Analysis of the effects of the Single European Act and Maastricht

Treaty in Germanys auto trade with the EU

First Draft
Alvaro de la Garza
Dr. Simran Sahi
ID 4264819

Auto trade between Germany and EU increased by 40% after the signing of the Single
European Act and the Maastricht Treaty in the years 1987 and 1992 respectively.(1) The
formation of the EU not only affected automotive exports from Germany to the EU, but also
benefited German workers by a combined 16% wage increase. The signing of these two
agreements brought in large amounts of domestic and foreign capital investment, concluding in
an increase in capital towards manufactured goods of 14% over the period of 7 years after
1992. On the other hand, unemployment in the auto industry increased by 9% after the first five
years of the European Union formatted.(2) This is seen as a direct consequence of the huge
influx of new capital to the country and the free mobility of people through the EU. Germany,
one of the strongest economies in the Union is bound to attract population who suffer both
structural and frictional unemployment in other EU countries.
This paper analyzes Germanys auto trade with the EU before and after the signing of the
European Single Act and the Maastricht Treaty, to confirm a 110% in exports and a 90% in
imports. The paper also goes into the consequences created by an increase in trade, an
unemployment increased 12% and 11% after the signing of both treaties, capital influx to the
country went from 29B to 28B, which translates to a 5% decrease. The paper goes into an
inflation analysis to disprove the existence of the Dutch disease in Germanys economy. Finally,
this paper confirms Germanys economy behaves according to the Heckscher-Olin model.
1. Introduction
Last year marked the 126th anniversary of the birth of the automobile in Germany. Karl Benz
registered his invention a vehicle powered by a gas engine. This patent is considered to be the
birth of the automobile as we know it. Germany to date continues to occupy a unique position in
the international automotive industry. German original equipment manufacturers account for 17
percent of global passenger car production.

In the domestic market, the automotive industry remains the countrys most important economic
sector and Europes single largest auto market. The country is also host to the largest
concentration of OEM plants in Europe. Today there is an annual 19.6 million euros committed
to automotive research and development making Germany the most innovative automobile
country in the world.
Even though the Karl Benz patented the first automobile in the late 1870s it wasnt until the
1920s that Germanys automotive industry started forming. Although this market sector wasnt
healthy it still held important trade with both France and Switzerland as well as with the rest of
Europe. The central position of this country as well as the quick innovation led to export high
export margins even before of extensive car use.
The Great Depression in the early 1930s trickled down to the European economies, and created
a very rapid decrease in both domestic and foreign consumption of cars in Germany. This event
plunged Germany's auto industry into a severe crisis. While eighty-six auto companies had
existed in Germany during the 1920s, barely twelve survived the depression, including DaimlerBenz, Opel and Ford's factory in Cologne. In addition, four of the country's major car
manufacturers Horch, Dampf Kraft Wagen (DKW), Wanderer and Audi formed a joint
venture known as the Auto Union in 1932, which was to play a leading role in Germany's
comeback from the depression.
The German auto industry did not explode until the 1930s with the election of the Nazi Party to
power. Nazis started a policy known as motorization, which would manufacture cars for a very
low cost to target mid-income households. This is when Volkswagen started and with it came an
inexpensive peoples car.
By 1955 VW had made one million Volkswagen Beetles, and by 1965 had built ten million.
About 56% of this car manufacturing was directed towards France, Spain, Switzerland, and UK

sales.(3) Other auto manufacturers rebuilt their plants and slowly resumed production, further
increasing consumer choice and auto exports in Europe. Trade in general rose extremely
amongst European countries after the Single European Act came into place in 1987 with the
purpose of creating a single market amongst several countries, Germany included. This
elimination of tariffs rose automobile exports to the European Common Market by 10%,
furthermore when the Maastricht Treaty was signed in 1992, automotive exports to the newly
formed EU increased by 30% in the first year, to later level off to a yearly increase of around
2%, which shows sustainable growth in the industry.
2. Analysis
The formation of a common market in Europe with the signing of the Single European Act
propitiated easier exports and imports from and to Germany, during a period of five years trade
to the European Union spiked. This increase led to several changes in the German economy
because it is heavily based of off the automotive industry. Below changes in wages, capital
investment, unemployment, and degree of openness are analyzed before and after the signing
of both treaties.
Figure 1 below shows the percentage change with respect to the previous year of auto exports
from Germany throughout the years. As said earlier, growth was seen in both 1987 and 1992,
with the signing of the Single European Act and the Maastricht Treaty respectively.

Figure 1. Germany Auto Exports to the EU Growth over Year

40
20
Percent Change %

0
1955
-20

1965

1975

1985

-40
Years

1995

2005

It is clear from Figure 1 than between these two free trade agreements (FTAs) there was a
huge raise in auto exports to the European Union, in 1987 just when the Single European Act
came into play, German auto exports to the EU went up to 9.8%. In 1993, the year when the
Maastricht Treaty started, the exports went up to almost 20% in a single year. This proves the
importance of these two FTAs in Germanys automotive industry and its economy in general. A
graph showing a constant increase in the volume of Germanys exports is shown below in
Figure 2.

1 .0 e + 0 6

E x p o rts
2 .0 e + 0 6 3 .0 e + 0 6

4 .0 e + 0 6

G e rm a n y c ar e xp o rts o v e r tim e

19 60

1 97 0

19 80

Y ea r

19 90

20 00

2 01 0

As it is expected, constant and sustained growth in car exports is perceived since 1987 to date.
From a regression analysis produced in STATA from years 1993 to 1999 showed a coefficient of
correlation of 0.92 which means the model generated is a precise representation of the data.
With a slope of 8,325US dollars/year which is three thousand dollars higher than the average
increase in exports of 5,245US dollars/year and even though a lot of noise is still detected, it is
assumed that the quantification of the change in exports provided by STATA is accurate.
Looking at the big picture, car trade has actually doubled in this period of time which brought
more consequences to the whole German nation, as automobile manufacturing accounts for

37% of the countrys economy today. Changes in the manufacturing sector wages,
unemployment, and capital investment are perceived after the installment of these two treaties.

Germany's Car Part Imports over Year

1400000
1200000
1000000
800000
Millions of Euros

600000
400000
200000
0
1975

1980

1985

1990

1995

2000

2005

2010

2015

Figure XX shows Germanys car parts imports over time, from two regression analysis done in
STATA, one using the data from 1981 to 1987, which resulted in an R2 of 0.93, which although
low, still reliable; and a slope of 2,256 Euros/Year. The second analysis was done using the first
few years following the two treaties, 1988-1995. An ANOVA table revealed a coefficient of
correlation of 0.94 and a slope of 3,880 Euros/Year which is almost two times greater than the
slope from 1981-1987. This proves again the huge increase in import consumption and in trade
because of the formation of a Common Market and the European Union. Both the car export
and import increase after the treaty provide evidence that sustains the H-O model which claims
a capital abundant country will export capital intensive goods, in this case automobiles. The
increase in car part imports just hits to an increase production and manufacturing of cars.
The consequences of car trade increase due to the Single European Act and the Maastricht
Treaty brought to Germany are analyzed below, with a special emphasis on how the automotive
industry relates to the Dutch disease and to the Heckscher-Olin model.

First off, the GDP per capita in Germany is analyzed over the years. This is a good indicator of
the countrys wealth. From Figure XX a really healthy and fast paced growth is observed in
Germany, again there is a change in the slope of the graph during the signing of both the Single
European Act and the Maastricht Treaty. Through those few years GDP per capital started
increasing faster in consequence to the increasing openness in Europe trade, not only in the
automotive industry but in all the economic sectors. The Single European Act created a
Common Market which eliminates all the tariffs from imports and exports, making Germany
more willing to exchange goods and services to the rest of Europe, which contains the strongest
economies in the World. With the disappearance of tariffs, import prices fell which increased
exports out of the country and with a decrease in import prices GDP increased rapidly.
Furthermore, after the Maastricht Treaty the EU was created which created a single currency
and increased free movement of tourists and workers across the Union. This way frictional
unemployment was decreased, and productivity increased (as it will be shown below). With
these two combined effects GDP increased in a pace almost double the speed than it usually
grows for a period of 5 years.

10 00 0

15 00 0

G D P p e r c a p ita
20 00 0
25 00 0

30 00 0

35 00 0

G e rm a n y's G D P pe r ca p ita o v e r tim e

19 80

19 90

20 00
Y ea r

2 01 0

20 20

A statistical regression analysis was done over the GDP graph; with an R2 of 0.85 the model is
reliable and useful. The model presents a coefficient of 620 US Dollars/Year and has relatively
low noise. A second regression analysis was done over 1992-1994, which is a perfect
representation of the effect of the formation of the EU. The slope of this section is 2,500
US/Year which is more than 4 times the average value, this is a surprisingly large increase
nevertheless, the formation of the European Union did eliminate several barriers in Europes
economy.

25

C a r P r o d u c ti o n S h a r e o f G D P
30
35
40
45

50

C a r P ro d u ctio n S h a r e o f G D P o ve r tim e

19 70

19 80

19 90
Y ea r

2 00 0

20 10

To place the automotive industry into perspective with Germanys economy, Figure XX a graph
of car production share of GDP over Time is presented above. Interestingly enough, the share
of GDP has been going down through the years. From a STATA analysis, a decrease in the
negative slope is seen in both periods after the treaties, which translates to increased
production with respect to all the other economic sectors. This constant decrease of car
production is explained by Germanys efforts to differentiate its economy, with a growing
chemical sector which to date accounts for about 9% of the economy and a machinery sector
that has a 14% share of the GDP it is not uncommon that the auto production share of the GDP

has gone down. (6) Furthermore, this Germany differentiation is in the production of capital
intensive goods, this is in agreement to the H-O model.
Another important thing to check when analyzing growth and more to it in the automotive sector
is capital investment. Below a regression of capital investment over the years is shown. It is
seen than before the creation of the EU it is in a high constant increase, nevertheless, right in
1992 the graph levels off and has very small increase. Even though this might seem counter
intuitive, it is explained through the Germany Trade and Invest Statistics. (7) According to them,
most of the big car industries were built before the signing of these two treaties and only small
technologic advances were added to each of these factories.

Germany Auto Capital Investment vs. Time

12
10
8
Millions of Euros

6
4
2
0
1975

1980

1985

1990

1995

2000

2005

2010

2015

Germanys Capital investment plateaued around 1992, but it still makes up around 25% of their
GDP. (5) Which compared to other countries is a very large percentage; this provides more
evidence to the H-O model being followed by Germany. Because of the capital abundance
nature of the country, a high capital investment is observed.

An additional element that was investigated was the unemployment rate in Germany through
the years; this is an economic indicator which helps track the direction of the economy of
Germany. Again, important spikes are observed in 1988 and 1997 with unemployment rates of
12.6% and 11.4% respectively. A regression analysis was done to this graph also, but as the
behavior is very stochastic through the years and a value of 0.41 for the coefficient of correlation
was found, not proving the model suggested.
Even though a model was not produced, the high levels of unemployment suggest a capital
oriented economy, which is in accordance with the analysis done through other economic
indicators. The high unemployment in Germany during the years after both treaties can be
accounted through two things: a substitution of labor to introduce machinery, or an increase in
foreign workers due to the free mobility started by the formation of the European Union.

U n e m p l o y e m e n t R a te
6
8
10

12

U n e m p lo ym e n t ra te o ve r tim e

19 80

19 90

20 00
Y ea r

2 01 0

20 20

Finally, inflation is analyzed to test the existence of the Dutch disease in Germanys economy at
some point in history. The Dutch disease is caused when a country is strongly based of off one
good and this way the countrys Consumer Price Index is overvalued with respect to the other
products. In the case of Germany, a strong focus in cars would create high inflation in its CPI.

Figure XX below does show an increase in inflation during the period between the two treaties,
although the increase reaches a high of 5%, it is not significant enough to prove the existence of
the Dutch disease at any point in Germany, therefore we wit out this theory.

I n fla ti o n
4

In fla tion ov er tim e

19 70

19 80

19 90
Y e ar

2 00 0

20 10

3. Conclusion
Germany has always been the largest automotive manufacturer in the World, and after the
creation of a common market and later the European Union, tariffs got eliminated which
increased both its exports to the strongest market: Europe; as well as its auto part imports. This
increase in trade brought with it good consequences in general. GDP per capita rose quicker for
these periods of time than its average; it was observed also that auto trade was a big
component of this fast paced growth. A spike in capital investment was not observed during this
period, which is due to the earlier construction of most of the car factories, and just small
innovation additions to the current technology. Finally both a rise in unemployment and inflation
was observed, the latter was not significant enough to catalogue Germanys economy to
present a case of Dutch disease. On the other hand, unemployment spikes were explained by
the capital intensity of most of Germanys business sectors, specially the automotive one. An

increase in the production of cars with the singing of the two treaties couldve led to
unemployment due to two reasons: free mobility of foreign workers, or the replacement of labor
with machinery and capital.
The reasons explained in this paper support that Germanys economy does follow the
Heckscher-Olin Trade model. Germany, a capital abundant country, exports capital intensive
goods; and this leads to incomplete specialization towards those goods. Even as Germany
continues to differentiate its economy away from cars, all of its activities are still capital oriented.

REFERENCES:
(1) http://www.vda.de/en/zahlen/jahreszahlen/export/index.html
(2) OECD Statistical Report - http://stats.oecd.org/
(3) Statistics on the production of manufactured goods Value ANNUAL 2012 http://stats.oecd.org/manu/goods
(4) https://www.destatis.de/EN/Homepage.html
(5) http://www.quandl.com/ODA/DEU_LUR-Germany-Unemployment-Rate-of-Total-LaborForce
(6) http://topforeignstocks.com/2010/04/11/ten-reasons-to-invest-in-germany/
(7) http://www.gtai.de/GTAI/Navigation/EN/Invest/Industries/Mobility/automotive.html