With a population of 82 million and a GDP of $3.6 trillion, Germany is the world's fifth largest economy (after the United States, China, Japan, and India) and the largest in Europe, accounting for about one-fifth of the gross domestic production (GDP) of the European Union (EU). Based on a per capita income of around $44,280 (2008), Germany is one of the world's high-income countries. Germany has also been the world's number one exporter of goods and the largest European trade and investment partner of the United States. Although its economic and commercial policies are increasingly determined within the EU, Germany plays a key role in influencing EU policies. The health and functioning of the German economy, as well as policy approaches adopted by the government, are not only of bilateral and regional importance, but also of global importance to the United States. Since its founding in 1949, the Federal Republic of Germany has experienced a continuous rise in living standards. GDP per person has risen by a factor of 6 since 1950. This increase in material well-being has helped create a very stable middle class. German firms remain competitive internationally and the work force tends to be highly skilled. The economy is heavily dependent on exports. In 2008 exports of goods and services accounted for 47% of Germany's GDP—more than three times the rate in the United States. Germany's strong export performance in goods or merchandise is also denoted by the term Exportweltmeister ( world champion exporter). At the same time, relatively weak consumer demand is a consistent feature of the German economy. Germany has been a driving force in European integration, including the creation of the European Monetary Union. Germany's EU partners remain its prime trade customers and suppliers. In 2008, 63% of German exports went to other EU member states and 64% of its imports came from other EU member states. The United States is Germany's largest trading partner outside of Europe. In 2008, 7.2% of German exports went to the United States and 4.2% of its imports came from the United States. In turn, Germany is the United States' largest European trading partner and its fifth largest trading partner worldwide, accounting for 4.5% of U.S. total trade. The two countries also share strong foreign direct investment (FDI) ties. The United States in 2008 accounted for $110 billion, or over 25%, of Germany's total stock of outward FDI and was the second most important provider of FDI in Germany. Germany's stock of FDI in the United States stood at $212 billion in 2008, making Germany the fifth largest foreign investor in the United States. These investments drive trade and create jobs. In 2007, 62% of U.S. imports from Germany consisted of related party trade—trade between German parent companies and their own affiliates in America. German companies doing business in the United States employ about 670,000 people, or one in every 200 people in the private sector. U.S. companies operating in Germany employ nearly 800,000 people, which accounts for nearly one out of every 35 jobs in the private sector. Mutually profitable, growing, and beneficial U.S.-German commercial ties historically have been facilitated by a strong German economy. By most standards, West Germany registered an impressive economic performance in the 1950s and 1960s, the first decades of its existence. Powered by export-led economic growth based on low wages and high-level engineering, the Federal Republic of Germany grew at an average of 6.3% per year during this twenty-year period. The economy grew at a less rapid, but still strong pace of 3.6% per year in the 1970s and 1980s. But beginning in the mid-1990s, the German economy has been on a much lower growth path, averaging around 1.5% GDP growth per year (as compared to an OECD average growth rate of 2.7%). Unemployment has ratcheted upward since 1970, from virtually full employment to a situation where in some years 10% of the population is out of work and another 4% can't find work but are in government programs. These trends, have been exacerbated by a 5% decline in German GDP growth in 2009, raise questions about the long-term vitality and strength of this European powerhouse. A number of mostly domestic factors may account for Germany's suboptimal economic performance. These include the heavy and continuing costs of reunification with East Germany in 1990, escalating costs associated with generous social security and welfare programs, rigid labor market laws and perceived over-regulation, and an economy more geared towards exporting than consumption. Amidst the current global economic slowdown, questions have been raised concerning the impact that Germany's export dependency has on the domestic economy, particularly for growth. Some of the aforementioned factors are at the same time valued by many Germans as essential features of the country's so-called social-market economy. Since the founding of the Federal Republic and reunification in 1990, German policymakers have consistently pursued parallel national goals of export-driven economic growth and social cohesion through a robust system of social welfare programs. Most Germans appear to continue to take pride in Germany's position as a leading exporter and to support government-funded programs aimed at reducing economic disparities within their society. In turn, German political leaders have displayed a willingness to sacrifice a degree of economic growth for what they perceive as social cohesion. These preferences are evident in the reluctance of most German governments to pursue the kinds of economic reforms advocated by many economists. Most recently, from 2005-2009, a so-called grand c oalition government of the center-right Christian Democratic/Christian Social Union (CDU/CSU) and the left-of-center Social Democratic Party (SPD) proved reluctant to advance unpopular cut-backs in welfare programs and labor market protections. Some believe that Chancellor Angela Merkel's (CDU) September 2009 reelection in coalition with the pro-business Free Democratic Party (FDP) could increase the likelihood of market-friendly reforms being enacted, but any radical restructuring of Germany's social market economy is considered unlikely. Failure to enact substantial reforms could mean that the problems posed by an aging population and Germany's system of social benefits will place an even larger strain on the economy in the future. As a result of its declining economic growth, aging population, and the growing costs of maintaining generous social security programs, Germany, as many other industrialized countries, faces a resource crunch. This resource crunch arguably has limited Germany's flexibility to maneuver domestically and appears to have been a factor in the evolution of somewhat more assertive German international economic policies. With dwindling economic and financial resources, Germany arguably has become less capable of compromising on matters of potential economic advantage. This has affected not only the trade and economic leadership role that Germany has traditionally played in Europe and the world economy, but also its position on issues that directly affect U.S. interests. These include different approaches in dealing with the global economic downturn and economic sanctions. In short, a prosperous German state remains critical to both the U.S. and European economies. Difficulties Germany may have in regaining a stronger growth pattern are an important concern, affecting the U.S.-German partnership in addressing a range of bilateral, regional, and multilateral challenges. This report elaborates on these themes in three parts: the first part examines Germany's economic performance in historical perspective and assesses some of the domestic factors that may be contributing to Germany's less than optimal growth pattern in recent years. The second section discusses the reform challenges facing German political leaders. The third section evaluates selected U.S.-German economic policy differences and strains that may be influenced by Germany's economic situation. In the first decades of its existence, West Germany experienced impressive economic performance. Powered by export-led growth and close collaboration between business, government, and labor, the Federal Republic of Germany was hailed as an "economic wonder" ( W irtschaft s wunder) as it averaged 8.2% growth rates during the 1950s, 4.4% in the 1960s, and 2.8% in the 1970s. In the 1980s, Germany's economic performance began to slip further, falling to an annual average increase of 2.3%. As shown in Table 1 , with only a few years of exceptions, the growth rate has continued to decline since 1990. In the 1990s, Germany recorded an average growth rate of only 1.6% and a meager 0.6% between 2001 and 2005. The economy did bounce back in the three years from 2006-2008, with growth averaging 2.3%. But the economy was again hard hit in late 2008 and early 2009 by the global economic downturn. Germany's economy contracted by 5% in 2009, compared with a 3.7% drop in the Euro-zone overall. Once Europe's growth engine, Germany since the mid-1990s has had, along with Italy, one of the lowest growth rates in Europe. The aggregate output of the German economy, for example, increased by 7% between 2000 and 2009 compared to a Euro Area increase of 12.6%. Slower German economic growth, in turn, has been accompanied by high unemployment (see Table 2 ). In the 1960s, both West and East Germany had almost no unemployment. In 1970, about 150,000 people or 0.7% of the labor force were unemployed—compared to over 3 million today. But by 2005 unemployment reached 11.7% nationwide and 18% in the states of the former East Germany. When the economy did bounce back in the three years from 2006-2008, with growth averaging 2.3%, unemployment also fell from nearly 5 million to around 3.3 million, but the unemployment rate barely dipped below 8%. The OECD also predicts that the number of unemployed will rise to 5.1 million and that the unemployment rate will increase sharply to 11.6% by the end of 2010.