The 2008 financial crisis left many industrialised nations reeling. Yet, one country continued to chug along. Its economic wheels, though moving slower than earlier, were still better than its neighbours. Then came the 2012 Euro crisis when this country single-handedly saved the Union from collapse.
Germany has long been the envy of many. Though not as boisterous as the US when it comes to showing its might, it has been steady in its own right, to say the least. What is the secret of its resilience?
According to a study prepared for the Directorate General of the Treasury, Germany, the unemployment rate hardly budged during the 2008-09 financial crisis. It stood at 7.3% in 2008 and was 7.5% in 2009.
This is in sharp contrast with what happened in other large countries of the Euro Zone. In Spain, the figure hovered around 18%. In France, it increased from 7.8% in 2008 to 9.4% in 2009.
Barbara Boettcher, head of European Policy Research, Deutsche Bank says, “The German economy has long benefitted from its competitive corporate sector that has a strong global presence. Also, the private sector in the country has low indebtedness, which in turn fuels private consumption.”
This, coupled with strong Mittlestand companies (family-owned small and medium-size enterprises), makes Germany stand out in the crowd. It is not only the industrial powerhouse of Europe, but a big manufacturing hub of the world.
Satyajit Das, a former banker and author of Extreme Money and Traders, Guns & Money, says, “Germany’s success is based on an economy heavily rooted in manufacturing. The country also has some amazing labour reforms (explained in detail later). The labour unions and the industry generally share a cordial relationship.”
To be fair, SMEs are important everywhere. Where Germany differs is in the importance given to innovation, pro-active approach in global markets and very specialised medium-size big family-owned companies.
Andreas Woergoetter, senior economist, Organisation for Economic Co-operation and Development (OECD), France, says, “Employees have long tenures and career opportunities at all levels. Regional ties are deep and cooperation with vocational education is intensive. The combination of stable employment and rising income prospects is providing strong incentives to mobilise synergies at the workplace and participate in productivity increasing innovation.”
Germany is known to produce high quality products, though not necessarily at cheap rates. And that is probably one of the reasons that the country, still after so many years, continues to enjoy its numero uno position in the manufacturing space.
Companies know that price is not always the deciding factor. They know that consumers buying German goods are looking for that little bit extra — something that can’t be found elsewhere. And this is precisely the reason many German SMEs are innovators — they know they have to innovate to survive and retain customers. In fact, many stay away from price-driven volume markets.
The country has a broad and diversified sector of SMEs. They tend to be larger on average than in other European countries and are more export oriented. The latter, in particular, helps the corporate sector leverage growth in dynamic export markets to the German economy as a whole, says Boettcher.
Michael Holz, an expert in international comparative SME research at IFM Bonn, an institute which provides comprehensive statistical information on small and medium-size enterprises in Germany, says companies often adopt the strategy of niche leadership. “They compete through superior value and not lower prices. They produce highly specialised and high-quality products for markets worldwide,” says Holz.
As a result, most enjoy a competitive edge which is not easy to challenge.
In 2013, approximately, 3.7 million German firms were classified as small and medium-size enterprises, accounting for 99.6% of the total number of enterprises in the country. In an international comparison, its economy is marked by a large number of medium-size enterprises that are international market leaders.
“Germany has been specialising in this (manufacturing) space for years now. It has been close to 50 years now, or even more. The firms here do not shy away from making strong R&D investments. The best part is they constantly try to improve,” says Alexander Kritikos, research director, German Institute for Economic Research, a leading economic institute in the country.
Good labour reforms
Somebody said it right: It is the work that matters, not the number of hours put in. Germany could not agree more. Its inhabitants work fewer hours than most of their counterparts in other countries. Yet, their productivity is one of the best. A data published by Office of National Statistics shows that Greek workers put in longer hours than anyone else in Europe — 42.2 per week, compared to just 35.6 in Germany (see table).
Germany undertook labour market reforms in 2003, which was mainly sparked by the excesses of post-unification wage increases. Thanks to the strong bond between employers and employees, the government could bring down wages a bit.
“Mittelstand companies are aware that their employees are the key success factor for competitiveness, innovation and growth. These companies usually show a high degree of social responsibility towards their staff members and other stakeholders, and have an interest in establishing and maintaining trustful and long-lasting relationships with their employees,” remarks Holz.
Thus, a value-based enterprise culture which fosters identification of employees with the company helps to increase motivation, productivity and creativity. In general, the German economy is marked by a higher degree of cooperation and coordination both within enterprises, between enterprises and their stakeholders as well as between governments, businesses, business associations and trade unions etc.
Sound education system
There is no denying that a major contributor to a successful economy is the human capital. The Germany model stands apart mainly because of the policy it follows in the later years of schooling.
Many students in high secondary schools get into vocational training. “Unlike in other countries, vocational training is not looked down upon in Germany. In fact, sharpening one’s industrial skills is valued highly in Germany. The training given by companies to students is very elaborate and covers every aspect of manufacturing,” points out Kritikos.
In fact, a lot of time is spent on receiving on-the-job training, coupled with theoretical training provided by vocational schools, both according to national standards. Apprenticeship scheme is regarded as being central to the relative competitiveness of the manufacturing sector.
“The German intermediate vocational training system is known for its comprehensive dual apprenticeship training that includes practical training at companies and theoretical training at vocational schools. This develops as a well-qualified work force and is seen as a key driver of economic growth,” says Anwar Shirpurwala, executive director, MAIT, an apex body that represents ICT sector in India.
The federal government funds the intermediate vocational training and employers who train apprentices. Also, employers try to retain the apprentice in their employment to recoup training costs.
Thus, the education system ensures a constant pool of highly skilled workers to meet the needs of the country’s strong manufacturing base.
One striking feature of the German economy is the large number of public support programmes and measures offered by governments and policy makers at various levels. For almost any specific enterprise need, there is a support measure. A data bank on the website of the Federal Ministry of Economic Affairs and Technology provides a comprehensive and up-to-date overview of available EU, federal and land-support programmes.
German immigration policies aim at attracting highly-skilled foreigners from countries outside the European Union to tackle shortages of skilled labour. It recently introduced the EU Blue Card, which allows skilled workers from other countries to live and work in Germany and the EU.
To conclude, a blind replication of the German model is not advisable, as every economy is different, but there are definite lessons to be learnt. For instance, a mindset that more hours in office means more productivity can be changed. Germany has shown that sometimes less can be more. And, it definitely helps to share a great relationship with employees.
No play during work
For Germans, there is only work that needs to be done during work time. Employees in Germany do not log in to Facebook, gossip with co-workers, open Twitter accounts or surf the net during working hours as these are socially unacceptable. In a documentary by BBC titled Make Me A German, a German woman explained that she was shocked to see the casual nature of the working style in Britain.
In fact, employees in Germany do not even check their private email during work hours.
Germany has safeguards to shrug off a financial crisis
Andreas Woergoetter, senior economist, Organisation for Economic Co-operation and Development (OECD), France
Resilience has a lot to do with the ability for error correction. In this respect, Germany went through the pains of adjusting to and correcting the policy failures in the course of reunification, which made it ready for the big international crisis to come. These measures included strengthening the fiscal policy framework and sustainably reducing the size and weight of the public sector. Reforms of wage bargaining and work organisation greatly increased the possibility of internal adjustment. Outsourcing into the near Eastern neighbourhood improved and diversified the production capacity of Germany’s export-focused manufacturing sector and facilitated access to new and rapidly growing markets. Work incentives were restored through the famous “Hartz-Reforms”, which made work pay, improved matching services of the Public Employment Service and allowed new forms of labour contracts.
Furthermore, Germany had not accumulated large internal imbalances, like real estate bubbles with an inflated construction sector or excessive lending to private households. True, during the run-up to the international financial crisis erupting in 2008, Germany achieved large current account surpluses, leading to large international asset positions, which were hit hard by the collapse of some segments of overseas financial markets. But these types of problems are more of a nature which signal missed opportunities than threaten the existence of companies and the well-being of households.
When the crisis hit, the economy was strong. Companies, consumers as well as the government had buffers to adjust. In addition, the need for structural change was small and the flexibility of hours worked, coupled with a rapidly growing non-standard labour market with labour agencies and fixed-term contracts helped strong and competitive firms to survive and maintain the workplaces for their highly qualified employees.
As a consequence Germany did not need to slash public spending and the amount of layoffs was small. Germany absorbed the crisis, rather than making it worse.