The German miracle?
What the US economy could learn from abroad
IN THE LAST six months, Germany has surpassed the United States to become the world's leading exporter of goods. Yet to listen to mainstream economic commentary in this country, Germany is the quintessential economic basket case. It is Old Europe at its worst, it is said, mired in excessive regulation, pampered trade unions, high taxes, and an unsustainably expensive welfare system. With one in 12 Germans unemployed and three straight years of low growth, critics point out, no wonder the country has to look abroad for business via exports.
But you don't get to be the world's leading exporter if your economy is a basket case. Indeed, there are signs that Germany's rising export numbers may signal an economic revival at home. Business confidence has risen for five successive months and growth in 2004 is forecast to rise to over 2 percent, with further increases expected. It's time to reassess the German model.
First of all, contrary to the assertions of free-market advocates, Germany does not have half a foot in socialism. It is unambiguously capitalist -- even if its capitalism is very different in kind from America's. Germans on both the left and right stress they have built a system that tries to combine the dynamism of markets with social justice and opportunity -- a system they call the social market economy.
American capitalism may have its virtues, they argue, but at heart it is a short-term financial-engineering system rather than a long-term business-building one. While American business enjoys unparalleled freedom, American society pays a heavy price in rising inequality, declining social mobility, and mounting anxiety over health care and retirement security.
In sector after sector, corporate Germany has a robustness, and a commitment to new technology, that is at least the match of America's. Chrysler discovered after its takeover by Daimler-Benz just how backward its technology and production processes were. Volkswagen is a decade ahead of the ailing Ford in its core production platform. In chemicals, machine tools, and power engineering, Germany is significantly more advanced than the United States. Leaving aside the former Communist regions, Germany has higher rates of productivity -- that is, output for every person-hour worked -- than the United States.
To Anglo-American eyes, the German system of "codetermination" -- managers and unions are obliged to talk to each other about business strategy -- concedes too much to trade unions. But German managers see it as a vital way of engaging their work forces. As a growing number of American CEOs are beginning to recognize, you can't build great businesses by ignoring everything but "shareholder value." As America's foreign debt approaches $3 trillion and the dollar replaces the euro as an endemically weak currency, the United States has much to learn from abroad.
Where Germany has gone wrong is not in the organization of its companies and financial system, but in the organization of its welfare state and labor markets. And that mistake has been compounded by two disastrous policy decisions.
First, in 1990, the government allowed East Germans to exchange their ostmark for the West German deutschemark in a one-to-one swap, despite the East's woeful productivity. Second, when the euro was launched in 1999, a reunified Germany adopted it at a rate that made exports -- the great driver of its economy -- uncompetitive for years. As growth stagnated and the budget deficit exploded, Germany has had to come to terms with the painful fact that its welfare state is too expensive and its unemployed are too featherbedded.
Chancellor Gerhard Schroeder, leader of the Social Democratic Party (SPD), traditionally the custodian of the expensive "social" part of the social market economy, has bitten the bullet and spearheaded an ambitious set of reforms known as Agenda 2010.
These reforms will halve the time the unemployed can collect unconditional benefits and mandate that they look harder for work or accept retraining. Pensions are to be frozen for two years, and patients using Germany's free health-care system will be asked to pay directly for part -- a small but very symbolic part -- of their care. While they preserve the social market economy, Schroeder's reforms are more far-reaching than anything attempted in Britain by his ideological soulmate Tony Blair.
Agenda 2010 has created massive dissent in the SPD, leading to the resignation of deputy leader Rudolph Scharping as well as plummeting membership and poll numbers. But there is no alternative. Last weekend at the party's special conference at Bochum, in the heart of industrial Germany, Schroeder stuck to his guns. If the right-of-center Christian Democrats return to power in 2006, he told doubters, the reform program will only intensify. Kurt Biedenkopf, former Christian Democratic governor of the state of Saxony and tapped to be the next German president, says protesters have to prove their case rather than assume that every aspect of Germany's social model is untouchable.
While American conservatives tout the eternal verities of the US business model, most Germans know they enjoy a deal that many Americans can only dream of. In Germany, 99 percent of those who finish secondary school go on to attend college or receive vocational training. (In the United States, while college attendance rates are high, only 69 percent do so.) With free university education, family income is no bar to higher education. Germans enjoy higher levels of social mobility across the income scale. Life expectancy is longer than in America, and health care is universal. Public transportation and the rest of the infrastructure are extraordinary.
If Germany can solve its serious unemployment problem, America will face an even tougher economic competitor -- and a strong challenger to its own social model. For here would be a country that has successfully absorbed an impoverished country (in relative terms, Germany reunification was rather like the United States taking over Mexico), while driving the process of European integration, establishing itself as the world's leading exporter, and reining in unsustainable social welfare costs while preserving important benefits.
American business executives and political leaders should be paying close attention to Germany's larger example -- not only to its exports.
Will Hutton is a bestselling author living in London. His most recent book is "A Declaration of Interdependence" (W.W. Norton), an analysis of the relationship between Europe and America.
