Economic Powerhouse Germany

As Europe has been struggling through a debt crisis and the world through a recession, Germany has been taking a lot of criticism from its neighbors and friends further afield. Berlin has been too reluctant in coming to the euro’s aid, is too indecisive and tightfisted in spending terms, and is unwilling to reexamine trade imbalances within the eurozone, they say. But even its critics cannot deny that today’s Germany is a huge economic success story, including  having its lowest unemployment rate in 20 years (6.6 percent according to OECD harmonized figures, compared to 9.4 percent in the United States) in the middle of a global economic crisis, as well as being one of the world’s largest exporters with a sizable trade surplus, and the fourth largest economy. Germans also boast an enviable standard of living.

How has Germany accomplished its success? The answer is that its various governments, both right and left, have pursued effective economic policies. This includes specific policies to deal with the economic crisis as well as longer term strategies. Germany’s sound policies have given it a dramatic edge.

A large factor in Germany’s current prowess is that it has continued to emphasize manufacturing and exports over the financial industry. Chancellor Angela Merkel once was asked by then-British prime minister Tony Blair what the secret was of her country’s economic success. She famously replied, “Mr. Blair, we still make things.” In Germany, manufacturing still dominates because German capitalism did not succumb to the rampant financialization that swept the United States and the United Kingdom during the Reagan-Thatcher years that later precipitated the global economic collapse in 2008 (though some of Germany’s banks did get snared in the Wall Street web).

Germany has many Fortune 500 multinational companies that are global leaders in manufacturing in their field, featuring brand names like Volkswagen, Daimler, BMW, Siemens, ThyssenKrupp, and BASF. But what really sets Germany apart is its vibrant mittelstand, those small and medium-size enterprises (SMEs) that form the backbone of the economy.  Some 99 percent of all German companies are SMEs (defined as firms with annual sales below 50 million euro and a payroll of less than 500 workers) and around two-thirds of all German workers are employed in these types of companies. That is about the same as the EU average, but higher than the United Kingdom, where SMEs employ about 60 percent of workers, and the United States, where they employ about half of American workers.

But not all SMEs are created equal; in the United States, workers employed by SMEs tend to have inferior health care benefits, if they have any at all. Apparel manufacturing workers employed by American SMEs are likelier to work in sweatshop like conditions, with Sweatshop Watch reporting that “67 percent of Los Angeles garment factories don’t pay their workers minimum wage or overtime.” Workers in Germany’s SMEs face much better conditions.

Germany’s SME sector is broad and vibrant, and its manufacturing SMEs are world-class. Nearly a third of Germany’s SME workers are employed in the manufacturing sector, but those workers account for a disproportionate share of Germany’s total exports (about 40 percent, compared to 31 percent of US exports from SMEs). A typical enterprise has been run by the same family for generations. Located often in small towns, they thrive on a very German brand of “family capitalism.” The manufacturing SMEs are noted for a high degree of specialization and the ability to dominate niches in the market. Typically they invest heavily in research and development and the creation of their own worldwide networks to deliver outstanding products and services to customers. They combine that with a relentless drive for quality, productivity, and a focus on improving operational performance. These companies are particularly well organized in their shop floor operations with state-of-the-art manufacturing practices.

A typical enterprise will specialize in making a single, high quality product that is crucially needed by other industrial enterprises, and be the best in the world at producing it. Many manufacturing SMEs have become world market leaders in their field, dominating the global market in an astonishing range of areas. Dorma makes doors and all things door-related, Tente specializes in heavy duty casters and wheels for industrial uses. Rational makes ovens for professional kitchens, and Würth is the leading industrial supplier of assembly and fastening materials worldwide. Other examples range from Koenig & Bauer (printing presses) and Utsch (license plates) to Hegra Linear, a leading manufacturer of mechanical motion technology.

Hegra Linear produces a little-known niche product:  linear guiding systems and telescopic slides. These are high tech, low-friction shelves, slides, and drawers needed in a wide range of industrial applications, including factory automation, automotive assembly, airplane production, and more. “Let’s say you have a very large, heavy battery for a metro bus that you need to have easy access to for maintenance,” says company co-owner Lisa Theuer. “You need a way to smoothly slide that battery in and out. We can set that battery on one of our high tech, near frictionless drawers that make it easy to gain access. That’s what we do.” And they must do it well, because the company has grown rapidly in the past year, ramping up their number of employees by 46 percent to 22.

Increasingly, German companies like these are providing China, India, and other emerging economies with the high tech precision tools they need to become the mass production factories of the world. These companies are not high profile, but they have a huge impact. “America concentrates on the mass market and quantity, but Germany is king of niche markets,” says Professor Bernd Venohr of Berlin’s School of Economics.

Germany has fed its manufacturing sector with a steady supply of skilled workers, technicians, and engineers via a first rate system of vocational training and technical apprenticeship. Companies also work closely with regional technical colleges, often sponsoring programs to get the graduates they need quickly. The innovativeness of German businesses proved to be a driving force during the economic recovery, with Germany currently spending around 2.6 percent of its GDP on research and development, well above the EU average of 1.9 percent.  The inventive spirit is also as strong as ever:  in 2009 investors and companies from Germany registered some 11 percent of worldwide patents, third place in the world ranking. And the federal government has used economic stimulus packages to ease the burden on SMEs through a cut in taxes and improved depreciation allowances.

For all these reasons Germany also continues to be one of the leading nations in several promising new technology fields, including biotechnology, medical technology, nanotechnology, computer science, and electrical engineering. The German renewable energy sector (wind energy, photovoltaics, biomass) has been expanding into international markets, with manufacturers of wind energy plants enjoying a world market share of almost 28 percent. The electronics industry and information and communications technology (ICT) continue to be two of the biggest branches of German industry.

All of this has earned the German manufacturing and export sector a sterling reputation around the world.

Punish Them With Economic Democracy

This focus on quality manufacturing and long-term economic performance over short-term gain is reinforced by other aspects of Germany’s economy, including more economic democracy. Workers are given a sizable stake in the health of companies and the economy, a symbiotic relationship that lumps everyone into the same boat and boosts long-term productivity.

For example, institutions with obscure names like codetermination (Mitbestimmung), supervisory boards (Aufsichtsrat), and works councils (Betriebsrat) have been crucial in helping to harness German capitalism’s tremendous wealth-creating capacity so that its prosperity has been broadly shared. Co-determination has several features, one of which allows German workers in large businesses (greater than 2,000 employees) to elect 50 percent of that business’ board of directors, and one-third of the directors in smaller businesses (500 to 2,000 employees). Known as supervisory boards, they then oversee CEOs, who handle day-to-day operations.

Imagine the impact if Wal-Mart or China’s Sinopec were legally required to allow their workers to elect half of their board members. Imagine how much the exploitative behavior of these companies would change. Researchers, like Professor Klas Levinson from the former National Institute for Working Life in Stockholm, have found that worker-elected boards have fostered cooperation between management and workers, reduced labor strife, and increased productivity. This has benefited the businesses as well as workers. One study of Swedish businesses found that two-thirds of executives viewed their worker-elected boards as “very” or “rather” positive, because it contributed to a positive climate, made board decisions “deeply rooted among the employees,” and facilitated implementation of “tough decisions.” Eight of ten chairmen were satisfied with the arrangement, even though workers in Sweden are well compensated with high salaries and the most generous social support systems in the world.

But partially-elected supervisory boards are only required for larger businesses, which employ a third of German workers. That is why the second pillar of Germany’s codetermination, the works councils, is so important: it covers the remaining two-thirds of workers. Works councils are just what the name implies—elected councils at every business through which employees gain significant input into working conditions. Works councils enjoy veto power over certain management decisions as well as codecision and consultation rights. These include the right to meet with management to discuss the firm’s finances, mergers, layoffs, work and holiday schedules, to plan the introduction of new technologies, and to obtain information useful in contract negotiations (such as profit and wage data).

Studies by Princeton University professor Jonas Pontusson and others have found that works councils are associated with lower absenteeism, more worker training, better handling of grievances, and smoother implementation of health and safety standards. Germany’s skilled, hard-working labor force has some of the highest labor productivity in the world. When workers are given a degree of consultation it makes them more satisfied and more productive.

When I interviewed labor leader Witich Rossman from Germany’s largest trade union, IG Metall, he told me, “Because of the works councils, I have no problems getting into a factory. I only have to say I want to visit the works council, and nobody can hinder me. I can go with the works council members through the factories and discuss with the workers.” As a result, says Rossman, “Many workers don’t feel like a trade union is something outside of the company; they feel it as a part of the company.” Compare that with the United States, where union representatives are generally banned from the workplace while management has unlimited access to their employees, using that access to promote anti-union sentiment and even to harass pro-union employees. A nationwide study by the University of Illinois at Chicago found that 30 percent of US employers fire pro-union workers, and 91 percent force employees to attend coercive, anti-union meetings with their supervisors.

Codetermination’s “spirit of consultation” pervades other aspects of company relations. At BMW, just about everyone—from the factory floor to the design studios to the marketing department—is encouraged to speak up about product development and industrial design. New approaches and innovation are valued, creating what Professor Ulrich Steger at the International Institute for Management Development in Lausanne, Switzerland has called a “fine-tuned learning system.” In 2007, at a time when General Motors and Ford were suffering severe setbacks and layoffs, the Bavarian auto maker was setting the benchmark for high-performance premium cars and customized production. BMW has benefited from an almost unparalleled labor harmony and in return offers broad profit sharing among all employees.

Germany’s success has greatly influenced the rest of Europe. Some degree of codetermination has been adopted throughout the European Union, including in most of the new member states from Central and Eastern Europe. Interestingly, the US military can take some credit for codetermination because it encouraged this line of thinking after World War II, as a way of decentralizing economic power away from the German industrialists who had supported the Nazis. In effect, US planners “punished” postwar Germany with economic democracy, helping to birth the most democratic corporate governance structure the world has ever seen.

In effect, Germany has reinvented the modern corporation and fostered a “culture of consultation.” This arrangement has been good for business as well as workers: hourly manufacturing compensation (wages plus benefits) was $48 in Germany and only $32 in the United States in 2008, according to the US Bureau of Labor Statistics.

Smart Reactions to Crisis

That culture of consultation deserves substantial credit for Chancellor Merkel’s government deploying a highly successful policy known as kurzarbeit, or, “short work,” in response to the economic crisis. Instead of laying off millions of workers, many firms trimmed the hours of all employees. Employees working less than full-time had much of their lost wages reimbursed from a special government fund squirreled away during more prosperous times. In essence, instead of the government and employers paying unemployment benefits to laid-off workers, they paid to keep workers at their jobs, at reduced hours. Washington Postcolumnist Harold Meyerson compared it to Joseph’s advice to Pharaoh to set aside resources in the seven fat years to get Egypt through the seven lean ones, an effective countercyclical program. Over a million workers, including nearly 70,000 employees of the automaker Daimler, were placed on short-work status.

It was a brilliant strategy that kept far more money in workers’ pockets, which in turn boosted consumer spending, one of the primary drivers of the economy. For employers, it kept their workforce intact and ready for the economic recovery. And the government paid much less for the missing hours than full unemployment benefits would have cost. Finally, it prevented the utter devastation that occurs to families and communities when the primary breadwinner is laid off, along with the increase in social ills such as home foreclosures that results from the stress of unemployment.

These policies and institutions have helped Germany not only weather the storm but emerge comparatively stronger. Sixty-five years after its destruction in a horrific war, Germany has evolved a social capitalism which has proven to be more stable and efficient than America’s Wall Street capitalism (and also more ecologically sustainable—Germans use half the electricity and emit half the carbon of Americans, per capita). Indeed, Germany has established a new model for global development. While the German economy will continue to have its challenges (what economy today does not?) the remarkable resilience of the German economy is directly attributable to shrewd policies and more efficient institutions that have better stimulated its -economy.

Some are complaining that Germany is trying to remake Europe in its image. Given Germany’s current economic trajectory, that might not be a bad idea. Get ready for a new Pax Germanica.

STEVEN HILL is a political writer whose latest book is Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age.