Why Is the German Economy Cranking?

This week’s Economist explains why the German economy has outperformed most other wealthy nations in the past decade. It’s not because of a “wirtschaftswunder,” but rather a solid focus on the part of German companies, especially small ones, to utilize globalization to their advantage by finding niches and developing good outsourcing practices. The abundance of cheap labor, the recent liberal Hartz reforms and the demand for the euro don’t hurt either — but the main driver has been the cornering of the globalized supply-and-demand market. Germany also made several good bets during the worldwide economic crisis: while many businesses cut costs by firing workers, German companies retained workers and, thus, human capital. That said, the Economist highlights two areas where the German model has room for improvement: enhancing productivity and rebalancing growth to cut down on its dependence on foreign demand. [%comments]


yeah- Germany has more exports and work sharing- 2 concepts apparantly unheard of by our statesmen, who tend to babble about deficits while thier unemployed citizens suffer

Arijit Banik

Lest we forget, real wage growth in Germany has been zero since EMU; Germans took the brunt of restructuring --arguably this took about 4 years-- from using a highly valued mark to a relatively undervalued non-optimal political experiment that is the euro currency during a period of global expansion. And with complete deference to our Teutonic friends, Germany believes that slow and steady and responsible wins the race: they believe in austerity, productivity, infrastructure and the value of capital. Having said this, the fact that Fräulein Merkel wants the peripheral economies to restructure in a short time frame is unrealistic and unkind given that "Old Europe" will be burdened with slow growth and a demographic time bomb. Indeed, Germany is a model but for the euro zone to function, German austerity will have to give way to largesse in the form of fiscal transfers to some of the PIG (portugal, Ireland, Greece) so challenges remain on the horizon.


Eric M. Jones

You're not going to like this, but the connection between Germans and Jewish businessmen is important. I know several German businesses that after WWII just forgot about all that "unpleasantness" and sought out Jewish businessmen to promote and sell their products. AND the all spoke German.


frankenduf: the reason that the German statesmen do not need to babble about deficits (as much as the others) is that the country has avoided the deficit by not having such spending levels as e.g. Labour-run Britain or the U.S. under Republican leadership.

Of course, this does not mean that Germany wouldn't be impacted by the deficits or would not be speaking about them - the deficits in other countries, particularly the Mediterranean, where German banks have dependencies, are a cause of concern.

D. Linde

What? I just read yesterday that Germany now is saddled with a $57 billion shortfall in their economy. No one gets out alive in this trash heap economy. We're being led down a path of no return unless businesses are left to their own devices to succeed or fail without bailouts. All businesses.

Fritz Mills

Where does the "abundance of cheap labor" come from? I always thought that German labor was expensive, which is why they tend to produce produce high-end things, like expensive cars. Also, I thought their labor unions were stronger than in the US, and they have better benefits (health, vacation, freedom from layoffs, etc).


Good point about human capitol. My guess is that the benefits of that are essentially unmeasurable. I wonder how much productivity is lost training new workers during a period of expansion after a series of layoffs.


In my opinion, there are 3 main factors for the German and other northern European nation's success like Sweden, Danmark in the export industry (e.g. Sweden, Denmark, The Netherlands, Austria and the baltic states)

1. The tradition of training in handicraft: We share a common tradition of over 600years years of 3 years apprenticeship for each handicraft position. With the exception of England, the young apprentices, who had to travel from workshop to workshop to get a degree and the approval to open a own workshop. The "Meister"-(master) training to get the license to train others, even takes much longer. Only few still do the travelling, but the 3 years training is still a basic requirement.

2. Most SME's and even many big MNC's don't focus on short time profits on the stock-market . They look for long-time profitability and the shareholders appreciate that, too.

3. International behavor: There are only three nation, who did not adopt the metric system for industrialized products, yet: Liberia, Myanmar and the USA. Despite, that the foot, inch & pound system is very inconvenient for any engineer; it becomes a major disadvantage for most US companies to export their products. Most of them need to me modified..



I have a question...Is the maintenance of human capital by companies in Germany the same concept of "unemployment" here: providing "reserve labor" decreased pay and access to "training"? It almost seems like privatize unemployment benefits...Instead of paying through taxes, it is being paid via higher prices and decreased profits. It is a great concept, but I don't see "our" companies adopting the same plan which can hurt their books, make their sub-par products more expensive, and take money out of the executive pockets, thus just push that responsibility on...and I am not sure how much one is better economically or not.


I see left-wingers crediting Germany's relatively large welfare state for their present success, and right-wingers crediting their 2003 labour market reforms. The same goes for Sweden, which has a large welfare state yet has shifted to the right in recent years. So is their success caused by the government intervention, or the abandoment of government intervention?


"...but the main driver has been the cornering of the globalized supply-and-demand market. "
Is that supposed to mean something? There is a market for supply and demand? WTF???

Mark S.

Germany was not so unhappy about the Euro crisis. It started just as the global economy regained growth last year and the Euro decline countered some of Bernanke's dollar devaluation strategies. The German govt's hesitation on addressing southern tier bailouts was clearly self serving to support the exports of German companies.
Those companies couldn't have taken advantage w/o some key factors though:
There is an "insurance" program called "Hermes" that assists small, mid sized as well as large companies to cover the potential for losses in export markets due to political or other factors. The middle business companies are mostly privately held and represent the core of the German economy. The competitive clusters in Germany are centered around precision machine tools in many key industries such as food processing, printing, automotive etc. Machine tools tend to be laggards into a recession as booked orders are filled but they can be leaders out of a recession when investments in places like China, India and Brazil were only delayed temporarily. So a short recession that hit the financial, consumer and real estate segments very hard had less impact on the German economy.
Most of all: many of the same factors above apply equally to Austria, Switzerland, Northern Italy, Netherlands, Denmark and to some degree to the Flemish part of Belgium. They all have small to mid-sized focused niche businesses with a global reach and they are Germany's main trading partners..


Michael Glass

I think that Claus is right about Germany having an advantage over the United States because it uses the metric system. However, it's no longer the case that Liberia is one of the holdouts against the metric system. Here's a quotation from the official website: "Repaired a number of roads including the Phebe via Sanoyea to Totota road (79 kms), the Saclepea-Bahn-Loguatuo road (79 kms)"

When it comes to holding out against the metric system, The United States is almost alone. That puts the United States at a significant disadvantage in trade, industry and education.


If you listen to experts (or wanna be's), journalists and ordinary readers, you get the impression, that germany did everything right in the last 15 years, since they were called "sick man of europe" by the anglo-saxon press, at a time when germany was facing mass-unemployment, a collapsing retirement, and a chronically deficit creating public healthcare system.
Today we germans praise ourselves and are envied by the rest of the western world for a thriving economy, relatively low unemployment (~7%) and a stunning trade surplus.
Let me give you my impression. I know all the numbers thrown out by so many experts and statisticians. There is no arguing, that germany regained a whole lot of its competitiveness, lowered its unemployment and somehow created a never before known vitality.
However, this was only possible due to extremely painfull cuts, mainly wage-levels, introduction of extremely low paying, so called "temporary employment", reduction of healt-care benefits and so on. There are approximately 4 million employees (10% of the workforce) that are not able to meet theirs expenditures, even though they have a full-time job. These 4 million people receive support by the government. Therefore they are considered substituted cheap labour forces for the industry, that is either unwilling or unable to pay them a decent salary.
Lets be honest. The german economy is competitive, but this did not result in higher wages or better paid jobs, nor saver jobs. In the early '90s, germans were scared off by politicians and managers, that the economy would break down and our livestandard couldnt be maintained unless we would accept major changes (see above). Our unions failed making sure, that this transformation process would be done reasonably.
Today, our livestandard is lower, our government is still creating record high deficits and we have to bail out the rest of europe.
Dear friends, do not be deceived by what the media writes. The reality has to be found by looking at ordinary germans livestandards.



@Fritz Mills: German labor used to be expensive, but wages have grown very little in the last 10 years, to the point that, inflation-adjusted, they have decreased in many sectors. Additionally, there have been labor market reforms that vastly increased the number of temporary workers who have less benefits and lower pay than regular employees. Overall, German labor prices have become much more competitive than they used to be.

@Brian: The "maintenance of human capital" happened through a very successful government programme called "Kurzarbeit", in which employees work fewer hours (potentially none, or only in training), are paid proportionally lower wages, and the government pays them 60% of the wages they lost. This way, the losses are shared between employees, employers and government, and the disruption of the companies' operations and the employees' lives is minimized, improving overall productivity.



I agree with Claus

My (German) company builds advanced automation equipment for the aerospace industry. Sale is worldwide. There is a good amount of training necessary to run our equipment, sleeping with the manual under your pillow will not do.

What always puzzled me in the US is high fluctuation in the workforce.

After putting a machining system into operation and training the personel, i could bet that after a year or so the machinist or service specialist was gone. Replaced by new people with only half the knowledge and half the productivity. So it started all over again with training ..

You may say that is the fault of the company? Mostly wrong. It is the systematical short term viewing at jobs from boths sides, employers and workers.

It all starts with hiring people off the street. Someone who repaired bicycles claimes he is a mechanic and gets a job. He is assigned to one of our advanced systems because he said he could do it.

Then things turn into one of two directions. 1. The mechanic does not live up to the requirements and gets fired. 2. The mechanic really does the job. If he is good, he soon thinks he is not payed enough and applies for a better payed job, mostly within the same company. Either way it is a waste of investment and keeps productivity low.

The fault of the company is the ignorance on professional education, neglecting that education makes workforce interchangeable and plannable. But who can blame the company, who can blame the mechanic.

In America both the CEO of the company and the mechanic have one thing in common: The CEO looks at his incentives after presenting quarterly earnings and the mechanic looks at his next month?s paycheck. Both thinking is short sighted, does not support strategic planning and keeps the US away from the competitive edge.