Lessons from the German engine room

Original

business and industry, economy, Europe, globalisation

Author(s):  Will Straw
Published date:  08 Sep 2011
Source:  IPPR

What lessons can the UK learn from Germany's relative economic strength during the downturn? As part of IPPR's Future of Globalisation project, Peter Mandelson is leading a delegation to Berlin to meet politicians, policymakers, academics, and business leaders.

A decade ago, the Economist described Germany as the “sick man of Europe”. But as politicians of all stripes here in Berlin are fond of explaining, the country’s economic model has withstood the test of the financial crisis rather better than Britain.

Virtually alone in the developed world, both Germany’s employment and GDP have rebounded to pre-crash levels. In the UK strong employment performance has been accompanied by GDP that is still 4 per cent below peak while in the US, stronger growth has failed significantly to reduce unemployment.

How has Germany pulled this off? One of the SPD’s leading candidates for the Chancellorship in 2013, Peer Steinbruck, told us that there are five factors. First, the country maintains a significant manufacturing base which makes up a quarter of all output compared to 12 per cent in the UK. “You should have kept your industrial structure”, another senior social democrat politician told us.

Second, the country’s growth and exports are heavily reliant on small and medium sized businesses. Many of these are family-owned rather than publicly listed, thus allowing them to take long-term decisions rather than being expected to produce short-term rewards. Germany contributes 9 per cent of world exports through output from half a million businesses. By contrast, France produces 4 per cent of world exports with 200,000 firms.

Third, the mixed banking structure of private, savings and cooperative banks have weathered the storm better than other countries’ less diverse banking structures. In addition state investment banks, like KfW, have helped the country make long-term investments in strategically important sectors.

Fourth, research and development has been a national priority while greater emphasis has been placed on science and engineering as important professional qualifications. As a result, CEOs of many leading companies come from a science rather than humanities background.

Fifth, Germany has kept wage costs down for the best part of 20 years. This has helped contribute to full employment in many regions but has had a negative effect of making domestic demand weak. This is now a major concern for many left-of-centre politicians. As in the US and UK, raising middle class wages to strengthen domestic consumption is seen as an important priority for those on the left. Introducing a minimum wage in some sectors is seen as a key means of driving this.

A sixth implicit factor in Germany’s success has been the competitive advantage gained by the undervalued level with which the country joined the euro. This has allowed Germany to run a huge trade surplus with its Eurozone neighbours. This – more than any other factor – is focusing minds in Germany towards saving the euro. The creation of Eurobonds, along the lines suggested by a prominent academic, Jakob Von Weizsacker, are being increasingly discussed in social democratic circles although Merkel, at present, rules them out.

What can Britain learn from Germany? Certainly we need to continue our focus on science as a base of national competitiveness and excellence. Emulating aspects of Germany’s approach to lifelong learning and technical skills is also critical. And while doubling our manufacturing base is unrealistic, there is certainly a need for greater pump priming of industries where Britain has actual or potential comparative advantages such as offshore wind and hydropower. Some form of state-led investment looks increasingly important.

But Britain also has some advantages that are perhaps less apparent in the immediate aftermath of the Great Recession. First our demography is better placed to support our economy than Germany’s, which is ageing faster and declining in size. By some projection, Britain is expected to overtake Germany in terms of population by 2030. Our reliance on services may also become a strength as China and India move up the value chain and come to rely more on business and financial services and less on machine tools. Finally, with the right investment, our Higher Education sector can continue to be world leading and a significant source of soft power as graduates from Oxbridge and the LSE go back to run businesses or government in their countries of origin.

The hubris that accompanied Britain’s criticism of Germany last decade is something that both countries should be wary of emulating in the future.

 
 

Our people

Will Straw, Associate Director for Climate Change, Energy and Transport