Success of the Government of Germany in Running Economy - Case Study Example

Name Class Unit Germany economy Introduction Germany is an open economy where social protection and the state play a dominant role. The economic decisions made in Germany are based on the need to compete globally which has been a fundamental economic law since the Second World War (Storm and Naastepad, 2015). Despite this, there are protectionist measures in some areas of Germany economy. This is especially the protection of individuals due to provision of employment. The Germany economic growth picked up in 2014 after a period of two years of weak growth. Germany was able to register a growth of 1.6% in 2015. The government has been expecting an economic growth of 1.8% in 2016 (Destatis, 2015). The government has a major role in the Germany economy. The central bank also has a great impact on the Germany economy. Germany central bank (Bundesbank) is a politically independent body whose mandate is focused on price stability and targeting (Berggren, Daunfeldt and Hellström, 2014). Bundesbank has been able to maintain transparency which has also supported economic growth. This paper looks at how successful has the government and the Central Bank of Germany been in running the economy for the past 2 years. The paper also describes and evaluates the main macroeconomic policies used by the Government and Central Bank of Germany over the last two years. Success of the Government and the Central Bank of Germany in running economy over the last two years Unemployment Despite the difficult international economy, the Germany economy has been performing well. The Germany economic growth has been able to match the potential output growth (Cantoni, Dittmar and Yuchtman, 2015). The country unemployment levels have been falling compared to most of the countries in the euro zone (Engbom, Detragiache and Raei, 2015). The current development in Germany labour market has been boosted by the low inflation (Kirkegaard, 2014). The government has made a lot of efforts in enhancing the labour market. In 2015, there were 43.5 million people in work which is an increase of 400,000 people than a year earlier (Destatis, 2015). Germany labour market reforms have been the key in reducing the level of unemployment (Engbom, Detragiache and Raei, 2015). The government has introduced incentives for the unemployed people tom take work. This has enhanced the labour participation in the country. The current labour market success is based on the drastic policy reforms that were known as Hartz reforms (Kirkegaard, 2014). These are the reforms that led to the improvement on the services offered by the employment agencies, created new employment opportunities and reduced labour costs (Cantoni, Dittmar and Yuchtman, 2015). These reforms have seen Germany to be one of the countries with the lowest levels of unemployment. The government has helped in making the labour market more absorptive for the unemployed looking for jobs. Bundesbank has played its part in maintaining low levels of inflation in the economy (Engbom, Detragiache and Raei, 2015). This has made it possible for the firms and business to thrive and increase the number of workforce. When the inflation is low, the market environment is enhanced leading to better working conditions. Through transparency, Bundesbank has made it easy for the policy makers to act in a flexible manner (Storm and Naastepad, 2015). This has allowed the wage and price setters to have a great awareness of the monetary policy in use. Economic growth According to Cantoni, Dittmar and Yuchtman (2015), high employment levels and increase in real wages in Germany has played a part in economic growth. These are areas where the government policy has given priority. The government has been able to put in place and expansive fiscal policy. This is for the period ranging from 2016 to 2018 where an investment package worth 10 billion euros was put in place. There is also a well-developed taxation system which has contributed highly to the economic growth in the last two years (Milward, 2015). It is also evident that the private consumption has been accounting for more than the half of GDP growth in the last two years. The households have been a major driver in then economic development for the last two years. This has been fuelled by the government increase in the gross earnings. The decrease in the unemployment rate from 6.4 to 6.3% also meant there was more money from wages (Storm and Naastepad, 2015). As the real wages rise, Bundesbank has been keeping their inflation down. It is important to note that an independent central bank is capable of producing lower inflation. The low dependence of the Bundesbank on the German political authority contributed to the economic growth. This can be proved by the fact that economic growth is higher in countries whose central bank is independent of the politics. The Bundesbank has been able to support economic institutions in Germany for the past two years. This is due to its orientation to industrial and social development. The German Central Bank has been playing an allocative role. This is through affecting the access to credit for the different industries (Cantoni, Dittmar and Yuchtman, 2015). Due to Bundesbank independence, it has been promoting financial liberalisation, inflation targeting and removal of capital controls. All these have acted to help the Germany economy. Through creating a context of macroeconomic stability, Bundesbank has been able to act as an agent of development. This is through creation of financial stability using financial regulations (Storm and Naastepad, 2015). Prices and the balance of payments Balance of payments is a summary of transactions between the residents and non-residents of a given economy over a time. It includes the current and capital account as well as the financial account which acts as the mirror image (Bodea and Hicks, 2015). In Germany, the monetary policy is conducted through the Bundesbank. The central bank has at its disposal all tools for the monetary policy. The Central Bank of Germany has been using these tools in an extensive manner to foster growth. Bundesbank has been buying and selling bills which are eligible for discounting at the bank as well as federal government bills (Cantoni, Dittmar and Yuchtman, 2015). Bundesbank has the ability to determine the quantity and price in these transactions as witnessed in the past two years. Bundesbank has been manipulating the monetary and budgetary policy to meet the balance of payment requirements. Through use of monetary instruments and budget, the central bank is able to adjust the balance of payments to make it more favourable as seen in last two years. The current balance of payment has been addressed through use of monetary and fiscal policies by Central Bank. The Central Bank monetary policy is aimed at safeguarding the currency (Ubide, 2014). This has made the Bundesbank to give precedence to price stability. This has helped in keeping Germany safe from economic crisis through control of domestic price stability. The monetary targeting by Bundesbank is used as the commitment device. Bundesbank has been able to maintain price stability which is very vital for economic growth (Bodea and Hicks, 2015). Main macroeconomic policies used by the Government and Central Bank of Germany over the last two years. Fiscal policy According to Moss (2016), the Germany government has a major role in fiscal policy. This is through ensuring that the country has a good fiscal policy in place. The current government has been cutting the taxes based on an agreement by the coalition of Christian Democrats and Social Democrats (Eichhorst, 2015). The main cut in taxes has been on the low and middle income earners and their families. The main goal for this move was to reduce the income tax tremendously. This was an expansionary fiscal policy where the government has been reducing the taxes. Through the expansionary fiscal policy, it has become possible to close a recessionary gap and reduce the level of unemployment. This has stimulated Germany economy over the last two years. Through tax reduction, it has become possible for the economy to adjust itself. It has also been possible for the use of government spending to create new job opportunities (Storm and Naastepad, 2015). With an increase in employment and reduction in taxation on the income, it has become possible to reduce the recessionary gap and make economy stable. A large part of the expenditure by the government goes to the social purposes. The government also plays a major part in the distribution of the income (Moss, 2016). The support given by the government to the firms and households has been playing a major role in the economic growth. This includes subsidies and tax breaks. The government plays a role in spending in the economy where the public sector absorbs almost the half GDP. There has been use of fiscal steering of the Germany economy through the use of revenue policies. The tax and spending polices made by the federal government has made Germany economy to grow for the past two years. The fiscal policy has in a great way influenced the conduct of effectiveness of the monetary policy (Cantoni, Dittmar and Yuchtman, 2015). The country monetary policy has been more effective since the private sector has been able to trust that the government will not resort at any time to inflationary deficit financing. The central bank has been made to monitor fiscal positions by the government more closely to reduce the use of central bank for debt financing which would destroy its credibility (Hein and Truger, 2014). Monetary policy German lacks their own money hence does not depend on their own monetary policy. This has made the country to depend on the European Central Bank (ECB) for monetary policy. The ECB in this case determines the interest rates which affects Germany economic growth. There have been concerns on the rising interest rates by the ECB (Milward, 2015). This is due to fact that a rise in interest rates leads to unstable prices. This led to an altered cost of living and makes it hard for the citizens to gain access to loan facilities. ECB increase in the interest rates has been blamed for an increase in borrowing costs. There has also been an increase in the mortgage income payments over the last two years. The increase has acted as an incentive to save rather than spend. Despite this, the increase in interest rates has not impacted the Germany government debt repayment in a great way (De Grauwe, 2016). Through the current monetary policy set by the ECB, it has been possible to attain price stability, employment and attain a stable economic growth in Germany (Eichhorst, 2015). Supply side policies Supply side polices are used with an aim of improving the economy productive capacity. There are two ways to attain supply side polices. The first method is by the government giving a stimulus to market and leaving it to work. The second method is the interventionist supply side policies which have more than the government intervention (Moss, 2016). Through use of supply side interventions, Germany has been able to improve infrastructure, reduce debt, enhance labour force and make the private sector strong. The supply side policies have been used by the government to hold the economy at an enhanced level of productivity. These polices have been very costly to implement while their outcome has been long term (Cantoni, Dittmar and Yuchtman, 2015). This includes investment in research and development, education and infrastructure. There have been policies which includes reduction on income tax and privitisation. The government has set up incentive based policies with an aim of boosting the economic growth. The Germany economy is strongly based on the supply side policies. The demand side is in most cases ignored. The government has been focusing on creating incentives for job creation. The use of supply side polices in Germany has been a success (Eichhorst, 2015). Conclusion To sum up, the government and the central bank of Germany has been very successful in running the country economy over the last two years. This is evidenced by the strong economic growth in Germany which has made it the economic powerhouse in Europe. Germany has the lowest unemployment level and the level of inflation is low. This has been attained through labour reforms to address unemployment, commitment to economic growth, low inflation rates, price stability and a favourable balance of payments. The government and Central Bank has been using macroeconomic policies over the last two years to boost economic growth. This includes the fiscal, monetary and supply side policies. Through use of macroeconomic policies, both government and Central Bank has been able to enhance the country economic growth. At the moment, Germany has a better and evenly balanced economic performance where there is more jobs and reduced inequality. References Berggren, N., Daunfeldt, S.O. and Hellström, J., 2014. Social trust and central-bank independence. European Journal of Political Economy, 34, pp.425-439. Bodea, C. and Hicks, R., 2015. Price stability and central bank independence: Discipline, credibility, and democratic institutions. International Organization, 69(01), pp.35-61. 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