entrants and bidders. However, as noted above, German law and court decisions have limited these agencies' effectiveness in some areas.

The planned sale to private investors of just below a 25% blocking minority of the 100% government-owned Deutsche Bahn (DB) did not take place as scheduled in 2008. The government scaled down from the original privatization plan for just below 50% to just below 25%. The change was largely due to unresolved disputes between the DB and rail unions and within the CDU/SPD coalition government over the retention of ownership of both rolling stock and the rail network. The SPD supported DB’s position to retain DB control over both rolling stock and the rail network in the midst of increasing grass roots opposition to any privatization at all. The CDU was also divided, but generally favored unbundling ownership of rolling stock and the rail network for competitive reasons. On January 1, 2006, the Bundesnetzagentur (BNA) took over responsibility for access and prices issues regarding competitors' access to the railroad network. Privatization during 2009 will remain difficult, particularly in light of the deepening financial crisis.

Protection of Property Rights

The German Government adheres to a policy of national treatment, which considers property owned by foreigners as fully protected under German law. There is almost no discrimination against foreign investment and foreign acquisition, ownership, control or disposal of property or equity interests, with airline ownership being an exception based on EU regulations, which require an EU majority ownership of shares to obtain an operating permit as an EU airline. In Germany, the concept of mortgages is subject to a recognized and reliable security. Secured interests in property, both chattel and real, are recognized and enforced.

Intellectual property is well protected by German laws. Germany is a member of the World Intellectual Property Organization (WIPO). Germany is also a party to the major international intellectual property protection agreements: the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, the Patent Cooperation Treaty, the Brussels Satellite Convention, and the Treaty of Rome on Neighboring Rights.

National treatment is also granted foreign copyright holders, including remuneration for private recordings. Under the TRIPS agreement, the federal government also grants legal protection for practicing U.S. artists against the commercial distribution of unauthorized live recordings in Germany. Germany has signed the WIPO Internet treaties and ratified them in 2003. Foreign and German rights holders, however, remain critical of provisions in the German Copyright Act that allow exceptions for private copies of copyrighted works. Most rights holder organizations regard German authorities' enforcement of intellectual property protections as sufficient, although problems persist due to lenient court rulings in some cases and the difficulty of combating piracy of copyrighted works on the Internet.

In 2008, Germany implemented the EU enforcement directive with a national bill, thereby strengthening the privileges of rights holders and allowing for improved enforcement action.

Transparency of Regulatory System

Germany has transparent and effective laws and policies to promote competition, including anti-trust laws. German authorities recently lifted many restrictions on store business hours, which had formerly restrained competition and business opportunities. There are concerns in Germany and abroad about the level of regulation prevailing with regulatory authority dispersed over the federal, state, and local levels. Many investors consider Germany's bureaucracy excessive, which has prompted most state governments to establish investment promotion offices and investment banks to expedite the process. The Merkel government has talked about the need to cut red tape in Germany and in the EU as a whole. New rules have simplified bureaucratic requirements, but industry must sometimes contend with officials' relative inexperience with deregulation and lingering pro-regulation attitudes.

In response to the problem, the federal government continues to reduce bureaucracy. In 2006, the National Regulatory Control Council was established, tasked with policy evaluation and the impact assessment of lawmaking. Based on its findings, the council reports annually and recommends further measures. The federal government also set the target of reducing the costs of law-induced bureaucracy by 25 percent by 2011.

Laws and regulations in Germany are routinely published in draft and public comments are solicited. The legal, regulatory and accounting systems can be complex but are transparent and consistent with international norms.

Efficient Capital Markets and Portfolio Investment

Germany has a modern financial market sector but is often considered "over-banked," as evidenced by on-going consolidation and low profit margins. The IMF's assessment of the German financial sector in spring 2003, the so-called stress tests, found that the system is robust. To improve their international competitiveness, the large private banks in particular have launched massive cost cutting programs. Consolidation among the banks is continuing. Regional state banks have increased their cooperation with affiliated local savings banks in an effort to cut costs and remain competitive.

In 2006 the total assets of Germany's 2,089 domestic banks were worth EUR 7.18 trillion. Their assets have shrunk considerably during the most recent financial turmoil, but no exact industry figure is available. The 5 largest banks (Deutsche Bank, Commerzbank, Dresdener Bank, Post Bank, and Landesbank Baden-Wuerttemberg) accounted for over 20% of 2006 assets.

Credit is available at market-determined rates to both domestic and foreign investors and a variety of credit instruments are available. Legal, regulatory and accounting systems are generally transparent and consistent with international banking norms, but in light of the current global financial turmoil, Germany is pushing for even more transparency in international financial markets Germany has a universal banking system that is effectively regulated by federal authorities.

Given the prevailing overall economic conditions, mergers and acquisitions (M&A) have decreased in recent years in line with global trends. Prior to the global financial crisis, Germany had seen an upswing in M&A transactions given Germany’s improved economic condition, the increased financial assets of especially the top 30 companies listed in the German stock exchange “DAX", and the high value of the euro. "Cross shareholding" exists among some large German companies, in particular among banks that hold shares in large industrial customers. However, Germany's major banks have been reducing their cross-shareholdings in recent years.

In response to a 2004 EU directive, the government has implemented legislation that established new rules ensuring greater transparency for takeovers. The new law went into effect in 2006.

In recent years, Germany has implemented a series of laws to improve its securities trading system, including laws against insider-trading and the Fourth Financial Market Promotion Law in 2003. In 2002, a corporate governance code was adopted, which, while voluntary, requires listed companies to "comply or explain" why the code or parts thereof have not been followed. The code is intended to increase transparency and improve management response to shareholder concerns. The Finance and Justice Ministries drew up a ten-point plan in 2003 to improve investor protection. As a part of that plan, the government tabled a bill in November 2004 that would (a) increase the liability of boards of directors for false or misleading statements; and (b) improve oversight of auditing operations. The EU's Financial Services Action Plan – an effort intended to create a more integrated European financial market by 2005 – has helped stimulate changes in the German regulatory framework, including adoption of International Accounting Standards for listed firms and use of company investment prospectuses on an EU-wide basis. In 2008, Germany passed legislation that makes private equity firms subject to greater transparency rules including the publication of a business plan for the acquired company.

Political Violence

Political acts of violence against either foreign or domestic business enterprises are extremely rare. Isolated cases of violence directed at certain minorities and asylum seekers have not affected U.S. investments or investors.

Corruption

Among industrialized countries, Germany ranks in the middle, according to Transparency International's corruption indices. The construction sector and public contracting, in conjunction with undue political party influence, represent particular areas of continued concern. Nevertheless, U.S. firms have not identified corruption as an impediment to investment.

The German government has sought to reduce domestic and foreign corruption. Strict anti-corruption laws apply to domestic economic activity and the laws are enforced.

Germany ratified the 1998 OECD Anti-Bribery Convention in February 1999, thereby criminalizing bribery of foreign public officials by German citizens and firms abroad. The necessary tax reform legislation ending the tax write-off of bribes in Germany and abroad became law in March 1999. Germany has signed the UN Anti-Corruption Convention but has not yet ratified it. The country participates in the relevant EU anti-corruption measures. Germany has increased penalties for bribery of German officials, for corrupt practices between companies, and for price-fixing by companies competing for public contracts. It has also strengthened anti-corruption provisions applying to support extended by the official export credit agency and tightened the rules for public tenders. Most state governments and local authorities have contact points for whistle-blowing and provisions for rotating personnel in areas prone to corruption. Government officials are forbidden from accepting gifts linked to their jobs.

Opinions, however, differ on the effectiveness of these steps, particularly in the area of foreign corruption. German industry - while generally in favor of creating a central, national-level register of corrupt companies that would be barred from bidding for public contracts - refrained from openly calling for its creation out of fear of added regulatory burden. Draft legislation to create such a register passed the lower chamber of the German Parliament but was blocked by opposition parties in the upper chamber in 2002. The CDU-SPD Government, which took over in November 2005, did not include a similar initiative in its program. Nevertheless, some individual states maintain their own registers.

Transparency Deutschland, the German Chapter of Transparency International, sees a national corruption register as one of its main goals in Germany and a speedy ratification of the UN Anti-Corruption Convention placing bribery of parliamentarians on the same level as bribery of public officials. Federal freedom of information legislation entered into force in January 2006, but is seen by many as ineffective. Several states have introduced their own freedom of information laws. The German government has successfully prosecuted hundreds of domestic corruption cases over the years. Numbers rose especially significantly in the three years. To date, only a small number of , charges have been filed involving the bribery of foreign government officials since the 1999 changes in German law to comply with the OECD Anti-Bribery Convention were enacted. However, the corruption scandal involving Siemens AG with its ongoing litigation and fines and the recent agreement with the Securities & Exchange Commission on an $800 million fine has focused attention on foreign bribery for the first time.

Bilateral Investment Agreements

Germany has investment treaties in force with 121 countries and territories. Of these, eight are with predecessor states and indicated with an asterisk (including Czechoslovak SFR, Soviet Union, Yugoslavia [SFRY]). Treaties are in force with the following states: Afghanistan; Albania; Algeria; Angola; Antigua and Barbuda; Argentina; Armenia; Azerbaijan, Bangladesh; Barbados; Belarus; Benin; Bolivia; Bosnia and Herzegovina; Botswana; Brunei; Bulgaria; Burundi; Cambodia; Cameroon; Cape Verde; Central African Republic; Chad; Chile; China (People's Republic); Congo (People's Republic); Congo (Democratic Republic); Costa Rica; Croatia; Cuba; CSFR**; Czech Republic*; Dominica; Ecuador; Egypt; El Salvador; Estonia; Ethiopia; Gabon; Georgia; Ghana; Greece; Guatemala; Guinea; Guyana; Haiti; Honduras; Hong Kong; Hungary; India; Indonesia; Iran; Ivory Coast; Jamaica; Jordan; Kazakhstan; Kenya; Republic of Korea; Kuwait; Kyrgyzstan*; Laos; Latvia; Lebanon; Lesotho; Liberia; Lithuania; Macedonia; Madagascar; Malaysia; Mali; Malta; Mauritania; Mauritius; Mexico; Moldova*; Mongolia; Morocco; Mozambique; Namibia; Nepal; Nicaragua; Niger; Nigeria; Oman; Pakistan; Panama; Papua New Guinea; Paraguay; Peru; Philippines; Poland; Portugal; Qatar; Romania; Russia*; Rwanda; Saudi Arabia; Senegal; Sierra Leone; Singapore; Slovak Republic*; Slovenia; Somalia; South Africa; Soviet Union**; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Serbia; Sudan; Swaziland; Syria; Tajikistan*; Tanzania; Thailand; Togo; Tunisia; Turkey; Turkmenistan; Uganda; Ukraine; United Arab Emirates; Uruguay; Uzbekistan; Venezuela; Vietnam; Yemen (Arab. Rep.); Yugoslavia (SFRY)**; Zambia; and Zimbabwe.
(Note: Asterisk * denotes treaty in force with predecessor state; Asterisks ** denote continued application of treaties with former entities, which have not been taken into account in regard to the total number of treaties.)

Germany has ratified treaties, which are not yet in force, with the following countries:

Country

Signed

Temporarily Applicable

Bahrain

2/5/2007

Brazil

09/21/1995

No

Burkina Faso

10/22/1996

Yes

Egypt

06/16/2005

*

Guinea

11/08/2006

*

Israel

06/24/1976

Yes

Madagascar

08/1/2006

*

Oman

05/30/2007

*

Palestine

07/10/2000

No

Timor-Leste

08/10/2005

No

Trinidad & Tobago

09/08/2006

No

Germany has signed, but not yet ratified, treaties with the following 2 countries.

Country

Signed

Temporarily Applicable

Jordan

11/13/2007

*

Libya

10/15/2004

No

(*) Previous treaties apply
Protocols of modification to existing treaties with the following countries have been signed:

Country

Signed

Temporarily Applicable

Poland

05/14/2003

N/A – In force as of 10/28/2005

Moldova

08/26/2003

N/A – In force as of 06/15/2006

Germany does not have a bilateral investment treaty with the United States, but an FCN treaty dating from 1956 remains in force. Taxation of U.S. firms within Germany is governed by the 1989 "Convention for the Avoidance of Double Taxation with Respect to Taxes on Income." It has been in effect since 1989 (and since January 1, 1991, for the area that comprised the former German Democratic Republic.) With respect to income taxes, both countries agree to grant credit to their respective federal income taxes for taxes paid on profits by enterprises located in each other's territory. The German system is more complex, but there are more similarities than differences between the German and U.S. business tax systems. On December 28, the U.S. and Germany ratified the Protocol of June 1, 2006, amending their 1989 income tax treaty and protocol. The new protocol updates the existing treaty and includes several changes, including a zero-rate provision for subsidiary-parent dividends, a more restrictive limitation-on-benefits provision and a mandatory binding arbitration provision.

OPIC and Other Investment Insurance Programs

OPIC programs were available for the new states of eastern Germany following reunification for several years during the early 1990s, but were suspended following progress in the economic and political transition.

Labor

The German labor force is generally highly skilled, well educated, disciplined, and very productive. Germany was often seen as unable to institute necessary labor market and social welfare reforms as reflected by notoriously sluggish employment growth and rising unemployment. Recent years, however, saw a complex set of reforms of labor and social welfare related institutions, such as labor market deregulation, cuts of social benefits, more emphasis on active and activating labor market policies and attempts to reduce the burden of payroll taxes and – last but not least – a series of changes in collective bargaining.

The labor-market related reforms implemented by the former SPD/Greens Government have in fact contributed to overcoming structural weaknesses of the German welfare state and creating an institutional setup more conducive to strong employment growth and lower unemployment. Chancellor Angela Merkel’s Grand Coalition has initiated other reform measures, such as a gradual increase in the mandatory retirement age from 65 to 67 – a move that would add 2.5 million to the workforce by 2030 – and an initiative aimed at reducing unemployment among older workers and discouraging early retirement. The government has also encouraged female labor market participation by measures that would make it easier for mothers to work – for example, longer school hours and more day care centers. To address the problem of Germany’s low birth rate, it has also adopted a new “parents allowance,” which entitles parents who give up work or reduce their hours of work to care for their newborn children to a compensatory monthly payment for one year.

To address ever rising health care costs, Germany implemented numerous health care reforms, most recently in April 2007. The introduction of a Health Fund is the key pillar of reform: Beginning in 2009, insured persons’ contributions to the statutory health insurance companies will be standardized. For each insured person, the health insurance companies will receive a flat rate from the Health Fund. At the same time, tax financing of health insurance services, such as contribution-exempt insuring of children of insured parents, will commence. From 2009 onward, insurance will be compulsory for everyone and private health insurance companies will be obliged to accept insured persons at the base rate. While Germany has achieved relative financial stability in its social insurance system, the ongoing debate over a national minimum wage and an alleged rollback of unemployment insurance reforms suggest that the Grand Coalition government will have difficulties pursuing significant additional reforms in the remainder of the legislative term.

The political debate in Germany over the introduction of a national minimum wage has intensified in recent years. Supporters subscribe to three arguments: a minimum wage is needed to ensure fair payment to workers in low wage sector jobs; a minimum wage would stop (indirect) wage subsidies to employers (note: about 1.2 million employees – half of them working full-time – currently qualify for supplemental government benefits due to low wages); and a minimum wage would ensure that employers compete on products/services, and not on low wages.

The critics argue that a national minimum wage would interfere in free collective bargaining, destroy employment, and extend the role of government. Although the coalition government has agreed to allow minimum wages on a sector-by-sector basis if employers and unions in these sectors applied for coverage by March 31, 2008 under the relevant legislation, the SPD-led Labor Ministry and the CSU-led Economics Ministry remain deeply divided over the best possible approach.

After a strong start in 2008, increasingly worrisome German economic data have captured broad media and public attention. The sobering data come after months of confident projections that Germany would ride out the global financial storm; surprisingly strong German growth in the first quarter of 2008 (1.3 percent) helped fuel that expectation. However, German consumer and producer confidence fell to the lowest level since unification in the third quarter of 2008 despite a continuing improvement in the German labor market. Preliminary data for November 2008 released by the Federal Statistical Office (Destatis) suggest that the number of persons in employment whose place of residence was in Germany amounted to 40.83 million. That was an increase of 500,000 persons or 1.2% from November 2007 and the highest number of persons in employment ever.

But experience shows that it often takes several months for changes in the macro economy to affect the labor market. As a result of the deepening financial/economic crisis, the Institute for Employment Research (IAB) reversed its more optimistic forecasts from earlier this year and is now expecting unemployment figures to rise in 2009. Although the anticipated average for 2009 of roughly 3.3 million unemployed will approximate the annual average in 2008, this is largely the result of the comparatively favourable initial situation at the beginning of 2009. In the course of the year, the number of unemployed is likely to increase noticeably.

The negotiated wage settlements in the first half of 2008 included larger percentage increases, on average, than those concluded in 2007. In August 2008, the Institute of Economic and Social Research presented its interim report on Germany’s 2008 round of collective bargaining that affected about 33% of all workers covered by such agreements. A further 4.6 million employees received pay increases in 2008 that have been negotiated in previous years. Calculated on an annual basis, the average increase in wages and salaries amount to 3.3% in 2008, which was above the average pay increase of 2.2% in 2007.

Although a considerable gap in earnings between men and women persists in Germany, special provisions to tackle wage discrimination and to promote equal opportunities were not included in those collective agreements concluded in the first half of 2008.

Since the late 1990s, Germany’s system of wage determination through multi-company, industry-wide contracts has become considerably more decentralized in recent years. Although sector-wide labor agreements can set wages and working conditions at high levels in some industries, company-level agreements frequently deviate significantly from them. Many industry-wide contracts have been revised in recent years, not only to include highly flexible working time arrangements but also to introduce escape clauses for ailing companies, and to lower entrance pay scales and performance-based annual bonuses. Moreover, the coverage of collective agreements has been declining. Multi-company, industry-wide contracts cover about 43.4% of all firms; 5.3% are covered by a company-level agreement; and 51.3% are not covered at all. Coverage in the eastern states is even lower than in the west. In terms of workers covered by a collective agreement, 73.6% of workers are covered, while 26.4% are uncovered. Again, the coverage is higher in the west than in the east.

The country’s education system for skilled labor, combining on-the-job and in-school training for apprentices, produces many of the skills employers need. There are rigidities in the training system, however, such as restrictions on night work for apprentices, to which some employers object. Another criticism is that the system is inflexible with regard to occupational categories and training standards. Labor unions complain employers do not establish enough training slots and do not hire enough of the trainees after their training is completed. Regulatory obstacles to workers’ mobility remain high in Germany (and throughout the EU) and have also contributed to serious labor shortages in many high-skilled fields, above all of engineers, technical professions and manufacturing trades. The German government has tried to address shortages of IT specialists through a “Green Card” program that has made available 20,000 work visas to foreign IT workers. In addition, a new immigration law went into effect January 1, 2005, easing the entry of highly qualified immigrants and promoting their integration into German society. Critics of the legislation, however, argue that a so-called “points system” would have been substantially more effective.

On November 1, 2007, the German government implemented a measure allowing companies to hire electrical and mechanical engineers from the eastern European countries that had joined the EU in 2004 without giving priority to German applicants. Concerns have been raised, however, that the move, intended to ease the skilled labor shortage in Germany, could lead to a “brain drain” in the ten new EU member states. A comprehensive immigration program (a points-based immigration system for skilled workers, such as the Canadian system) is reportedly under consideration.

The increasing demand for skilled labor is resulting in the first staffing problems in some economic sectors. Vacant positions can no longer be filled as quickly as in previous years. Small and medium-sized businesses often have problems finding personnel – they are not as well known and the applicants do not queue up at their doors. Engineering companies and medium-sized businesses are feeling the labor shortage more than large companies, whose personnel departments are able to recruit new employees more easily.

About 23% of the workforce is organized into unions. The overwhelming majority are in eight unions largely grouped by industry or service sector. These unions are affiliates of the German Trade Union Federation (DGB). Several smaller unions exist outside the DGB, principally in white-collar professions. Since peaking at more than 13 million members shortly after German re-unification, total union membership has steadily declined to about 7 million at the end of 2007.

Unions’ right to strike and the employers’ right to lockout are protected in the German constitution. Court rulings over the years have limited management recourse to lockouts, however. Although 2006 and 2007 were years of major industrial conflicts by German standards, the country reports on average a low volume of industrial action compared with other European countries. Labor-management agreements have resulted in relatively few work stoppages (in 2006, about 2.4 days of work lost per 1,000 workers).

At the company level, works councils represent the interests of workers vis-à-vis their employers. A works council may be elected in all private companies employing at least five people. The rights of the works council include the right to be informed, to be consulted, and to participate in company decisions. Works councils often help labor and management to settle problems before they become disputes and disrupt work.

“Codetermination” laws give the workforce in medium-sized or large companies (stock corporations, limited liability companies, partnerships limited by shares, co-operatives, and mutual insurance companies) significant voting representation on the firms’ supervisory boards. This codetermination in the supervisory board extends to all company activities.

Foreign-Trade Zones / Free Ports

There are seven free ports in Germany established and operated under EU Community law: Bremerhaven, Cuxhaven, Deggendorf, Duisburg, Emden, Hamburg and Kiel. These duty-free zones within the ports also permit value-added processing and manufacturing for EU-external markets, albeit under certain requirements. All of them are open to both domestic and foreign entities. Falling tariffs and the progressive enlargement of the EU have in recent years gradually eroded much of the utility and attractiveness of duty-free zones, but there are currently no plans to eliminate them.

Foreign Direct Investment Statistics

According to the U.S. Department of Commerce’s Bureau of Economic Analysis, in 2007 German direct investment in the United States was worth $ 203 billion while U.S. direct investment in Germany was worth $107 billion. Foreign investment has been particularly strong in eastern Germany where about 1 trillion euros have been invested since 1991, of which an estimated 84% came from private, non-government sources. Some 2,000 foreign companies, including 300 U.S. firms, have invested in eastern Germany since reunification.

Top 20 U.S. Companies in Germany by sales in 2007:

1. Ford-Werke GmbH
11. Ingram Micro Holding
2. Adam Opel
12. TRW Automotive (Gruppe)
3. ExxonMobil Central Europe Holding GmbH
13. McDonald’s Deutschland Inc.
4. GE Deutschland
14. Motorola GmbH
5. IBM Gruppe
15. MTU Aero Engines Holding AG
6. ConocoPhillips Germany
16. Goodyear Dunlop Tires Germany GmbH
7. Hewlett-Packard GmbH
17. Microsoft Deutschland GmbH
8. Philip Morris GmbH
18. Deere & Company – European Office
9. Dow Gruppe Deutschland
19. Intel
10. Proctor & Gamble
20. Abott GmbH & Co. KG


(Source: American Chamber of Commerce in Germany “Commerce Germany” October 2008



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