As Europe's largest economy and second most populous nation, Germany is a key member of the continent's economic, political, and defense 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.

Germany's affluent and technologically powerful economy - the fifth largest in the world in PPP terms - showed considerable improvement in 2007 with 2.6% growth. After a long period of stagnation with an average growth rate of 0.7% between 2001-05 and chronically high unemployment, stronger growth led to a considerable fall in unemployment to about 8% near the end of 2007.

Among the most important reasons for Germany's high unemployment during the past decade were macroeconomic stagnation, the declining level of investment in plant and equipment, company restructuring, flat domestic consumption, structural rigidities in the labor market, lack of competition in the service sector, and high interest rates. The modernization and integration of the eastern German economy continues to be a costly long-term process, with annual transfers from west to east amounting to roughly $80 billion.

The former government of Chancellor Gerhard SCHROEDER launched a comprehensive set of reforms of labor market and welfare-related institutions. The current government of Chancellor Angela MERKEL has initiated other reform measures, such as a gradual increase in the mandatory retirement age from 65 to 67 and measures to increase female participation in the labor market. Germany's aging population, combined with high chronic unemployment, has pushed social security outlays to a level exceeding contributions, but higher government revenues from the cyclical upturn in 2006-07 and a 3% rise in the value-added tax pushed Germany's budget deficit well below the EU's 3% debt limit. Corporate restructuring and growing capital markets are setting the foundations that could help Germany meet the long-term challenges of European economic integration and globalization, although some economists continue to argue the need for change in inflexible labor and services markets. Growth may fall below 2% in 2008 as the strong euro, high oil prices, tighter credit markets, and slowing growth abroad take their toll. 

Source: The World Factbook, CIA.