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GERMANY: An Introduction

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Europe’s biggest economy and a strong international player

Located centrally in Europe, Germany is by area the fourth largest country in the European Union, but has the biggest population (83 million) and is by far the largest economy. The German language is native to almost 100 million people worldwide, being most widely spoken not only in Germany, but also in Austria, Switzerland, Liechtenstein, and the Italian province of South Tyrol.

Germany’s economy is the largest manufacturing economy in Europe. The automotive and commercial vehicle, electrical engineering, mechanical engineering and chemical industries are considered the most competitive sectors of German industry worldwide.

Another characteristic of Germany is that most companies belong to the "Mittelstand", small and medium-sized enterprises, which very often are family-owned.

Also owing to its geographic position with nine neighbouring countries, more than any other country in Europe, Germany is the world's top location for trade fairs. Around two thirds of the world's leading trade fairs take place in Germany, or used to take place before the COVID-19 pandemic.

Effects of the coronavirus crisis and fundamental challenges for the German economy

The COVID-19 pandemic has not only shown Germany’s strengths but also its weaknesses. While in general, the economy withstood the situation quite well due to its strong manufacturing and exporting base (shrinking by only about 5% in 2020), there are several fundamental challenges for German society and economy in the near future:

The automotive industry, one of the pillars of the German economy, is experiencing the most profound structural change in its history due to the electrification of the powertrain, competitors from the IT industry and the sharing economy. The effects of the COVID-19 pandemic intensify the pressure to act and the urgency of climate change requires a rapid and consistent adaptation towards green mobility solutions. Slumps in sales figures and the resulting financial burden are pushing small enterprises to their limits. To initiate trend-setting investments in future technologies and qualification during this crisis therefore becomes an enormous challenge - but is nevertheless unavoidable.

It is to be expected that this will lead to industry concentration, insolvencies, and increased M&A activities as well as huge restructurings and layoffs in Germany in coming years. Furthermore, it may have a lasting impact on the German tariff landscape. The automotive industry has traditionally been the sector where the dominant trade union IG Metall (the largest union in Europe) has set trends and achieved benefits for the workers that other industries have then followed. In the past IG Metall has skilfully managed to defend its position by adapting to the circumstances in sectors that have already undergone structural change (e.g. the steel industry), so it can be expected that the trade union will continue to play an important role in the automotive sector. At the same time, new players like Tesla, which are not (yet) unionised, are entering the German employment market. It will also be interesting to see to what extent the dogma of uniform regulations will make way for tailor-made solutions for companies in crisis.

A related topic is the digitalisation, which affects the whole of society and all sectors of the economy. Germany shows considerable deficits here, which are also evident in the state's relative lack of ability to fight the pandemic with digital tools. The coronavirus crisis has accelerated this structural change: the organisation of work has shifted towards working from home, and online trade has recorded high growth rates. Other sectors of the economy, which can make greater use of digital solutions, have also benefited. However, German companies are not world leaders in this field. It is more and more felt that the prerequisites for a nationwide digital transformation of companies have to be established e.g. by facilitating the expansion of fibre optics to improve the mediocre broadband access situation.

The digitalisation also influences the world of work, as many classic HR processes and tools are replaced by digital solutions. This raises a wide range of new legal questions. At the same, the co-determination rights of works councils with regard to IT systems (both software and hardware) need to be respected, so it is very likely that the need for legal advice and practical solutions in this field will grow further.

Federal election and general political and legal trends

In autumn 2021, Germany will head to the ballots to elect a new federal parliament, the 20th Bundestag. Big changes are certain: Angela Merkel will not stand again to be elected Federal Chancellor and in all likelihood the so-called grand coalition between the medium-right wing CDU/CSU and the medium-left wing social democrats (SPD) will not continue.

During the pandemic, the model of the strong and caring state has once again taken root in the minds of many Germans. The state took comprehensive executive measures to combat the crisis in the health and administrative sector, but also in economic terms. Wide circles of the population expect the state to have comprehensive competence in finding solutions for the challenges ahead.

Presumably, after the end of the pandemic and after the Bundestag elections, the fight against climate change will once again come into focus. It is already being discussed whether the climate change crisis not only justifies but also requires the same comprehensive state intervention as the coronavirus pandemic. Even if it is unlikely that this will occur to the same extent, a further increase in regulatory intervention by the state is nevertheless to be expected.

This applies, for example, to the housing market, which is very tight in the big cities, where a cap on rents has already been introduced in Berlin, but in some cases even more far-reaching measures, up to and including nationalisation of private housing companies, are being demanded by left wing groups.

Both the pressure for change due to the upcoming structural change, accelerated by the coronavirus crisis and its consequences, and the changing political landscape are expected to create a high demand for legal advice in the German economy.

One particularly interesting topic will be the future balancing of data protection topics – which traditionally are very important in Germany – against the need for competitive digital solutions.