Introduction

Currently, one of the German economy’s main problems is its weak growth performance, which shows up in low growth rates for potential output and for real gross domestic product (GDP) (Sachverständigenrat, 2005). Comparing important economic performance indicators within the EU15 countries, it further becomes apparent that economic development in Germany has lagged behind that of many other European countries since the mid 1990s. For instance, since 1995 Germany has continuously been among the group of the three countries reporting the lowest growth rates in real GDP. Similarly, the average growth rate of labour productivity of about one percent for the period 1995–2004 ranks within the lower third of the EU15 countries. In addition to falling behind other competitors in Europe, Germany — and also Europe as a whole — have been unable to keep pace with the economic development in terms of real GDP growth or labour productivity growth in the US, as can be seen in Fig. 1.1. Fig. 1.2 further shows that the low growth development is accompanied by a steady rise in the rate of unemployment over the last 15 years in Germany, whereas other countries, e.g., the United Kingdom (UK) or Spain, have experienced great success in reducing unemployment. In 2004, the internationally harmonised unemployment rate amounts to 10% in Germany. This is one percentage point above the European average, 4 percentage points higher than in the US and even twice as high as in Japan or the UK (see OECD, 2005a).