Germany: Country Profile

Background Information

History

As Europe’s largest economy and second most populous nation (after Russia), Germany is a key member of the continent’s economic, political, and defence organizations. European power struggles immersed Germany in two devastating World Wars in the first half of the 20th century and left the country occupied by the victorious Allied powers of the US, UK, France, and the Soviet Union in 1945. With the advent of the Cold War, two German states were formed in 1949: the western Federal Republic of Germany (FRG) and the eastern German Democratic Republic (GDR). The democratic FRG embedded itself in key western economic and security organizations, the EC, which became the EU, and NATO, while the communist GDR was on the front line of the Soviet-led Warsaw Pact. The decline of the USSR and the end of the Cold War allowed for German unification in 1990. Since then, Germany has expended considerable funds to bring eastern productivity and wages up to western standards. In January 1999, Germany and 10 other EU countries introduced a common European exchange currency, the euro.

Economy

The German economy – the fifth largest economy in the world in PPP terms and Europe’s largest – is a leading
exporter of machinery, vehicles, chemicals, and household equipment and benefits from a highly skilled labour force. Like its Western European neighbours, Germany faces significant demographic challenges to sustained long-term growth. Low fertility rates and a large increase in net immigration are increasing pressure on the country’s social welfare system and necessitate structural reforms.

Reforms launched by the government of Chancellor Gerhard SCHROEDER (1998-2005), deemed necessary to address chronically high unemployment and low average growth, contributed to strong growth and falling unemployment. These advances, as well as a government subsidized, reduced working hour scheme, help explain the relatively modest increase in unemployment during the 2008-09 recession – the deepest since World War II. The new German Government introduced a minimum wage of about $11.60 (8.50 euros) per hour that took effect in 2015.berliner-dome

Stimulus and stabilization efforts initiated in 2008 and 2009 and tax cuts introduced in Chancellor Angela MERKEL’s second term increased Germany’s total budget deficit – including federal, state, and municipal – to 4.1% in 2010, but slower spending and higher tax revenues reduced the deficit to 0.8% in 2011 and in 2015 Germany reached a budget surplus of 0.9%. A constitutional amendment approved in 2009 limits the federal government to structural deficits of no more than 0.35% of GDP per annum as of 2016, though the target was already reached in 2012.

The German economy suffers from low levels of investment, and a government plan to invest 15 billion euros during 2016-18, largely in infrastructure, is intended to spur needed private investment. Following the March 2011 Fukushima nuclear disaster, Chancellor Angela Merkel announced in May 2011 that eight of the country’s 17 nuclear reactors would be shut down immediately and the remaining plants would close by 2022. Germany plans to replace nuclear power largely with renewable energy, which accounted for 27.8% of gross electricity consumption in 2014, up from 9% in 2000. Before the shutdown of the eight reactors, Germany relied on nuclear power for 23% of its electricity generating capacity and 46% of its base-load electricity production. Domestic consumption, bolstered by low energy prices and a weak euro, are likely to drive German GDP growth again in 2016.

GDP (purchasing power parity):
$3.841 trillion (2015 est.)
$3.786 trillion (2014 est.)
$3.727 trillion (2013 est.)
Note: data are in 2015 US dollars
Country comparison to the world: 6
GDP (official exchange rate):
$3.358 trillion (2015 est.)
GDP – real growth rate:
1.5% (2015 est.)
1.6% (2014 est.)
0.4% (2013 est.)
Country comparison to the world: 153
GDP – per capita (PPP):
$46,900 (2015 est.)
$46,600 (2014 est.)
$46,100 (2013 est.)
Note: data are in 2015 US dollars
Country comparison to the world: 28

Employment Issues

Germany is a complex market and surprisingly ranks 107th in ease of opening a new business. It can take up to six months to get started and a tax advisor is strongly recommended as there are many financial filings to make en route ranging from the type of business you’re trying to open, to two sets of tax registration and obtaining of a certificate of registration. It is also quite difficult to hire non-German and non EEU employees. To do so, the business must be able to show that there are no local workers available who could perform the same task.

When negotiating terms of an employment contract and the offer letter with an employee in Germany, it is useful to keep the following in mind:

Public Holidays
Germany celebrates 9 national public holidays as well as additional public holidays that vary by state:
• New Year
• Good Friday
• Easter Monday
• Labour Day
• Ascension
• Whit Monday
• Day of German Unity
• Christmas
• St. Stephen’s Day

Working hours
Employee working hours must not exceed 8 hours per day and 48 hours per week. The typical work week consists of 35-40 hours.

Bonus
A bonus or commission program is discretionary on top of salary. There is no 13th month or 14th month salary payment in Germany as in many other countries.

Vacation
German law provides for 24 days of vacation time for a 6-day work week or 20 days for a five-day work week. However, in practice, most full-time employees receive 25 to 30 days of vacation time per year in Germany. Vacation time is not reduced by time taken for sick leave or public holidays.

Sick Leave
Germans receive six weeks of paid sick leave. If more time is needed, health insurance pays 70% salary until employee returns to work.

Maternity/Paternity Leave
Maternity leave consists of six weeks prior to birth and eight weeks after, all at full pay. For a multiple birth, mothers receive 12 weeks paid leave.

Either parent is entitled to up to three years of unpaid leave to stay at home with their child and a new program funded by federal taxes also allows direct subsidies to new parents (Elterngeld) for the first 12 to 14 months of the child’s life. The amount of the subsidy is based on the income of the parent caring for the child.

Termination/Severance
Terminating employment in Germany can be extremely complex.

In the event of an “ordinary” dismissal, the employer must observe the statutory minimum notice period, which depends on the length of employment:
• During probationary period (maximum duration of six months): two weeks’ notice.
• After or without probationary period: four weeks’ notice, effective at the end of a month.
• After two years’ service: one month’s notice, effective at the end of a month.
• After five years’ service: two months’ notice, effective at the end of a month.
• After eight years’ service: three months’ notice, effective at the end of a month.
• After ten years’ service: four months’ notice, effective at the end of a month.
• After 12 years’ service: five months’ notice, effective at the end of a month.
• After 15 years’ service: six months’ notice, effective at the end of a month.
• After 20 years’ service: seven months’ notice, effective at the end of a month.

Both employment contracts or Work Agreements and Collective Bargaining Agreements (CBAs) can provide for more favourable periods.

A termination for cause will (when justified) have immediate effect and terminate the employment relationship immediately. However, in practice it is often difficult to prove cause.

During the notice period, an employer must continue to pay full salary as well as provide the opportunity to work. However, with reasonable cause the employer can place the employee on garden leave. Payment in lieu of notice is uncommon in Germany as this triggers a disadvantage to the employee when trying to claim unemployment benefits.
There is no statutory obligation to pay any severance in the case of individual dismissal, irrespective of whether the dismissal is valid or not (although different terms apply to collective dismissals or redundancies.) However, in practice, employers and employees usually agree on a severance payment. Severances are usually calculated based on the formula of half a month’s salary per year of employment but in reality the calculation of the severance payment often depends on the strength of the reason for termination.

Health Insurance/Social Security
Employees belong to a mandatory social security system composed of old age pension insurance including disability benefits, unemployment insurance, health and long term care insurance. Companies pay 7.3% of the employee’s salary toward health insurance.

The corporate contribution to social security is 18.35% of the employee’s salary, with a cap of 6,200 euros in the west and 5,400 euros in the east. Companies are also encouraged to establish company retirement plans to further support workers.

Additional Benefits
Some companies offer employees a housing subsidy (Wohngeld) to help with rent and a child subsidy (Kindergeld) to help with the cost of raising children. There are also transportation and meal subsidies, and many companies have a cafeteria where low cost meals and snacks can be obtained.

Bottom line on benefits
It is sensible for employers to budget about 12% on top of total cost of employment for statutory benefits in Germany. In addition, employers often provide additional supplementary insurance benefits.

Employment Contracts
It is a legal requirement to have a locally compliant employment contract in Germany. The contract should be in the local language, and should spell out the terms of the employee’s compensation, benefits, and termination requirements. An offer letter and employment contract in Germany should always state the salary and any compensation amounts in Euros rather than a foreign currency.

German Trade Tariffs
A comprehensive list of Trade tariffs which apply when trading with Germany can be found here.

Business Culture – top tips

Tip 1img_4748-1
Germans are often uneasy with uncertainty and ambiguity. They like to analyse problems in depth before reaching a conclusion and are less comfortable with ‘feelings’ or ‘hunches’ in the business setting.

Tip 2
In-depth and long-term planning are both expected and respected. Such planning helps, in large measure, to shape future success.

Tip 3
The greatest amount of respect is due to the person with the greatest depth of technical knowledge. Therefore, education is highly prized.

Tip 4
Once decisions have been made, everybody is expected to carry them out without question, regardless of their agreement or disagreement with the original decision.

Tip 5
The boss is expected to know his/her subject and give clear leadership. As there is a strong respect for authority, subordinates will rarely contradict the boss in public – disagreements will be discussed ‘off-line’.

Tip 6
Outbursts of emotion in the workplace (anger, frustration etc.) are seen as signs of weakness and as a lack of professionalism.

Tip 7
Employees expect to be given precise, detailed instructions regarding specific tasks, but then expect to be left to carry them out without interference or close supervision.

Tip 8
Relationships between bosses and subordinates tend to appear somewhat formal from the outside.

Tip 9
Appraisal systems are difficult to implement. Germans are expected to perform their tasks professionally and correctly. Why should positive feedback be necessary?

Tip 10
German companies tend to be hierarchical and departmentalised. Each department seems to guard its power structure and information is expected to flow through appropriate channels.

Tip 11
Teams built across hierarchical lines can be difficult to organise and manage as they could interfere with the normal structures and rules.

Tip 12
Meetings tend to be formal, unless on a one-to-one basis. If you want to find out opinions, possible trends of thinking etc., it is often more successfully done in an informal one-to-one meeting.

Tip 13
Germans usually come extremely well prepared-for meetings with all the facts and figures at their disposal. The idea of attending an important meeting without the requisite data would be quite unusual.

Tip 14
The truth does not lie in a compromise or middle ground between two conflicting ideas. Compromising can be seen as weakness, diffidence or uncertainty.

Tip 15
It is better to say nothing than to comment on topics about which you have no particular knowledge or expertise. Subject matter expertise is highly prized.

Tip 16
Internal information flow is top-down on a need-to-know basis. It is expected that superiors are better informed than others are.

Tip 17
More reliance is placed on the printed than the spoken word and it is always important, therefore, to put information, decisions etc. in writing.

Tip 18
Although Germans have a great sense of humour it is generally regarded as out of place in the work place. You should certainly avoid humour in all difficult or important business situations. However, when socialising with Germans you will find that they are as keen to enjoy themselves as you are.

Tip 19
Punctuality is important – do not be guilty of stealing time.

Tip 20
Germans may seem extremely formal – even amongst themselves. This over-formality is a sign of respect as is using the formal ‘Sie’ and ‘Herr’ or ‘Frau’ with people they may have known for many years. This is possibly changing with the younger generation.

For a more comprehensive guide to business culture in Germany please visit our website.