'We Need To Learn from Germany': How the German Economy Became a Model

By Thomas Schulz in New York

It wasn't so long ago that many viewed Germany's economic model as outdated and the country as the "sick man of Europe." These days, however, even the Americans have come to praise parts of it, though they still doubt whether they would be able -- or willing -- to adopt it wholesale.

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The entryway to the neoclassical mansion on New York's Upper East Side betrays not a single indication of its inhabitant's name. A security gate is waiting behind the heavy metal door. Inside, one can see dark wood, marble and valuable paintings. From this base, Steven Rattner manages the private fortune of Michael Bloomberg. New York's mayor has entrusted his billions to Rattner because there are few as adept as him at multiplying money.

Rattner previously served as an economic adviser to President Bill Clinton. Barack Obama had been intending to make him a secretary in his administration, but then he assigned him the job of rescuing the American auto industry during the financial crisis. People in Washington are listening to what Rattner has to say on how things should go forward with the rest of America's stagnating economy. And Rattner is saying: "Germany is a model for the United States."

By now, Rattner has become quite knowledgeable about the issue, as well. He calls the German idea of Kurzarbeit "a model," referring to the "short-time work" program that the German government used during the crisis to avoid layoffs by encouraging companies to reduce workers' hours while making up for some of the workers' lost salaries and benefits itself. Likewise, he says that Germany's system for training skilled workers is a "clear role model for us or any other country" and that its intelligent industrial policies are also worthy of being imitated by Americans.

He also expressly praises the creative approaches of Germany's "Agenda 2010" program, the painful and unpopular reforms to the country's social-welfare system and labor market, and the achievements of Gerhard Schröder, the man who ushered in these reforms as Germany's chancellor between 1998 and 2005. Rattner says Schröder figured out how to steer Germany in the right direction so that a "developed contry could remain competitive even in a world where new economic giants, such as China, India and others, are emerging."

'One of the Wonders of the World'

Rattner isn't the only person who shares this opinion. US newsweekly Time writes that the wide range of German economic and social reforms have been "farsighted" and that German firms, together with those reforms, have forged "the most competitive industrial sector of any advanced economy." The New York Times, meanwhile, says that: "The German economy has been one of the wonders of the world over the last couple of years."

Just a few years back, hardly anyone -- and perhaps Schöder himself less than anybody -- would have expected that his reforms would be lauded in, of all places, the Anglo-Saxon media. Indeed, it was primarily American and British economists and politicians who had written the German economy off as an outdated model in the era of globalization, as too cumbersome and inflexible and weighted down by protections against termination, social equalization and strong unions. In the financial centers of New York and London, Germany was labeled the "sick man of Europe."

And now? As America groans under the aftereffects of the financial crisis and recession, Germany's economy continues to steam ahead, even becoming an object of study. "Americans, including policymakers, are increasingly taking an interest in Germany's reforms and what it managed to accomplish in the last 10 years," says Michael Spence, an American economist and the 2001 winner of the Nobel Prize in economics.

"We need to be more like Germany" concurs GE CEO Jeffrey Immelt. And former President Clinton has praised Germany for what he described as a correct response to the crisis. More than anything, Germany is considered a role model for its successes as an exporting nation. While Germany enjoys a foreign trade surplus of €120 billion ($158 billion), America has a trade deficit of €423 billion.

This imbalance troubled Americans very little in the years preceeding the financial crisis. Nor were they bothered by the declining importance of their manufacturing base. The Americans considered machine building, chemicals and heavy industries -- all of which have been traditional German strengths -- to be yesterday's economic fields and ones that, for at least the foreseeable future, were better left to the emerging powers in Asia.

US Loses 200,000 Industrial Jobs a Year

Since the early 1980s, America has lost an average of over 200,000 jobs each year in the manufacturing industries and, today, only a little less than 9 percent of working Americans are employed in factories. Manufacturing as a share of gross domestic product has fallen to around some 12 percent, whereas the same figure for Germany is 26 percent. Instead, it has been the service sector and, especially, the financial industry that has been gaining in power and importance. Indeed, at times, the financial sector has accounted for over 40 percent of all US business earnings. But all of that has significantly changed since the Lehman Brothers collapse in 2008.

In an interview with SPIEGEL published two years ago, Paul Volcker, who was President Obama's chief economic adviser at the time, already said that the crisis had given the United States "a wake-up call" about re-establishing its competitiveness and boosting exports. "I wish we had fewer financial engineers and more mechanical engineers," he said at the time, adding: "Tell me the secret of how the Germans keep this going."

Jennifer Granholm is the former governor of the state of Michigan, which, as the center of the country's automotive industry, has suffered immensely from the rapid decline of industrial production in the United States. In a June 2011 interview with the Daily Beast, she touched upon the same issue. "Germany is the perfect example," she said. "How did they crack the code to get manufacturing to stay?

In their search for the causes behind Germany's success, the Americans relatively quickly stumbled upon its Mittelstand, the small and mid-sized firms making up the lion's share of Germany's manufacturing base and that function differently than their American counterparts, which are often listed on stock exchanges. These are companies that "are family owned, they have a very longterm horizon, they don't have to worry about the next quarter's profits, they have stable ownership" and they have competitive advantages as a result, says Rattner, who first became familiar with the structure of Germany's economy after investing in the private television broadcaster ProSiebenSat.1. "These companies focus on producing sophisticated goods that emerging markets can't easily replicate."

In the meantime, Obama has set a target of doubling US exports by 2015, arguing that "Made in the USA" needs to become a major player again, and more industrial production has to be brought back to the country.

Is the German Economy Truly a Suitable Model?

Despite such enthusiasm, there are still the questions about whether the German economy is really suitable as a model and whether its successes are at all possible to replicate elsewhere. Indeed, one might also ask whether some critics are correct in their assessment that Germany's current economic miracle is in large part based upon the fortunate fact that it is producing precisely the kinds of products that the emerging Asia economies would especially like to have. These critics argue that there isn't just a master plan behind the German model, but also a good deal of chance.

Economist and globalization expert Spence, who teaches at New York University, believes there is a lot that can be learned from Germany's example. He suspects that the world's economic evolution will force industrialized nations to regularly "restructure and re-orientate their economy through major policy changes." Likewise, he believes that Germany has already been rather successful at doing so with its labor-market and social reforms and adoption the appropriate industrial policies. He also predicts that "America is going to have to go through a similar process."

One particular focus of this debate is on Germany's system of technical training. In terms of technical and scientific training and the esteem given to engineers and technical professions, Rattner says, Germany should serve as a "model" for the US.

The United States has no equivalent to the German training system or comparable programs for retraining or continuing education. As a result, despite high unemployment figures, there is still a lack of workers qualified to fill positions in the manufacturing industry. Anglo-Saxon shareholders view the German tendency to secure jobs in times of doubt as a competitive disadvantage. For this reason, an economic decline in the United States leads to a swifter and more drastic slashing of jobs, aimed at guaranteeing short-term profits, than it does in Germany. However, the prevailing "hire-and-fire" mentality also discourages companies from investing in the basic and advanced education of their employees.

Obama now intends to change this state of affairs -- with government financial support, as well. During the State of the Union speech he delivered on Jan. 24, Obama dealt at length with how a new gas turbine factory in North Carolina served as a model example of how to give more Americans the "skills that will lead directly to a job." The company "formed a partnership with Central Piedmont Community College … (and) helped the college design courses in laser and robotics training." The program also received government support. The company behind the gas turbine and the unique partnership was Siemens, the German engineering giant. The company had hired some 30 recruiters to find the workers needed for its long-running expansion in the US -- but it wasn't an easy task. "There's a mismatch between the jobs that are available and the people that we see out there," Eric Spiegel, the chief executive for Siemens in the US, told the Financial Times in June 2011. "There is a shortage (of workers with the right skills)."

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