One hundred and twenty-five years ago last month, Carl Benz filed an application at the Berlin patent office for a vehicle propelled by an internal combustion engine. The world’s first motor car was about to get its birth certificate. Siblings soon followed and one of those, the velociped or “Velo”, has pride of place in the entrance to the Mercedez Benz Museum in Stuttgart.
Without apparent irony, the explanatory note on the Velo concludes that, of the 1,200 units made, most were produced for export. That strategy – exporting – has been a winner for the company ever since and is one of the reasons why the local economy is booming as others have gone bust. With more economic turbulence forecast for 2011 and important regional elections in the offing, both Stuttgart and Mercedes provide valuable clues about where Germany – the most powerful country in Europe – might be going next.
Chic and self-confident, Stuttgart and the surrounding region of Baden-Württemberg – home to Mercedes, Porsche and a host of other hi-tech manufacturers – is a prize example of what is becoming known as the second wirtschaftswunder or economic miracle. German unemployment is at its lowest since reunification and growth last year was around 3.5 per cent. The first wirtschaftswunder happened in the 1950s and ’60s as Germany picked itself up from the devastation of the Second World War. And now, for several reasons, history is repeating itself in the Rhineland.
First, there is the dynamism of German manufacturing industry. The country has a large number of firms known as the Mittelstand – the small and medium-sized manufacturers which drive the country forward. The German government has got behind firms like this. When the recession hit and workers were on short time, the state stepped in with wage bill subsidies to prevent mass lay-offs and the de-skilling of labour. It made social and economic sense. The fabric of the German industrial economy was preserved intact and is now perfectly placed to take advantage of the upswing.
These Mittelstand firms are often small enough to be flexible but large enough to enjoy significant economies of scale, look outward and export across the globe.
Recently, I visited a typical mittelstand company, Ziegler GMBH, which produces hi-spec components for aircraft landing gear. Located in the rolling countryside south of Stuttgart, Ziegler competes in a truly global market. Markus Ziegler, son of the founder, says: “We are a family company, no shareholders, no big loans, no bank interference. We have 70 employees and we all know each other. We can discuss things and react very rapidly to changing market conditions without having to get outside approval. This is really important in helping us to stay ahead of the game.”
The capacity to export is the second factor behind the success. Germany has a long tradition of providing quality engineering and making goods that last. “Price is negotiable, quality isn’t”, as they say at BMW. The emphasis on quality, design and innovation has been appreciated in global markets since those first Mercedes Velos rolled off the production lines. And it is especially important today. Despite the recession in the developed world, many emerging economies have continued to experience dynamic growth, so that while the majority of exports go to other countries within the European Union, German manufacturers have a very strong presence in the emerging economies of Asia and China.
It has helped that the parlous state of other eurozone economies, such as Ireland, Spain and Greece, has been pulling down the value of the single currency on the international exchanges and making the German export-led economy more competitive than ever in global markets.
Some Germans have complained noisily about the cost of the recent eurozone rescue packages, but economy minister Rainer Brüderle rebuked the sceptics. “Those who want the deutschemark back have to understand what that would mean. It would appreciate considerably and drastically worsen our competitiveness.”
In any event, with the euro unlikely to recover strength in the near future, neither Brüdele nor the strategists at BMW need worry too much about price competitiveness in global markets at present.
The final reason why Germany is weathering the economic storm better than most is the round of structural reforms started more than a decade ago. At the end of the 1990s, Germany was called the “sick man of Europe”, with low rates of growth and high rates of unemployment. The Social Democratic (SPD) government of Gerhard Shröeder tackled the problem directly with a controversial programme of economic reform known as Agenda 2010. The age of retirement was raised. Welfare benefits for the old and unemployed were cut in order to reduce the fiscal deficit. With a nod to Bill Clinton’s Democrats and Tony Blair’s Labour Party, the labour market was reformed with an emphasis on “welfare into work” and fiscally-encouraged investment.
None of this was painless. Throughout the 2000s, Germans saw a reduction in their living standards compared to other European countries. Real wages remained static and the size of the welfare state was reduced. A decade of low inflation and low interest rates was used to rebuild the productive base of the economy rather than speculate on house prices (fewer than 50 per cent of Germans own their own homes).
Whatever the long-term benefits for Germany, Agenda 2010 was a short-term disaster for the left. The SPD split and the progenitor of the reforms, Gerhard Shröeder, was kicked out of office at the 2005 general election and replaced by Angela Merkel. Those wounds are only now beginning to heal.
The hurt of Agenda 2010 helps to explain why few Germans are sympathetic to providing economic aid to other EU member states now. Popular sentiment holds that Germany passed through its own pain barrier to avoid a crisis and even paid into the EU structural funds to help others do the same. If other member states failed to use that decade of high growth and falling unemployment to restructure their economies, Germans are in no mood to help them out now.
This sentiment is important, because 2011 is a year of elections in Germany. Seven of the 16 regional governments go to the polls this year. Despite the booming economy, increasing numbers of voters perceive Chancellor Merkel as weak and ineffectual. Neither she nor her governing centre-right Christian Democratic Union are getting the credit for the upswing. Recent elections in Hamburg saw the CDU get its worst results in the city for more than five decades. The leader of a coalition in the lower house, Merkel has already lost her majority in the upper chamber. Further losses around the country could leave her as a lame duck leader for the remainder of her term.
Later this month, Baden-Wurttemberg, epicentre of the wirtschaftswunder and hitherto a bastion of the CDU, goes to the polls. Opinion polls suggest that voters there are preparing to give the Chancellor another drubbing. If that happens, it could precipitate an early general election, plunging Germany – and Europe – into an uncertain future.
