International Economy

International Economy

Cross-border trade in goods and services, the exchange of savings and investment capital – in short: the international division of labour – are responsible for a large part of the prosperity enjoyed by the world’s population. Germany is particularly deeply involved in this global supply network.

German firms largely concentrate on their core competencies, such as research and development, at their original locations, while having simple production processes carried out abroad. As a result, low-skilled workers in the industrialised countries find themselves under pressure, although they also benefit from the lower prices at which many products can now be offered. Those who gain are the populations of developing and threshold countries with open markets. Since the early 1980s the proportion of the earth’s population with a purchasing power of less than a dollar a day has approximately halved.

Globalisation is reflected in political structures, too: neighbour states are forming ever closer regional communities and intensifying mutual trade. In the European Union, for instance, the common internal market has secured its citizens a remarkable standard of living. Germany takes full advantage of the free movement of people, goods, services and capital in the EU, sending almost two thirds of its exports to other members states.

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The common internal market has caused trade within the EU to flourish. The free movement of people, goods, services and capital has afforded the EU’s citizens an enviable standard of living.

Despite being the largest net contributor to the EU budget, Germany benefits from the community, too, with two thirds of its exports going to EU countries. There are, however, huge economic gaps between the member states. While in central and eastern Europe per capita economic output, adjusted for purchasing power differences, barely reaches 60% of the EU average, Luxembourg achieves two and a half times that average. Lest the gap become too great, the EU supports poorer regions with annual sums running into the billions – a policy known as ‘cohesion’.

The euro, introduced in 1999, is supposed to strengthen cohesion, too. At the time of its introduction, the euro countries committed themselves to pursuing sound financial policies with the aim of keeping the common currency stable. Some states, however, have not met their responsibilities. Now their enormous budget problems pose a threat to the other EU countries. For this reason, the Union should supplement its regulatory framework with a set of rules covering cases of insolvency, ensuring that creditors contribute to the rescue package.

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The globalisation process determines the development of the world economy. Many companies invest abroad, founding subsidiaries there or taking holdings in already existing firms. Cross-border trade in goods and services has increased prosperity in the majority of countries.

The growth in world trade would have been unthinkable without the dismantling of duties and other obstacles to trade under the auspices of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO). Since countries’ economies are ever more intricately intermeshed, the economic situation in one country increasingly affects its trading partners. Germany, with its strong exports, is particularly dependent on the state of the world economy.

The countries which have profited most from globalisation are those which have opened their markets. Yet despite the obvious advantages of the international division of labour, many countries continue to isolate themselves. Industrialised countries use trade barriers and subsidies to defend themselves against cheap agricultural produce from developing countries, preventing the latter from raising their standard of living. The poorest nations are often unable to hook into the world economy, lacking as they do a reliable infrastructure and growth-oriented economic policies. Many of these countries continue to be dependent on development aid.

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Although many emerging economies have been trying to catch up, Germany has in recent years been able to maintain its strong position in world markets. Its market share of world exports is now – and has been since the early nineteen nineties – just over 9 %.

The success of German companies can primarily be ascribed to technically outstanding products, the mastery of complex processes, a high level of innovation and good marketing of the advantages they offer. In order to survive in global markets, however, firms need attractive economic conditions where their production facilities are located, including extensive public infrastructure, simple taxation and an efficient social welfare system.

One of the most important factors in locating production facilities is labour costs. It is true that in recent years the increase in labour costs in German industry has been moderate. Due to the dramatic hike in the first half of the nineties, however, Germany continues to be one of the most expensive business locations in the world. German companies partly make good the disadvantage of high labour costs by achieving higher productivity than their foreign competitors. Higher prices can be justified by better quality and more innovative products. It is thus all the more necessary for a high-wage country like Germany to maintain its competitiveness by continuous improvement in the fields of education, science and research.

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