The Federal Republic of Germany, as the name states – is a democratic, federal parliamentary republic of sixteen states, which are collectively known as “Länder” (meaning – land, or country) with the legislative, executive and judiciary branches of government.
Every level of government from federal to province, district or local government is governed by an elected body which directs these offices in all matters of decision making. Like the US Senate and House of Representatives, and the Lok Sabha and Rajya Sabha in India, federal legislative power is split between two bodies – The Bundestag and the Bundesrat.
The lower chamber of parliament or the Bundestag is elected by the German population every four years. The political party that enjoys a majority in the Bundestag forms the government, while the other parties form the opposition. The delegates of the individual provinces or the “Länder” form the Bundesrat which is the upper chamber of parliament. Bundesrat nominations are based on the electoral system, with each province having a predetermined number of votes, proportional to its population.
Bills are proposed and debated in the Bundestag. The Bundesrat primarily acts to safeguard the interests of the “Länder”, ensuring that any federal legislation passed by the Bundestag does not place any province at a distinct disadvantage. All bills proposed in the Bundestag, thus require the approval of the Bundestag, and it can propose changes to a bill to serve the interests of any province. In the event of a disagreement between the two houses, a conciliation committee is formed1. If the Bundesrat wishes to adopt changes in a proposed bill, it must involve the conciliation committee, and accordingly work out a compromise with the Bundestag. The committee has equal representation of both houses – 16 members each; who vote on an action on the proposal and in the event of a tie, the compromise proposal is rejected.
The Federal or the Bundestag elections are held every four years, with the most recent being held in September, 2017. Every German voter has two votes – the first vote enables them to vote for a candidate in their constituency. The candidate, who receives the most votes, wins a mandate in the Bundestag. 299 mandates (out of 598) are distributed this way, as there are 299 constituencies. However, it is important to note that it is the second vote which allows the voter to vote for particular political party that determines the relative strength of the political parties in the Bundestag. The remainder of the 598 seats are distributed amongst the parties using the “Sainte-Laguë method”, where the proportion of total seats earned is approximately equivalent to the percentage of second votes. A party must receive more than 5% second votes to earn a mandate in the Bundestag.
Analysis of the 2017 Federal Elections and its impact on the Business Environment
At the end of the 2017 Federal Elections, the CDU/CSU2 party led by the present Chancellor Angela Merkel and the SPD 3party led by Martin Schulz were the major parties winning 33% and 20% respectively. The Election also saw the emergence of the Alternative for Germany (AfD) as the third party in the Bundestag with 12.6% of the vote, having previously being unrepresented. Both the CDU/CSU and the SPD failed to secure a majority in the Bundestag, making a coalition the only logical possibility for formation of the government. The SPD, had ruled out the possibility of another grand coalition with the CDU/CSU, as it had done after the 2013 elections. Merkel also announced that a coalition with the AfD or The Left would be out of the question, on grounds of conflicting beliefs. Experts say that the CDU’s most realistic option is the formation of a “Jamaica Coalition4” with the Free Democratic Party (FDP) and The Greens. The possible formation of a Jamaica Coalition has a substantial impact on business. The FDP is an “economically right, socially left” party – It has been noted for its support for entrepreneurial freedom, and start-up incentivization. It also calls for increase in federal education funding, pushing or the promotion of entrepreneurial spirit in schools and colleges. The FDP, also has proposed a tax holiday for start-ups, as well as simplified venture capital legislation. The FDP, has primarily liberal immigration views – it aims at making Germany a modern immigration nation through simplification of the procedure, which could lead to an inflow of skilled workers to Germany
The Greens, on the other hand, primarily focus on environmental conservation, climate protection, more investment in public works and the creation of an ecological economy. While Chancellor Merkel capped the refugee limit at no more than 2, 00,000 per year, this move has been slammed particularly the Greens – hinting at the strong possibility of immigration policy reforms. The coalition would also make Eurozone reform unlikely, as the FDP strongly believes that Greece should exit the Eurozone, and is also opposed to Macron’s proposition of a Central Eurozone Treasury. The coalition would also mean trouble for ecologically harmful industries like coal and automotives. The Greens have insisted on the closure of 20 German coal plants as a prerequisite for the formation of the coalition. The Greens, also want to phase out fossil-based cars by 2030, which would not only lead to a loss of 0.6 million jobs, but has definite implications for the automotive industry.
A CDU-FDP alliance does mean good things for business, as both pro-market parties have hinted at possible tax reforms – with the CDU proposing a tax cut of $15 billion. The FDP also proposes the abolishment of the solidarity surcharge tax, and the Greens have proposed an asset tax, however the latter has been strongly opposed by the FDP and the CDU. The CDU also proposes to raise R&D expenditure to 3.5% of the GDP, from the earlier 3%. The entry of the AfD, known for its controversial xenophobic and racial comments, into the Bundestag, could affect the entry of businesses that are openly opposed to such ideologies.
Legal Environment –
The legal system consists of all laws and acts that govern business in Germany; the Genesis of all these laws is the Constitution – The Basic Law for the Federal Republic of Germany (Grundgesetz). Of essential importance to the conduct of business are the fundamental human rights specified in the Basic Law, particularly the rights of Freedom of Association (Article 9) and the Freedom to Work (Article 12). All fundamental rights are protected under the Article 19, which ensures safeguarding of these constitutional rights, and in the event of violation also provides for the right to legal remedy in the Federal Constitutional Court under Article 93 (1) (4a).
The judicial system in Germany is decentralized, with courts being divided speciality wise into different streams. Germany therefore has the labour courts (Arbeitsgerichte), the highest of which is the Federal Labour Court (Bundesarbeitsgericht)5, which adjudicate disputes over working conditions, terms of employment and trade agreements. The Social Law courts (Sozialgerichte), the highest of which is the Federal Social Court (Bundessozialgericht)6 address issues related to compensation, social security, wage and salary disputes. For tax matters, Germany has Finance courts (Finanzgerichte), the highest of which is the Federal Finance Court (Bundesfinanzhof)7. The Federal Patent Court (Bundespatentgericht) hears all disputes on matters related to intellectual property rights.
The major law that affect business is the German Antitrust Law i.e. The German Act Against Restraints of Competition, which prohibits cartelization and unfair trade practices. Under this Act, the German Federal Cartel Office has been established, the approval of which must be obtained for every merger and acquisition. It also has the power to blacklist a company or prohibit an M&A, on grounds of restrictive trade practices, other than in the cases of a public monopoly. Most businesses in Germany are either Companies with Limited Liability Gesellschaft mit beschränkter Haftung (GmbH) or Joint Stock Companies Aktiengesellschaft (AG) which are governed under the Limited Liability Companies Act, and the Stock Corporation Act, respectively. For an AG, the par value of the share capital must be a minimum of 50,000 EUR, whereas it is 25,000 EUR in case of a GmbH. The Articles of Association for both forms of companies must be notarized by a notary public. An AG has two tiers of management – firstly, a supervisory board which is elected by the shareholders, and secondly, the management board which looks after the day-to-day management of the company; the members of which are appointed by the supervisory board. A supervisory board is not mandatory in the case of a GmbH, unless the number of employees exceeds 500.
The Deutsche Corporate Governance Kodex lays down rules pertaining to corporate governance, such as in Article 87, which states that managerial remuneration to be set by the supervisory board, and also provides that if the company performance has deteriorated, the remuneration can be reduced by the justified amount. The annual accounts for an AG, as well as a GmbH, have to be audited by an audit board, which is appointed by the shareholders of the company. In addition to this, an independent audit board may be appointed by the supervisory board. As per the law, the company’s annual accounts, as well as an annual company statement on compliance with The Deutsche Corporate Governance Kodex has to be published.
Labour Legislation –
Contracts of employment, between an employer and employee are generally concluded for an unlimited period as per Sec. 620 of the German Civil Code. However, the employer-employee may contract for a fixed period of time, or for part-time work. Such contracts must be in line with the provisions of The Act on Part Time & Fixed Term Employment Relationships. Fixed-term and part-time employees must be given the same treatment as all other fulltime employees, doing same or similar work.(Sec 3, para.2) In keeping with the recent trend towards working from home, the rights of and rules regarding the employment of all home workers, are laid down in the Home Work Act. An employer wishing to terminate the contract of employment has two options – an ordinary (with notice) or extraordinary (without notice) termination. In an ordinary termination, the contract expires at the end of the period of notice, whereas in the case of extraordinary termination, the effect is immediate. The statutory notice period is 4 weeks, which increases by 1 month, when the worker completes his 5th, 8th, 10th, 12th and 15th year of continuous employment. The maximum notice period is 7 months, after the employee completes his 20th year of employment. The termination notice must be in writing to be valid, and can be challenged by the employee in the labour courts within 3 weeks of receipt of such notice.
Working hours are governed by the Working Time Act, Maternity Protection Act (MPA) and the Young Workers Protection Act (YPWA). A workday is typically 8 hours long on all days of the week, except Sunday and public holidays. The normal workweek is thus 48 hours, but most trade agreements have shortened this to 35-38 hours a week. The regular working day may be extended up to 10 hours, provided that every employee gets a minimum of 11 hours of rest between two consecutive work days. In cases of pregnant women and young workers, a work-day cannot be more than 8 hours long. The YPWA, prohibits employment of children below the age of 15, and also states that young workers cannot be employed between 8pm and 6 am.
Paid leave is governed by the Federal Paid Leave Act, and through trade agreements between workers and employer’s unions. The statutory minimum requirement is 24 days per year (not counting Sundays and public holidays), but this can be extended to 4-6 weeks through collective agreements. Sick leaves are regulated under the Act on Payment of Wages and Salaries on Public Holidays and in Case of Sickness, under which 6 weeks of paid sick leave are provided for every employee.
Under the Maternity Protection Act, pregnant women do not have to work for 6 weeks prior to the due date, and 8 weeks after the birth of the child. In case of a premature birth, or multiple births or caesarean birth, this period is increased to 12 weeks post the birth of the child. An employer cannot dismiss a female employee during her pregnancy, and for 4 months post the birth of her child.
Germany has no official trade union law; as such trade unions are recognized as employee’s associations without legal capacity. They can however, engage in collective bargaining on behalf of the employees, and can go as well as be taken to court. The largest trade union in Germany is the German Unified Services Union.