The secrets of Germany's economic success

Deutsche Welle, 19 October 2013

The world is fascinated by Europe's biggest economy. Despite the economic crisis, Germany has grown, created more jobs, and reduced its national debt. But what makes the so-called "German model" work so well?

As a rule, the economic system is usually fairly important to an economy's success. That, after all, is what creates the conditions for a country's economic activities. In Germany, this system is a "social market economy" - on the one hand, it is based on capitalist competition, but on the other hand it still allows the state to provide social correctives.

The roots of this lie in the 19th century. "Bismarck, also known as the 'Iron Chancellor' at the time, first introduced social legislation, by creating pension schemes and health care," said Werner Schreiber, former social affairs minister in Saxony-Anhalt. That system was based on a parity principle: in other words, one half would be paid by the employee, the other half by the employer.

This principle is still at the heart of Germany's social legislation, which, after the Second World War, expanded to include family policy, social welfare, and many other measures. Also, the social market economy includes the principle of tariff autonomy. "That means the unions and the employers negotiate salaries among themselves - without state intervention," Schreiber told DW.

Deregulation

This partnership between unions and employers has in the past few decades led to the fact that there are few strikes in Germany - another plus for Germany's economy. At a time when unemployment rates are climbing to record highs all around, nothing short of a labor market miracle has happened in Germany.

These days, 42 million people have work - more than at any other time in Germany's post-war history, a success that is partly owed to Agenda 2010, the labor reform introduced ten years ago.

Brückner says labor market reform
was key to the success

"An important part of that was the creation of a low-wage sector, the deregulation and flexibilization of the job markets," said Uli Brückner of Stanford University. "That created more jobs on the one hand, but it also created a lot of badly paid jobs."

Corrections

Regardless of who forms the next German government, it will almost certainly attempt to remove some of the negative consequences of this reform. They will be small corrections, rather than the grand measures like Agenda 2010 - that, too, is part of the "German model."

"Germany has a major social consensus in that we see a lot of things as a kind of engineering performance," Brückner told DW. "Our political system is like a system of gears, in which different institutions interlock within a legal framework."

While the political gears still creak occasionally, real engineering in Germany is first rate. Around 100,000 new engineers and scientists arrive on the job market every year - young men and women who have just received a top class education at one of the 200 engineering schools, or in the technical faculty of a university.

But also uneducated, still well-qualified workers also contribute to the country's high productivity. This is the result of the dual education system, whose roots lie in the medieval crafts and trades teaching system, whereby young people acquire practical abilities and basic knowledge in a vocational school. "If I'm working in the logistics industry, then I learn languages, book-keeping, and how markets work, and that becomes the framework within which I operate as a logistics expert," Brückner said.

Family businesses

This provides the German economy with a reliable stream of skilled workers, from which mid-sized companies benefit the most. These, defined as companies that employ no more than 500 people - the so-called "Mittelstand" - are the backbone of the German economy. They stand for 99 percent of the approximately three million companies in Germany, most of them family-owned.

Part of the Mittelstand: the Ortrander Eisenhütte GmbH in Saxony

For Klaus-Heiner Röhl of the Cologne Institute for Economic Research (IW), this is another reason why industry still makes up around 26 percent of the economy, while de-industrialization is much further advanced in other countries. "That means that the family owns this company and nothing else, while in Britain a company may have long since been put on the stock market, the shares possibly bought up by a large corporation, who may then close down the British factory and move production abroad," said Röhl. Since the family's whole life is invested in the company, they keep it in Germany.

Most of these families have a good cushion of capital, and so don't float their company on the market. That makes long-term planning more of a possibility. "You don't pin everything on certain statistics from one quarter to the next, you make long-term plans, which you then follow," said Röhl. "You don't get hasty. You don't expand faster than is good for the company."

'Made in Germany' with add-ons

Röhl praises Germany's family-run
 businesses

Having a good product is often no longer enough to compete with low-wage economies in Asia. The "Made in Germany" now includes a number of extra services. "A company now doesn't just sell a machine - it installs it, it trains the buyer's staff in how to use it, it offers a 24-hour repairs service," said Röhl. "At the end of the day it practically goes so far as to guarantee the machine's performance."

One guarantee for the success of the "Germany Model" is advanced technologies. Germany is practically forced to innovate, because it doesn't have any real natural resources. As many as 11 percent of German workers are employed in high-tech industries - far more than the EU average.

Every year, around 70 billion euros ($96 billion) is spent on research - more than in any other European country. "We have a whole network of publicly-financed research institutes like the Max-Planck-Institute and the Fraunhofer Institute, which are distributed across the whole country and try, in partnership with industry, to work on things that are not immediately marketable," Brückner said.

While dreaming is allowed in the field of research, only hard facts count when it comes to infrastructure. But here, too, Germany passes the stress test. Only a few countries in the world can boast such well-developed networks in energy, telecommunications, roads, rail, and aviation. Every European country is within a few hours' journey of Berlin - and the country's geographical location may well make up the final piece of the puzzle.

That, and the moderate climate. "We don't have any heat waves or tornadoes that could act as shocks to the system," said Brückner. "It is relatively moderate and cool, which has meant that through the centuries better growth and production conditions have appeared than at the edges of Europe. And Germany has profited from that too."

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