Germany

2008 Investment Climate Statement - Germany

• Openness to Foreign Investment
• Conversion and Transfer Policies
• Expropriation and Compensation
• Dispute Settlement
• Performance Requirements and Incentives
• Right to Private Ownership and Establishment
• Protection of Property Rights
• Transparency of Regulatory System
• Efficient Capital Markets and Portfolio Investment
• Political Violence
• Corruption
• Bilateral Investment Agreements
• OPIC and Other Investment Insurance Programs
• Labor
• Foreign-Trade Zones/Free Ports
• Foreign Direct Investment Statistics

Openness to Foreign Investment Return to top

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 Return to top

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 thirteen other EU 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 Return to top

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 Return to top

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 Return to top

There are about 3,000 incentive programs for investors in Germany, offered by EU, federal, and state authorities. Cash Grants under the Joint Agreement for the Improvement of Regional Economic Structures are available for improving the structure of regional economies and the economy as a whole – a primary objective of the German federal and state governments. Distribution of these subsidies is generally subject to approval by the European Union.

A comprehensive package of federal and state investment incentives is available to domestic and foreign investors. In some cases, there may be performance requirements tied to the incentive, such as maintaining a certain level of employment. 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 placed particular emphasis on investment promotion in the New States of the former East Germany and has offered a large number of incentives to this end. Ongoing efforts to reduce government budget deficits and EU efforts to reduce state aid to industry are putting pressure on these programs. 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 € 26.3 billion. The accession of 10 new EU member countries in 2004 has resulted in reduced subsidy levels for Germany going into effect in 2007. Especially eastern Germany felt the impact of the change, losing its status as “target one” region for highest priority support. The new German states are still going to receive the lion’s share of the EU subsidies going to Germany, € 15 billion, for the budget period of 2007 -2013.

Available incentives currently include:

For the eastern German states and eastern Berlin:

• Tax Incentives: investment allowances, special depreciation allowance.
• Investment Grants: Improvement of Regional Economic Structures Program; grants for research and development; consulting fee and training costs; export, marketing and fair participation assistance.
• Credit Programs: loans at below-market interest rates from the government-owned Bank for Reconstruction (KfW) and its subsidiary the Mittelstandsbank; the European Recovery Program (ERP); EU programs; and loan guarantee and credit programs.

Programs for all of Germany:

• Still applicable are cash grants under the Joint Agreement. Investments in eastern Germany in particular profit from this program, with outright grants of 50% available to SME's (small and mid-size companies – defined by the EU as having fewer than 250 employees, a maximum turnover of € 40 million, or a balance sheet total of no more than € 27 million); larger firms receive grants of 35% of investment costs. As noted above, the EU is reviewing this program and while there may be cuts for some regions, by and large the program and grant volumes are expected to remain relatively constant after 2005.
• Tax Incentives: special depreciation allowance, capital reserve allowance.
• Investment Grants: Improvement of Regional Economic Structures Program, grants for research and development, consulting fees, and training costs.
• Credit Programs: loans at below-market interest rates from the Equalization Funds Bank, Reconstruction Funds Bank, the European Recovery Program, European Union programs, loan guarantee programs, and other programs for small technology firms and environmental demonstration projects.

United States and other foreign firms 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 project engages in sponsored research entirely performed in Germany;
• The firm can exploit intellectual property rights independent from a parent company;
• The Federal Ministry of Education, Science, Research and Technology (BMBF) may exploit intellectual property rights from funded research;
• Any licensing of technology outside of the EU is done with the written approval of
  the BMBF;
• Preference is given to locating manufacturing facilities in Germany for any production resulting from the research (this criterion can be modified on a case-by-case basis.)

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 this R&D funding.

Foreign investors can obtain more information on investment conditions and incentives from:

Invest in Germany GmbH
Friedrichstrasse 60
10117 Berlin
Telephone: [49][30] 200 099 250
Telefax: [49][30] 200 099 111
Email: office@invest-in-Germany.de
http://www.invest-in-germany.de

Invest in Germany, LLC
1776 1 Street, N.W.
Suite 1000
Washington D.C. 20006
Telephone: .202 347 7471
Telefax: 202 347 7473
Email: m.schmidt@invest-in-germany.com
www.invest-in-germany.com

Invest in Germany, LLC
401 N. Michigan Ave, Suite 3330
Chicago, IL 60611-4212
Telephone: 312 377 6131
Telefax: 312 377 6134
Email: bremer@invest-in-germany.com
www.invest-in-germany.com

Invest-in-Germany, LLC
201 C California St., Suite 450
San Francisco, CA 94111
Telephone: 415 248 1246
Telefax: 415 627 9169
Email:geiger@invest-in-germany.com
www.invest-in-germany.com

The Industrial Investment Council, IIC, which used to provide assistance to foreign investors specifically on the new states in Eastern Germany, merged with Invest in Germany in January 2007.

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 Return to top

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 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. The EU has raided leading energy utilities and plans to file charges of price fixing and territorial demarcation against at least two major German utilities. 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 this year. As consumers begin to change their suppliers in the electricity market in particular, courts are also increasingly supporting consumers against energy suppliers. After years of competitive stagnation, some new foreign competitors have entered the market in the last two years.

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 is regarded by some competitors, however, as favoring Deutsche Post (DP). 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.

Pushed by the desire of the 100% government-owned Deutsche Bahn (DB) to have private ownership by 2008, Government and Parliament have hotly debated the sale of DB since 2006. To date, however, no agreement has been reached on how this would occur. The DB and rail unions favor retaining the ownership of both rolling stock and the rail network in any privatization scheme. The Government has appeared to support DB’s position but is now faced with grass roots opposition from the SPD. Some members of Parliament,are considering unbundling the infrastructure from the rolling stock to increase competition. On January 1, 2006, the Bundesnetzagentur (BNA) took over responsibility for access and prices issues for competitors' access to the railroad network. The Cabinet has yet to review the latest proposals to privatize only a minority share in DB or, alternatively, to retain government ownership of a track and infrastructure and a separate operational subsidiary which could be privatized. Privatization during 2008 will be difficult.

Protection of Property Rights Return to top

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. 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 comprehensive, although problems persist due to lenient court rulings in some cases and the difficulty of combating piracy of copyrighted works on the Internet.

Transparency of the Regulatory System Return to top

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.

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 Return to top

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.

At the end of September 2004, the total assets of 2,166 domestic banks were € 6.63 trillion. The 255 reporting commercial banks accounted for €1.9 trillion of this amount. The four largest commercial banks are Deutsche Bank, Commerzbank, Dresdner Bank and DZ Bank. They account for over half of Germany's total commercial bank 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. 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 over the last few years in line with global trends. More recently, however, analysts have predicted this trend to change and M&A transactions to pick up again 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.

Political Violence Return to top

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 Return to top

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 and pressure is growing to reintroduce such legislation on the federal level. 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 last two years. Corruption cases involving major (internationally operating) German companies in 2006 may lead to greater public awareness and increased enforcement of the laws. 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 ongoing corruption scandal involving Siemens AG has brought new charges and hefty fines.

Bilateral Investment Agreements Return to top

Germany has investment treaties in force with 120 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: 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 and Montenegro*; 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:

Germany has signed, but not yet ratified, treaties with the following 7 countries. These include new treaties signed with some of the countries of the former Soviet Union and former Yugoslavia, which also remain listed above, as prior treaties with these entities remain in effect.

(*) Previous treaties apply

Protocols of modification to existing treaties with the following countries have been signed:

Germany does not have a bilateral investment treaty with the United States. 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 Return to top

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 Return to top

The German labor force is generally highly skilled, well educated, disciplined, and very productive. However, the performance of the German labor market since the late 1990s, as measured by the level and growth of job creation and unemployment, has been weaker than in many comparable countries.

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. The current government of Chancellor Angela Merkel 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. Moreover, the government has 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 in order to care for their newborn children to a compensatory monthly payment for one year.

Since 2006, the German economy has been registering rates of growth last seen in the 1998-2000 period. After years of stagnation (between 2001 and 2005 the economy grew by a mere half percent per annum) – Germany is no longer the “sick man” of Europe, but rather by some measures its healthiest partner. The need to reduce labor costs has helped to achieve Germany’s remarkable economic turnaround. Business, through painful restructuring, the opening of new markets and the development of innovative products is the major force behind the success. Wage restraint on the part of the unions, coupled with longer working hours and more flexible labor input, added substantially to the decline in unit labor costs. Under growing competitive pressure, increases in nominal unit labor costs in recent years are clearly behind the rises in other countries. While the German unit labor costs increased from 1999 to 2006 by only 0.6 percent, the unit labor costs of other Eurozone countries increased by 15.9 percent, on average, resulting in a relative reduction of labor costs in Germany of 13.2 percent. This development has also generated a downward pressure on real income. According to federal statistics office data, disposable incomes of German households in 2006 were, in real terms, 2% lower than in 1991.

In 2007, as in the two preceding years, the macroeconomic scope for distributing the national income was not fully exhausted by negotiated wage settlements. In July 2007, the Institute of Economic and Social Research presented its interim report on Germany’s 2007 round of collective bargaining. The study evaluated the collective agreements concluded in the first half of 2007, affecting about 33% of all workers covered by such agreements. Calculated on an annual basis, the average increase in wages and salaries amounted to about 2.3% in 2007, which was above the average pay increase of 1.5% in 2006.

The strong revival of the German labor market continued in 2007. Registered unemployment fell in 2007 by 15.7% to below 3.8 million persons on an annual average, which corresponded to a decline in the unemployment rate from 10.8% in 2006 to 9.0%. In eastern Germany the unemployment rate stood at 15.0% and was roughly twice as high as in the western part of the country. While much of the improvement has been the result of an expanding number of temporary or low-paid jobs, more importantly, the number of socially-insured jobs and of self-employed have been rising, too. Employment increased during the year by 1.7% to an annual average of just below 40 million persons, while the number of people in jobs subject to full social security contributions rose by 2.2% to almost 27 million. The current development on the labor market has not been caused solely by a cyclical recovery but is also characterized by a higher flexibility and dynamics. The now declining numbers of long-term unemployed and of older jobseekers are indicative of a more sustained revival of the labor market.

This strong dynamic will likely persist in 2008, and although the increase in employment and decrease in unemployment will become less pronounced in the course of the year, the robust state of the labor market is playing a major role in lifting disposable incomes in real terms and hence stimulating private consumption, which with a projected increase of 1.7% will become the main driver of economic expansion in 2008.

Since the late 90s, 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.

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 7.9 million at the end of 2006.

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 Trade Zones Return to top

There are eight free ports in Germany established and operated under EU Community law: Bremen, 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 Return to top

According to the German Bundesbank (central bank), foreign direct investment in Germany in 2005 increased to $ 468 billion (€ 390 billion) – about $ 18 billion more than in 2004.

Foreign investment has been particularly strong in eastern Germany where about 1 trillion euros have been invested since 1991, the majority, an estimated 84%, from private, non-government sources. Some 2,000 foreign companies, including 300 U.S. firms, have invested in eastern Germany since reunification.

According to the Bundesbank, in 2005 German direct investment in the United States was worth $ 280 billion (€ 233 billion), while U.S. direct investment in Germany was worth $ 54 billion (€ 45 billion).

Germany's International Investment Position (billions of euros) – manufacturing industry

(Source: Deutsche Bundesbank “Kapitalverflechtung mit dem Ausland” April 2007, p. 6, 42)

Foreign Direct Investment in Germany by key sectors (2005 – millions of euros)

(Source: Deutsche Bundesbank “Kapitalverflechtung mit dem Ausland” April 2006 p. 60/61)

Top 20 U.S. Companies in Germany by sales in 2005:

(Source: American Chamber of Commerce in Germany “Commerce Germany” October 2006)

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