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Germany's Economic Resilience

The Ants Battle Back


The Ants Battle Back


In Aesop's Fables, the hardworking ant has plenty of stores for the winter. With its legendary diligence, Germany has staged comebacks following many downturns in the past. What are the secrets to its resilience?



The Ants Battle Back

By Monique Hou
From CommonWealth Magazine (vol. 482 )

While emerging nations are vibrant and boisterous, old Europe, steeped in tradition and history, remains lethargic and depressed. There is a widely held notion that Europeans are not keen to work for a living and prefer to rely on social welfare. The continent's industry is past its prime or on the decline like a worn-out machine with loose parts. Its general outlook is bleak.

But Germany is very different. After a decade-long restructuring process, the country in the heart of Europe stands out among its neighbors.

During the 2008-2009 financial tsunami, Germany was as hard hit as everyone else. But after the storm came with violent force and departed quickly, leaving a sea of destruction in its wake, Germany showed the whole world what it means to pull oneself to one's feet and leap forward again.

Germany's secret lies in two magic numbers: Its GDP and unemployment rate for 2009.

In 2009 global trade contracted 12 percent. As an export-dependent economy, Germany was hard hit when the order books remained empty. "The turnover of many companies declined by 50 percent," recalls Bernd Venohr, professor at the Berlin School of Economics and Law and author of the academic paper "The German Miracle Keeps Running."

That year, Germany's GDP shrank by 4.7 percent. In many European countries unemployment soared to double-digit rates. In Germany, however, unemployment rose only 0.19 percentage points to 7.85 percent. Just how did Germany pull it off?

Flexible Work Hours, Wage Subsidies

Flexible work hours: German Chancellor Angela Merkel promoted various "flexible work" measures with the common aim of protecting workers' social security and welfare.

Proven most efficient has been the "flexible work schedule account system." Under such schemes, work hours are saved in an account. In times of high demand workers accumulate time in their accounts, and then when demand for labor is low, they work less, using up saved time. For the employer the advantage is that he does not have to pay for overtime during boom times, whereas workers continue to receive full salaries, social security and other benefits when they work reduced hours. The time that workers owe the company is made up during high demand periods.

Wage subsidies: In order to enable companies to retain their workers, the government subsidizes wages that have been reduced due to shorter working hours, with up to 60 percent of the monthly wage. Workers' social security payments, which are automatically deducted from the monthly wages by the employer, are also subsidized up to 100 percent.

As Walter Ganz, director of Fraunhofer Institute for Industrial Engineering (IAO) in Stuttgart, points out, in contrast to their competitors in the United States and other countries, German companies were therefore not forced to cut their workforce. So when demand picked up, the German companies were able to immediately boost production without having to spend money on recruitment or skills development.

"Our competitors had a problem, because they didn't have the personnel. Recruitment takes time, particularly to get the competencies… This was really an essential difference in our labor policy," Ganz explains.

As a result German workers retained their jobs, while companies retained skilled, experienced employees and continued to invest in R&D.

Venohr believes that a well prepared workforce gave Germany a competitive edge. "The crisis wasn't that long. A couple of economies, Asia, recovered very fast. The German companies were ready," he points out. "It's an amazing story. It's really interesting." 

In 2010 the world economy bounced back. Germany posted a trade surplus of US$203.3 billion, becoming the world's largest trading nation ahead of China with its US$183.5 billion trade surplus. Germany has a population of just 80 million people, compared to China's 1.3 billion, which translates into a per capita trade surplus 18 times higher than China's.

Ten-Years of Restructuring for a More Flexible Labor Market

Merkel had room for these labor policies thanks to a ten-year-long restructuring carried out by the government of her Social Democratic predecessor Gerhard Schroeder.

Globalization spread like a wildfire just after West and East Germany reunited in 1990. As low-cost emerging economies snatched away orders, exports from Germany and other industrialized nations dwindled. Germany's economic growth ground to a halt, also because of the country's overly rigid labor system. As more companies relocated abroad to cut costs, the country's unemployment rate remained stubbornly high.

Back then Germany was ridiculed as the "sick man of Europe." General Electric CEO Jack Welch once even put it more drastically: "Quit (Germany) or die."

In this crucial hour the German government chose to make the employment system more flexible again.

Schroeder turned to Peter Hartz, then the human resources executive at German automaker Volkswagen AG. He appointed Hartz head of the Commission for Modern Services in the Labor Market with the mission to carry out drastic structural reforms of the rigid employment and unwieldy social welfare systems. Yet he had to pay a considerable political price for his courage to reform.

The series of reforms recommended by the Commission caused heated public debate for five years and triggered worker strikes in many industry sectors. Some 100,000 members of Schroeder's Social Democratic Party (SPD) left the party in protest. But from 2003, the different stages of the reform package, "Hartz I" through "Hartz IV" were gradually put on track.

Simply speaking, the so-called Hartz concept gradually reduced unemployment benefits for the long-term jobless to social welfare level. But it also created new types of employment, providing more options for companies that were willing to hire and unemployed workers who were willing to take on a new job or set up their own business.

"Putting it simply, we don't feed lazy ones," says Ganz.

"There were intensive debates, and I didn't agree with the Hartz (concept) either at that time," he recalls. When out of the blue the financial crisis hit in 2008, it proved just how necessary the reforms had been and that they saved the German economy from going under.

The unemployment rate steadily declined from 11 percent to 7 percent. The number of unemployed came down from more than 5 million to the pre-crisis level of 3 million. The number of long-term unemployed even declined by 40 percent.

But for the sake of a more flexible labor market, the Germans also paid a considerable price.

The Price the Germans Have Paid

Over the past decade Germany's price competitiveness has been 20 percent higher than the 20 top industrialized nations worldwide, because average wages declined along with the living standards of the vast majority. A fair distribution of wealth and income became Germany's new challenge.

But despite languishing as the sick man of Europe in the wake of reunification, Germany subsequently managed to reclaim its international top spot in many fields. Germany has passed the unification test.

"Another country would have probably collapsed under the burden of poor brother East Germany," posits Lee Hsien-feng, associate professor at the Department of Economics of National Taiwan University. Lee, who earned his doctorate at Bielefeld University in Germany, is an expert on the European economy.

Why was Germany able to shoulder the cost of unification?

At the just-concluded IAA Frankfurt Motor Show, a Munich Technical University (TUM) team proudly displayed an all-electric concept vehicle with a powerful engine that weighs only 1,100 pounds. But then they were shocked to find that a futuristic car from California outdid their prototype. Humiliated, the TUM team vowed to put to shame the Californian challengers. "When a German engineer gets angry, watch out," The Economist magazine quoted TUM team member Markus Lienkamp as saying.

Germany counts among the world leaders in chemistry, optics, precision machinery, and car manufacturing.

Teutonic Discipline

Much of the German national character is rooted in the Teutonic Order, a medieval military order.

During the Eastern Crusades, the Teutonic Order which had its strongholds in the northern part of the kingdom of Germany stood out for its military loyalty and strict discipline. Subsequently, the Teutonic knights conquered Prussia, and Prussia went on to found a unified Germany. The spirit of the Teutonic knights is reflected in the Prussian virtues that the German Empire upheld.

German discipline also becomes apparent in punctuality.

Germany is generally known as the country where punctuality rules. Arriving on time is a must for both business and social appointments. Electronic displays at bus or tram stops show departure times to the exact minute. Even when transferring between four different means of public transport, passengers usually won't suffer delays. Journalists can be sure to find interviewees all ready at the appointed time.

But the disciplined, punctual Germans are not so good at enjoying the lighter side of life. Around noon this reporter fancied the idea of finding a nice place for a delicious little lunch. But all the people in the streets seemed to have a quick sandwich and coffee eaten on the run. The same scenario repeated itself day after day, meal after meal. Anyone who is out to spot the latest fashion in the German street is also likely to be disappointed. Fashionistas, either male or female, are a rarity. The average German dresses in dull white, grey or black, shoulders a daypack and wears flat shoes designed more for comfort than style.

Emmanuel Fritzen is the headmaster of the German section of the Taipei European School. As a leading anti-nuclear activist and a founding member of the Green Party, Fritzen's mother was very busy. But "ever since I was a child, our home was spotless and orderly. Such habits are handed down from generation to generation," Fritzen explains in fluent Mandarin. These traditional values are also instilled in coming generations through the German education system.

Two German Features that China Finds Hard to Emulate

After Iron Chancellor Otto von Bismarck created a unified German Empire, he favored technical education, which eventually evolved into Germany's unique dual vocational education and training system. Under the system, trainees receive on-the-job training in a company while also attending vocational school on a part-time basis.

Thanks to this system, generations of skilled workers have been trained, providing an inexhaustible talent pool for skill-hungry German businesses.

Wan Gang, China's minister of science and technology, spent 15 years in Germany earning his doctorate and working for German carmaker Audi. Wan once said Germany boasts two things that the Chinese won't likely be able to emulate even in two generations. First, its vocational education, and second, its solid technical foundation.

Thanks to technically oriented training, R&D at German companies usually puts a heavy emphasis on practical application. Government funding also aims to nurture small and medium-sized enterprises that are highly specialized within a narrow field.

Europe's largest application-oriented research organization, Fraunhofer-Gesellschaft, comprises 60 institutes across the country, whose research and inventions have made Germany number 1 in many fields.

Ganz stresses that the mission of Fraunhofer is applied research. " 'Applied' means collaboration funds. Fifty percent the companies have to pay – this is the benchmark," he notes. When a Fraunhofer project gets the green light, the government subsidizes the other half of its costs.

Thanks to close collaboration among industry, government, academia and research institutions, the German B2B industrial development model has held a globally leading position for many years.

Two decades of globalization have moved the world's growth center to the emerging markets. Germany has benefited a lot from this trend, since many infrastructure projects in these countries such as roads, airports, harbors and factories are built with German equipment.

"If we say China is the world's factory, then Germany is the one who built the factory. Germany is the top supplier of the whole world supply chain," notes Venohr, summing up Germany's presently unshakable position at the top.

Translated from the Chinese by Susanne Ganz