Europe’s Economy: The Challenges of High Unemployment and Sluggish Economic Growth

Millions of European citizens find themselves in a fantasyland of “wanting to keep things the way they were” even as the fundamentals of the European style of government continue to crumble. Europe simply cannot have things the way they were.

Nevertheless, millions of residents of “Old Europe,” in particular France, Germany, Italy, and Spain, refuse to accept the reality of enhanced global competition and unaffordable government-sponsored social programs. Their anxieties are many, including a substantial outsourcing of jobs, persistently high unemployment, a weak educational system, an aging society, a declining overall population, and new global competitors, especially China, India, and numerous Eastern European countries.

Europeans face a barrage of issues, with limited means to escape economic sluggishness and high unemployment. Such was not always the case. European countries traditionally found many of their prized companies as formidable competitors. Many remain in this role, perhaps led by the German automakers. Reasonable levels of economic growth and low jobless rates were the norm in prior decades, but no longer.

The European Union

The broad objectives of blending together a unified Europe included the ability to compete globally as a more cohesive economic unit. Many successes were found, including the ability to dramatically reduce red tape and hassles involving trade among European nations.

The creation of a single currency for the European community has had mixed results. The euro currency enjoys broad acceptance as a major global currency (second only to the dollar). However, the loss of monetary flexibility among many of the smaller nations within Europe has been a major frustration.

Tomorrow in Europe

Growth prospects are modest as the European model of extensive social welfare, protected industries, high taxes, and few free market ideas remain its foundation. Companies by the thousands have shed jobs in Old Europe even as they added jobs in the Czech Republic, Slovakia, Romania, and Hungary.

Fewer Bodies

Europe also faces an actual decline in population. The European birth rate (as in Japan and Russia) is well below the “replacement rate” of 2.1 children for each woman of childbearing age. For Western Europe as a whole, the birth rate is now 1.5, with lower rates in Old Europe. A continuation of such low birth rates for years to come would lead overall populations sharply lower, and threaten the ability of taxpayers to finance future government social spending.

In all likelihood, stronger overall population growth is expected. However, it will be the result of higher birth rates in poorer Eurozone countries and stronger migration (both legal and illegal) into France, Germany, Italy, Spain, and so on.

High levels of Eurozone unemployment compensation and welfare have traditionally provided many citizens with an ability to survive while lacking jobs. Many have lived at public expense for years. Average jobless rates of 9 percent to 10 percent in Germany and 8 percent to 9 percent in France compare to rates half as high in the United States and Japan.

Life in Old Europe includes the “haves” (older high-wage unionized workers) and the “have nots” (millions of younger people who will move between limited employment opportunities and more “comfortable” jobless benefits than found in most parts of the world)–not a pretty picture for the young.

Eurozone Expansion

Bigger is better–or so has been the mindset of European leaders. The European Union comprised 12 member nations a decade ago. Membership today is roughly 25 nations, representing more than 450 million people. A cohesive group? Tens of millions of new member citizens speak different languages and represent vastly different cultures, including rising Islamic populations.

Citizens of richer nations seethe at the addition of 10 mostly poor nations during the past few years, with rising anxiety about the loss of their higher-wage jobs to those poorer countries which feature much lower wage levels.

Facing Reality

There is a quiet realization building across European political and business circles that in order to be competitive with North American and Pacific Rim companies, European companies must have greater flexibility in terms of hiring/firing practices, more open competition, and wider use of production incentives for workers. Lower tax rates and less government are also viewed as necessary.

Some progress is being made, with more upbeat growth prospects for those nations willing to embrace change. Data also suggests that a greater share of Eurozone growth is coming from rising domestic demand, a favorable development should the euro continue to appreciate versus the dollar in coming years.

The enormous unemployment rate disparity between Europe and the United States/Japan comes down to the issue of the entry and exit of labor in a free market. Pro-union governments and powerful labor unions have distorted the European labor issue. The reality is that once a company hires an additional employee in various countries, it is almost impossible or very costly to ever let them go.

So what do rational European company managers do in this hostile labor environment? They utilize alternatives to new hiring, including more overtime for current workers, greater use of automation, more use of less costly Central European or Pacific Rim labor, and greater investment into non-European companies that operate in more business-friendly locations.

Liberal European governments blame their high unemployment rates on job-reducing technology and increased competition from countries where wages are lower. However, they are unable to explain why unemployment rates in the United States and Great Britain are so much lower–countries subject to the same competitive pressures.

The realities of high unemployment and limited economic growth prospects are finally leading labor leaders to the bargaining table, with particular progress in Germany. German workers in various industries, principally manufacturing, have agreed to greater flexibility in exchange for promises that jobs will be maintained.

German workers are embracing more flexible and longer work weeks. In addition, more and more German and other workers are trading fixed (but declining) bonuses for something commonplace in the Western world–profit sharing. The ability of European nations to enjoy solid growth expectations in coming years is tied in part to such labor flexibility.

Setting Up and Doing Business in Germany With a GmbH

Setting up a GmbH

The minimum capital of a GmbH is 25.000,00 Euro. A quarter of the nominal capital but at least 12.500,00 EUR has to be paid in at the time when the company is founded and before the application for the entry in the commercial registry is filed. If the GmbH has only one partner who shall also act as director he will have to provide a security for the outstanding residual amount.

In November 2008 a new sort of baby-sized GmbH was introduced. It is called Unternehmergesellschaft (haftungsbeschraenkt) or UG (haftungsbeschraenkt) and may operate at the start with a share capital between 1,00 and 24.999 Euro. However, the partners of such business company with limited liability are obliged to invest one quarter of the future annual profits of the company in into its capital reserves until the statutory minimum share capital of 25.000 Euro is reached.

The company agreement is subject to a notarial recording. The notary manages for the partners also the application for the registration of the company in the Commercial Register. However, the a notarial recording if the partners choose a standard set of clauses provided by law for their articles of association. This set stipulates only the minimum which is necessary for the company’s entry in the registry.

Costs for the establishment of a GmbH then depend on the nominal capital. For a GmbH holding the minimum capital of 25.000 Euro; the costs are:

– 168 Euro; of the notarial drafts of the company charter,
– 168 Euro; for the notarial recording of the first general meeting (actually not needed),
– 42 Euro; for the entry in the register, publication in the gazette
– 100 Euro; publication in the gazette

The notarial establishment of any company charter also requires the involvement a sworn translator unless the founders waive this requirement. The waiver is only accepted by the civil notary if he is assured that the founders gain proper knowledge of the company charter in another way.

Conduct of the GmbH

The start of a business must be reported to the local office of trade and industry. It will inform the tax office immediately and they will send a questionnaire to the owner of the business in order to acquire data which are necessary for taxation purposes. The questions refer from general information such as the type of business, its address, banking data and so on to data which are particularly important for the taxation, e.g. if the business is liable to VAT due to its size or whether the tax office will have to assess advance payments on the income, corporation and business taxes. If cross border business is planned the business owner can apply for a trade ID. The questionnaire has to be filled in and sent back to the tax office within a month.

GmbHs have to maintain an adequate and orderly accounting in the shape of a double entry book keeping irrespective of their size. They will also have to produce annual statements consisting at least of a balance sheet, the explanatory notes to the accounts and a profit-and-loss report within three months as of the beginning of a new accounting year. For small GmbHs this period is extended to six months. The annual statements have to be published by furnishing them to the Commercial Register.

Managing directors (Geschaeftsfuehrer, GF) act as statutory representatives of the GmbH. As such, they are exposed to various liabilities in particular if the business of the GmbH is not thrivng. In general, any damage caused through deliberate acts contrary to public policy can incur a personal liabilty of the GF eg. by the placement of orders at a time when the GmbH is already overindebted and is not able to pay the rendered work later on. In connection with the overindebtedness of a GmbH the criminal delay by the managing director in filing a bankruptcy petition is practically very relevant. Such petition is to be filed without undue delay upon the occurrence of either an overindebtedness or an illiquidity of the GmbH (after three weeks at the latest). However, if no plausible solution to save the business is on hand there is no cause in deferring the filing until the end of this three-week-deadline. Any financial obligation incurred after illiquidity or indebtedness may cause a personal liability of the GF against the contractors of the GmbH. Furthermore, the failure to pay wage withholding tax or social security contributions for the employees often may cause respective claims. Therefore, any GF is well advised to shorten the staff`s salaries or wages if necessary in order to keep enough cash to meet the statutory obligations. Otherwise, even a prison sentence for the GF may be imminent.

Business Income Taxation and Taxation of the Partners

The German government offers a variety of tax advantages as well as funding supports to starting businesses.

The GmbH is liable to corporate income tax including the solidarity surcharge and to business income tax. The corporation tax rate at present is 15 %. Losses incurred by the GmbH in one fiscal year can be carried further or backwards which may reduce the profits that serve as a basis for the assessment of the corporation taxes in earlier or later tax assessment periods.

In addition to the corporation tax the profits of the GmbH are subject to the municipal business tax at a rate that is made of result of the municipal rate as fixed by the municipality multiplied with 3,5 %. As the tax rates differ considerably from town to town the business tax constitutes a decision factor on the location of the company.

Dividends paid out to the shareholders as well as profits arising of the sale of share are liable to capital gains taxes at a rate of 25 % plus solidarity surcharge and – if applicable – church tax. Upon a respective application, the tax rate can be reduced for taxpayers with low income. Partners holding at least 25 % of the nominal capital or partners who hold at least 1 % and work for the GmbH can also opt for a taxation pursuant a partial income procedure (Teileinkuenfteverfahren). Here, 60 % of the dividends received or the sales profits are subject to income taxation. the other 40 % of the proceeds are income tax free. For corporations holding interests in a GmbH only 5 % of the dividends and sales profits received are subject to taxation. Foreign shareholders/ partners have to observe the taxation rules as stipulated in the double taxation agreements between Germany and their respective home country.

Labour Relations

A foreign employer will have to observe that labour contracts had better concluded in writing. This also applies to notices of termination of a work contract. Employees benefit from several rights which cannot be deviated from by mutual agreement to their disadvantage, e.g. in regard to the vacation which are stipulated in the Federal Vacation Act.

Employers are required to pay half of their workers’ health, unemployment, pension and old-age care insurance. They also have to pay for the statutory accident insurance. Moreover, they are responsible that the employers’ and the employees’ shares of the insurance contributions are paid to the Employers` Liability Insurance Association and health insurance fund in charge for the collections.

Further Information for Founders of New Businesses and Foreign Investors

The German Ministry of Economy and Technology offers an English language online service for foreigners wishing to start a business in Germany. This step-by-step portal lists start-up procedures, business planning strategies and management techniques to ensure the company is successful. State aid can also be applied for, although previous employment in the country is required for at least a year to be eligible for assistance in general.

Foreign nationals seeking to start-up a business the German Federal Ministry of Economy provides a website in English, French, Turkish and Russian with further information (URL: existenzgruender.de)

For foreign investors the “Invest in Germany GmbH” – a government agency – provides among others a thorough investment guide and comprehensive information about the German industries (URL: gtai.com)

Essentials to Land a Good Job When Relocating to Germany

Germany is home to 82 million people. This makes it the largest European Union nation in terms of population. When speaking of the number of immigrants coming from other nations, it ranks third worldwide. With these figures, why would you decide of relocating to Germany?

The answer is simply because the country has a flourishing economy. While it is the largest in terms of population, it also has the largest economy in Europe. The country acts both as an innovator and beneficiary of globalization making it a successful economy all over the world. Among a list of sectors that every foreigner or local would desire to fit in are those in the services sector, automobile industry and chemical production. Since the competition is stiff, you need to prepare yourselves when landing a job before relocating to Germany.

How to apply for work when relocating to Germany

If you are looking for work when relocating to Germany, you must consider some essential tips. This includes general conditions on applying for work, making your CV’s and application letters and preparing for the interview proper. Below is a detailed explanation on each part.

1. Applying for work. Formalities are needed when applying for work in Germany. Employers will consider your work experiences together with your activities at the moment. Do not hesitate to indicate the salary you expect from the company.

2. Curriculum Vitae preparation. Strict guidelines are followed when writing CV’s. Everything must be in chronological order. Place your photographs on the upper right hand corner of the CV. State gaps between employment and unemployment periods.

3. Application letter. Your application letter must be directly addressed to the person who will interview you. The typewritten name and position of the addressee should be the first thing seen on your application letter. Discuss the scope of the last position you previously had. Take note that German application letters follow the conservative letter format.

4. Interview proper. You should take note that German rules may differ from what you have been used to. Never ask for a position in the company or sit until the interviewer allows you. Never be late for any appointment set by the interviewer or else you may just lose an opportunity. Never speak ill about your previous employers. Always ask questions when necessary.

Understanding management culture when moving to Germany is also important

Apart from tips on how to seek employment, you must also look into the workplace culture or environment when moving to Germany. There is a different hierarchy of management in this country. Expect that it might be stricter than your previous workplace. Germans are known to work on exact details and not on assumptions. If you are already part of the team, you should have that attitude as well.

Time is also very essential to Germans the way it is essential to Americans. Therefore, you may never have a problem with punctuality. Meetings are held in an orderly manner and follow a schedule.

Once you have understood the working environment, relocating to Germany will rather be easier than you expected. This part is as essential as other parts of the move like looking for international movers to help you with the job. Looking for work and settling all other financial issues are your responsibilities while the transferring of your valuables is a job left in the hands of moving companies.