The German economy is known as one of the hardest working and most highly developed social market economies in the world. The Germans boast the most powerful economy in Europe and is the 4th largest in the world when ranked by nominal gross domestic product. Germany is a founding member of both the Eurozone and the European Union (EU), accounting for approximately ¼ of the total EU’s economy. This article will cover the financial system of Germany, as well as a range of market information covering currency, futures, and stocks.
Most of the German economy points to one strong indicator with the highest trade surplus in the world worth some $300 billion (USD). Ranked globally, Germany is the 3rd largest exporter on the globe with most of their exports homegrown or manufactured goods. Germany is known for exporting a range of goods from basic metals, rubber, plastic, pharmaceuticals, machinery, and of note, vehicles.
At the center of the German financial system is the Deutsche Bundesbank. According to the national bank, the role of The Bundesbank is to “maintain representative offices and representatives in twelve countries, who continually monitor the economies and liaise closely with the local financial sector.” As we can expect, the bank also prints new currency when banknotes or coins need replacing and stipulates monetary policy when needed as well.show more
The Frankfurt Stock Exchange (FWB), also known as Frankfurter Wertpapierbörse, is one of the world’s largest trading centers for financial equities and securities. The roots of this stock exchange stretch back all the way to the 16th century, and is one of the first of its kind. As the titan of Germany’s many stock exchanges, the FWB is responsible for over 90% of the financial volume traded through the European super economy. The Frankfurt Stock Exchange is an entity under public law and is operated by Deutsche Börse AG. The exchange has this particular framework to ensure the function of fair exchange trading.
Today, the Frankfurt Stock Exchange has become a trading center for international clientele and businesses. This is also reflected in the structure of its participants as roughly half of the approximated 200 market participants are companies headquartered outside of Germany. The most notable participant in the Frankfurt Exchange is the DAX, or Deutscher Aktienindex (meaning, German stock index). This blue-chip stock market index consists of the top 30 major German companies traded on the Frankfurt Stock Exchange. The DAX is more or less the equivalent of the Dow Jones Industrial Average or the FTSE100, similarly. Because of their minimal selection, the indexes do not accurately represent the entire economy of a nation.
The euro (€) is the official currency of the European Union (EU). Although Germany joined the EU in 1957, euro banknotes and coins were only introduced in Germany as the official currency in 2002.
It is first worth noting that the Deutsche Bank of Germany is the largest trader of global currencies in the world. This bank controls some 19% of the total world foreign exchange trading. The central bank trades the euro, the pound, the US dollar, and the yen predominately, but does trade exotic currencies as well sometimes utilizing a total of 30 or more well-known currencies.
Historically, Germany has used the Deustche Mark, previously the Reichsmark and Papiermark before it. The gold standard was removed from the currency as far back as the Papiermark in the 1920’s, but the proverbial sons of this currency have remained one of the strongest on the planet until the country’s adoption of the European Union’s currency, the euro, in 2002.
The euro is the international currency of the EU member states who have adopted it, and is the second most traded currency in the world, behind the US dollar. Although mainly beneficial to adopt such a currency, some countries resist the temptation due to some less popular criticisms. One such criticism of the euro is that its value is aligned closely to the German economy, the strongest within the EU. Other smaller nations that are at different stages of their economic cycle are overshadowed by the larger German economy, and thus, suffer.
To demonstrate, imagine that the German economy is booming, therefore the euro is likely to be highly valued. If, however, during this time Luxembourg is in economic downturn, then their highly valued currency would work against their economy instead of a weaker currency that would otherwise offer the nation some relief.
The German mark (or Deutsche Mark in native German) had a reputation as one of the world’s most stable and strongest currencies. Evidence suggests that the monetary policy of the central bank was the direct cause of this strength. The policy was “hard” in relation to the policies of certain other central banks in Europe, referencing the scope of politician influence and inflation target of the economy. This policy became the foundation of the European Central Bank’s present policy towards the euro.
As Germany is known for its manufacturing products, specifically automotive and manufactured goods, there are many other sectors traded successfully on the German Exchange. These sectors include real estate, pharmaceutical companies, insurance, media, and financial services. While this is only a sampling of the German economy, one could argue that these are the most successful enterprises on the market. If an investor were to look for a stable growth environment to park their capital, German stocks would be a worthy investment vehicle to consider.