2009 Index of Economic Freedom

Quick Facts

Population:

• 82.4 million

GDP (PPP):

• $2.7 trillion
• 2.9% growth
• 0.9% 5-year compound annual growth
• $32322 per capita

Unemployment:

• 8.4%

Inflation (CPI):

• 2.3%

FDI Inflow:

• $42.9 billion

Germany's economic freedom score is 70.5, making its economy the 25th freest in the 2009 Index. Its overall score remains almost the same as last year. Germany is ranked 13th out of 43 countries in the Europe region, and its overall score is significantly higher than the world average.

The German economy has benefited from strong institutional capacity that facilitates economic freedom and vibrant entrepreneurial activity. Protection of property rights is exemplary. The judicial system is strong, professional, and independent of political influence. A lack of corruption underpins the security of economic activity. The German economy also enjoys strong business freedom and investment freedom. Foreign and national investors are treated equally under the law. Although investors continue to face some bureaucratic red tape, regulations are clear and evenly enforced.

As in many other European social democracies, government spending and tax rates remain high in support of an extensive welfare state. Despite a modest decrease in government expenditures, Germany's government size score is well below the world average. The labor market operates under restrictive conditions.

Background Back to the top

Germany is the largest economy in Europe and the third largest in the world. A significant adjustment period followed reunification in 1990, and growth rates have been slow. Unemployment, particularly in the former East Germany, remains high. Measures aimed at rationalizing complex social welfare and labor regulations remain under active political debate. The fiscal budget deficit exceeds the European Union's Stability and Growth Pact standards. Nonetheless, Germany is home to many world-class companies and has an enormous export industry and one of the world's highest incomes per capita. The election of conservative reformer Angela Merkel to the chancellorship in 2006 led to some economic reforms, but inclusion of the Social Democrats in a grand coalition continues to hamstring the government's ability to deal with structural challenges and ensure long-term sustainable economic development.

Business Freedom 90.3 Back to the top

The overall freedom to start, operate, and close a business is protected under Germany's regulatory environment. Starting a business takes an average of 18 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days.

Trade Freedom 85.8 Back to the top

Germany's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. The burden of regulations and standards exceeds EU policy, and the enforcement of intellectual property rights is problematic. Consequently, 10 points were deducted from Germany's trade freedom score.

Fiscal Freedom 58.5 Back to the top

Germany has a high income tax rate and a burdensome corporate income tax rate. The top income tax rate is 47.5 percent (45 percent plus a 5.5 percent solidarity surcharge). The federal corporate tax rate is 15.8 percent (15 percent'down from 20 percent'plus a 5.5 percent solidarity tax), but a 7 percent to 17 percent trade tax raises the effective rate to roughly 33 percent. Other taxes include a value-added tax (VAT) and a flat tax of 25 percent on all investment income, including capital gains. In the most recent year, overall tax revenue as a percentage of GDP was 40.6 percent.

Government Size 38.2 Back to the top

Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 45.4 percent of GDP. Social welfare programs remain large and expensive.

Monetary Freedom80.8 Back to the top

Germany is a member of the euro zone. Between 2005 and 2007, its weighted average annual rate of inflation was 2.1 percent. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also regulates prices for pharmaceuticals, electricity, telecommunications, and other public services. Ten points were deducted from Germany's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom80.0 Back to the top

Foreign and domestic investors are treated equally in accordance with EU standards. Some businesses, including certain financial institutions, passenger transport businesses, and real estate agencies, require licenses. There are no permanent currency controls on foreign investments and no serious limitations on new projects, except that the sale of defense companies to foreign investors requires permission. Foreign and domestic firms face the same barriers to investment, such as labor laws that impede hiring and dismissals. New rules have helped to cut red tape, but bureaucracy remains burdensome. There are no restrictions on capital transactions or current transfers, real estate purchases, repatriation of profits, or access to foreign exchange.

Financial Freedom60.0 Back to the top

Germany's financial system is efficient, although bank consolidation has been slow and marginal because of political obstacles. Regulations are generally transparent and consistent with international norms. All types of capital are available to foreign and domestic businesses. Most of the roughly 2,000 banks are local savings banks and cooperative institutions. Private banks account for less than 30 percent of the market, and government-linked publicly owned banks account for nearly 50 percent; the rest are cooperative banks. Banks are competitive and offer a full range of financial services. Interest rates are market-determined, and foreign investors can access credit freely. The insurance sector and capital markets are open to foreign participation. The stock market is well developed.

Property Rights90.0 Back to the top

All property, including intellectual property, is well protected. Contracts are secure, and the judiciary and civil service are highly professional. Separate supreme courts deal with commercial, tax, labor, and constitutional cases.

Freedom From Corruption78.0 Back to the top

Corruption is perceived as minimal. Germany ranks 16th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Strict anti-corruption laws are enforced, and Germany has ratified the OECD Anti-Bribery Convention.

Labor Freedom43.4 Back to the top

Restrictive labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is costly. Wages and fringe benefits remain among the world's highest. The difficulty of laying off workers is a disincentive for additional hiring.