During the second half of 2006 and in early 2007, the German economic engine seemed to gain speed, moving into recovery after several years of stagnation. Whether this recovery is sustainable is still unclear, however. With its reliance on exports, Germany remains vulnerable to any downturn in the global economy. Nor is it yet clear that the recent upswing will result in long term job growth and increased consumer spending.
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To reinforce this recovery, the chancellor should go beyond an economic policy based on balancing the budget and reducing corporate taxes. She should focus now on creating more flexible conditions of employment, so that more workers can be hired and companies can expand, and should work with German business to develop the successor industries to today’s export champions. Her government must also rethink the failed policy of subsidizing the eastern Länder, and take steps to deal with the long term challenges of an aging workforce and an education system that does not produce workers with the right skills. Chancellor Merkel knows that coping with globalization will require a liberalized economy with more freedom and flexibility for its workers and its companies.