Since 1995 Germany has barely managed to grow by 1.2% annually, with growth over the last four years averaging only 0.6%. In 2005, growth will again be below 1%. With these low growth rates Germany has clearly fallen behind all the other
European countries. The German economy is suffering from a number of problems. There are the usual long-running concerns about Germany’s high labour costs and taxes, and high levels of regulation. This has been exacerbated by new challenges over the last decade and a half, such as the high costs of German unification and the direct exposure to low-wage eastern and central European countries. With hindsight the four-year stagnation might therefore not be all that surprising. And what this paper shows is that structurally the country has made substantial progress and is in a better competitive position than before. What is needed now is an improvement in confidence and a pick-up in domestic demand.

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