1. Introduction
In the past 15 years, the huge cost of reunification has exerted great pressure on the German economy. (1) The tortuous road to European integration, together with many old structural problems, has reinforced the gloom hanging over this newly reunified country. In this context the debate about the economic decline of Germany has come to the forefront of political and economic discussion in Europe. In particular, many commentators are concerned about the health of German businesses because some German world-class companies no longer loom large on the radar of global investors. (2) Politically and economically, many structural problems have prevented these corporate giants from reaping the benefits of globalization and new technological changes. Nevertheless, Germany is still among the most competitive countries in the world. (3) One of the themes of this paper is to discuss some positive changes that are shaping the economic landscape of Germany. Linked to these macroeconomic changes are the corporate changes that are sharpening the competitive edge of the German business sector. As a result of these changes, many German firms are no longer engulfed in a blanket of bureaucratic smog. Paying more attention to these favorable changes, smart investors will soon realize that the German stock market represents good investment values.

2. The improved competitive position of the German economy
No doubt, the huge financial burdens of reunification, a less-than-competitive exchange rate in the post-Euro period (4), and a mountain of structural problems are blunting the competitive edge of Germany. In the past 15 years, these problems have carried Germany into choppy economic water. But it would be naive in the extreme to think that nothing has been done and that Germany has been contemplating its economic decline without reacting. To regain its economic status, Germany has carried out many structural reforms and Merkel is promising to introduce more reforms in future. (5) The following discussion will mainly focus on these structural reforms. Besides, I will also discuss the investment opportunities brought about by the enlargement of the European Union (EU).

2.1 Labor market reform
As Ostermann and Schmidt have pointed out, the high wage level in Germany is often presented as the country's most negative Standort factor. (6) Additionally, German managers need to find ways to loosen the constraints imposed by the rigid systems of collective wage bargaining and co-determination. (7) Although some of these factors are still affecting the German economy, we should not lose sight of some recent changes in the German labor market. These changes have lifted a big millstone from the neck of German businesses. In fact, wages have barely grown in the past ten years. Noticeably, at the grassroots level, wage negotiations within companies have resulted in a strong disinflation in labor costs. The willingness of labor unions to accept flexibility in the calculation of working hours and the introduction of 'working time accounts' have helped companies contain their costs by limiting the payments of overtime bonuses when cyclical business activities require more working time than at other times of the year. Another development that warrants attention is the growing number of part-time workers in Germany. At present, one-third of the German workforce is temporary or part-time, granting companies a generous measure of flexibility. (8)Besides, the rigid system of collective wage bargaining has become more flexible. At present, more and more wage deals are being struck on the shop floor, where labor and management pay attention to the company's balance sheet. (9) Finally, the system of co-determination is no longer regarded as a sacred institution. Michael Adams, a reformer in the academic world, argues that labor supervision should be limited to one-third. (10)

2.2 Unemployment benefits and pension reforms
Some economists argue that globalization is 'an entirely non-negotiable external economic imperative which exposes all economies within the global system to near identical pressures and challenges.' (11) Responding to the challenges of globalization, Germany feels both the necessity and the hardship of reforming her generous welfare systems. (12) For example, Schroeder introduced a big reform to make unemployment benefits less generous. It slashes payments to young people who do not shape up. (13) The famous Hartz-IV program aims at shaking up welfare benefits and pushing people back to work. Apart from reforming her unemployment payment system, Germany also carries out pension reforms. Recently, it took a step in the right direction by merging the multitude of agencies that administer state pensions. All 23 central and regional government pension administrators plus those for sailors and railway workers were finally merged into one organization. Besides, new pension reform allows Germans to increase their investment in saving instruments. (14) It is likely that German pension funds will grow in size as a result of this reform. However, Germany still needs to do more to reform her pension system. As mentioned earlier, globalization has exerted great pressure on this high-cost welfare state because she must compete against cheap-labor countries in Eastern Europe and non-welfare states in Asia. (15) In order to reduce cost, some German companies like to choose foreign locations for new investment. The exodus of German firms has removed from the country the wages that could be taxed to provide social benefits or create jobs.

2.3 Deregulation and privatization
In the past few years, Germany has introduced some deregulation measures to create a favorable investment environment for investors. The rationale for deregulation is that a market-friendly business environment is much better for all if the many gainers from any given market opening compensate the few losers, rather than to keep protectionist barriers that reduce the total incomes of all. (16) One of the deregulation measures is the attempt made by Schroeder to liberalize the rules on doing business in a number of branches, from carpentry to butchery, which for centuries have required a special certificate of authorization. In the financial market, the barrier between banks and insurance firms have been broken.(17) Besides, the German bond and stock markets have been opened to foreign competition.(18) Though some scholars argue that Germany must introduce more measures to cast off the yoke of bureaucratism (19), they should not underrate the effectiveness of the above deregulation measures. In fact, the OECD recently put Germany at the top of Euroland with respect to its business friendly product regulations.
In order to bend flexibly with the global winds of change, Germany began to privatize some public service providers in the 1990s. (20) As a result of privatization, these firms have transformed themselves from monopolistic public administrations into much better-performing private enterprises with more of an eye for the bottom line and readier for the increased competition spurred by EU-led deregulation. (21)

2.4 Eastern opportunities and the enlargement of the European Union
In the post-cold war period, many economists have shown great interest in the investment opportunities offered by the opening of new markets in Eastern Europe. Nicholas Sayek suggests that 'the temporarily lower wage levels in Eastern Europe could help entrepreneurs to revive mass production of consumer items that Europe had lost to Japan and the newly industrialized countries of East Asia decades ago.'(22) German investors, thanks to their familiarity with Eastern Europe, are quick to explore these eastern opportunities. But some German firms want to move outside the eastern front. Unwilling to confine their investment activities to Eastern Europe, they are eager to explore new opportunities in other parts of Europe. The investment opportunities brought about by the enlargement of EU are too attractive to be ignored.
With 25 member states, the EU provides a huge 'home market' for German firms. The common market enables German firms to produce more efficiently because of economies of scale. (23) Secondly, regionalism can increase the attractiveness of the German economy to potential investors. Companies that previously supplied the separate national markets through exports from outside the region may now find that the unified regional market is of sufficient size to make local production (and hence foreign investment into the region) attractive. (24). Thirdly, many newcomers have proved to be the model member states. Their pace of economic growth is two to four times faster than that in Western Europe, with the three Baltic states registering annual rates of six to eight percent. (25)

3. Corporate changes
In Germany, the long-term investment outlook for many big businesses is bright. First of all, these German firms have carried out a series of reforms to make them more competitive. Secondly, the changes in cross-holding system and corporate governance have injected some bright colors into the German stock market.

3.1 Positive response to the challenge of globalization
From the mid-1990s on, most German firms began seeking to rationalize operations, shed workers, and export core activities in the face of the pressures to internationalize production locations. (26) In the past few years, Daimler-Benz restructured significantly. It sold off Dornier (aircraft), dismantled AEG (engineering), allowed Fokker (aircraft manufacturer) to go bankrupt in 1996, and merged with Chrysler in 1999. (27) Recently, it sold its stake in Mitsubishi Motors Corps to Goldman Sachs International. (28) Some German companies have joined the scramble for investment opportunities in China. Volkswagen (VW) was the pioneer in putting some Chinese flesh on the bones of its global empire. In the 1980s, it formed a joint venture with a Chinese carmaker in Shanghai. In 2000, China became the second-largest global market for VW and a major source of profit. (29) Siemens, Krupp-Thyssen Stainless Steel and BASF were active in erecting factories in Shanghai during the 1990s. (30)
The changes in the larger firms have also affected the smaller firms with which they are linked. The internal demands for greater competitiveness and return on investment from subsidiaries and subdivisions are often replicated in relations with suppliers and subcontractors, which have felt increasing pressures for cutting cost while maintaining quality. (31) Furthermore, Merkel's proposal to make it easier for small companies to fire workers has won the hearts and minds of many small and medium-sized businesses. It is worthy of note that the German manufacturing sector mainly consists of medium-sized companies of less than 100 employees. (32) To embrace globalization, German firms are energetically pressing for liberalization all round, but especially for the dismantling of the employee safeguards that defined the country's own brand of controlled capitalism. (33)

3.2 Cross-holding systems and corporate governance
A drastic reform of the tax code in 2002 has greatly affected the cross-holding system in Germany. The repeal of the capital gains tax has provided incentive for big corporations to sell their shares in other German companies. According to Allen Myerson, the reform 'will change the landscape for a lot of companies and their stocks.'(34) Besides, the changes in cross-holding system will increase the weight of the institutional investors in the German stock market. As opposed to strategic investors, institutional investors are more eager to exert pressure on German firms for corporate performance. The rise of institutional investors has also increased the demand for better corporate governance. Starting in the early 1990s, some companies began to set financial targets for evaluating management performance and establish value-oriented controlling systems and international accounting standards. Furthermore, the supervisory board has become more independent because of corporate code revisions in 2002. Nevertheless, the dual board system remains unchanged.

4. Conclusion
At present, Germany is still suffering the pain of a premature reunification. But there are good reasons to argue that the worst of reunification's tidying up is over. Besides, deep concern has been expressed over the internal strife within the EU. (36) Some pessimists even argue that Europe is dead or dying. If the EU project fails, Germany will suffer tremendously. In view of the intolerably high cost of failure, some optimists argue that the powerful pro-integration camp will be able to formulate effective policies to speed up the process of integration. The proposal for a 'multi-speed Europe' may provide a more feasible option for European leaders to transform the EU into a viable supra-national entity in the long run. (37) Taking a neutral stance, Joseph Nye argues that 'the picture for Europe is not as bleak as pessimists assume.'(38) Aside from focusing on the problems of reunification and European integration, pessimists are obsessed with the structural problems of Germany. But these pessimists have turned a blind eye to the drastic structural reforms that are carried out by the German government in the past few years. In spite of the clash between the reformers (Merkel) and non-reformers (Social Democrats), the Coalition government has agreed to introduce more reforms. They include: minor labor-market reforms and an eventual rise in the pension age to 67. (39) There are grounds to speculate that the pressure of events will soon push Merkel to introduce more structural reforms in the near future. Finally, big German firms are becoming globally oriented. All these macroeconomic and corporate changes have brightened the economic outlook for Germany.

The End

November 2005

Notes
1. The cost of reunification has been primarily financed by the social security system and the annual transfer payments to the East, which represent about 4% of GDP from the West. Studies have demonstrated that Eastern Germany has become the worst subsidized region of the world.
2. In 1994, German firms just accounted for 8.8% of the world's 500 largest multinationals. Only Siemens could join the top 25 League (Charles W. L. Hill, Global business today (Boston: Irwin McGraw-Hill, 1998), p. 20-21).
3. Hanna Ostermann and Ute E. Schmidt, 'Investing in Germany: Standort Deutschland,' in Peter James (ed.) Modern Germany: politics, society and culture (London: Routledge, 1998), p.85.
4. The adoption of the EURO in January 1999 has undermined the German competitive position. HSBC estimates that the Deutsche Mark overvaluation was approximately 12% versus the Spanish Peseta.
5. Mary Dejevsky, 'Turbulence ahead,' in The world today, August/September 2005, p.38.
6. H. Ostermann and Ute E. Schmidt, op.cit., p.73.
7. In Germany, wage negotiations are carried out generally at regional or federal level and are accepted as binding. Negotiated wage levels do not take into account the situation of individual firms (H. Ostermann and Ute E. Schmidt, ibid., p.75; Vivien A. Schmidt, The future of European capitalism (Oxford: OUP, 2002), p. 168-169.) The German system of co-determination gives employees and labor equal representation on the supervisory boards of the largest corporations. It makes managers beholden to labor unions because a two-thirds vote of the supervisors is required to appoint a managing board director (The Wall Street Journal, 2/11/2005).
8. Time, October 3, 2005, p.31.
9. Ibid.
10. The Wall Street Journal, op.cit.
11. Colin Hay, 'Globalization's impact on states, 'in John Ravenhill, (ed.) Global political economy (Oxford: OUP, 2005), p. 248.
12. In 1996, the social budget amounted to 29.1% of GDP. About 30% of this comes from general taxation (Sue Lawson, 'Social provision,' in Peter James, op.cit., p.92).
13. Time, op.cit., p. 35.
14. Vivien A. Schmidt, op.cit., p.177.
15. Sue Lawson, op.cit., p.100.
16. Edward Luttwak, Turbo capitalism (New York: Harper Collins Publishers, 1998), p. 183.
17. Susan Strange, Mad money (UK: Manchester University Press, 1998), p. 152.
18. Ibid.
19. H. Ostermann and Ute E. Schmidt, op.cit., p.77-78.
20. Some bog public service providers were privatized. They include: Bundesbahn, Deutsche Telekom, Deutsche Post and Lufthansa. Since the reunification, many East German firms have been privatized by the Trust Authority (Treuhand) (S. Zeidenitz and B. Barkow, The xenophobe's guide to the Germans (Beijing: Foreign Language Press, 2001), p.10).
21. Vivien A. Schmidt, op.cit., p.179.
22. Peter H. Merkl, German unification in the European context (Pennsylvania: The Pennsylvania State University Press, 1993), p.299.
23. John Ravenhill, 'Regionalism,' in John Ravenhill, op.cit., p.125.
24. Ibid.
25. South China Morning Post, 9/5/2005; Schroders Insight, October 2005.
26. Vivien A. Schmidt, op.cit., p.172.
27. Ibid., p.173.
28. South China Morning Post, 12/11/2005.
29. South China Morning Post, 24/10/2005.
30. Pamela Yatsko, New Shanghai (Singapore: John Wiley & Sons (Asia) Pte Ltd., 2003), p.23, 29.
31. Vivien A, Schmidt, op.cit., p.173.
32. Andrea Schulte-Peevers, et.al. Germany (Australia: Lonely Planet Publications Pty Ltd., 2000), p.49.
33. Edward Luttwak, op.cit., p.240.
34. Allen Myerson, The new rules of personal investing (New York: Times Books, 2001),p. 163.
35. Vivien A. Schmidt, op.cit., p.173.
36. Chris Patten, East and West (London: Macmillan, 1998), p. 99-100.
37. Henry Kissinger, Does America need a foreign policy? (New York: Touchstone, 2002), p.56.
38. South China Morning Post, 25/7/2005.
39. The Economist, 19/11/2005.