The labor market rigidity has resulted in increasing output gap for the German economy, despite the inflation rate remaining more or less stable, says Kunal Kumar Kundu, Senior Economist, Indo-German Chamber of Commerce.The German economy, the third largest economy in the world and the largest in the European Union (EU), has been experiencing conspicuously lower growth rate since the second half of the 1990s, thereby dragging down the overall growth rate of the EU. In fact, in 2003, the German economy actually contracted by 0.1%, first time since 1993.

This is symptomatic, not just of the general global economic slowdown, but of a deeper malaise that afflicts the economy. In the past eight years, cumulated German growth has been 7% below the EU average. In fact, since the middle of the 1990s, Germany had the lowest growth among all the European nations and there is no sign of change. So much so, that German per capita GDP, which used to be the highest in Europe, has been surpassed in recent years by the UK, Finland, the Netherlands, Ireland and Austria. That is despite the German population hardly growing. In fact, only four EU nations—Spain, Portugal, Italy and Greece have per capita GDP lower than that of Germany (see Figure1).