Amplify’d from www.economist.com

Angela in Wunderland

What Germany’s got right, and what it hasn’t

THE West has rightly marvelled at China’s economic miracle. Less noticed is a minor miracle in its own midst. It is time to pay attention to Germany’s new Wirtschaftswunder.

Germans entered 2011 in their most optimistic mood since 2000, according to Allensbach’s polls. Business confidence is at its highest since the Ifo institute began tracking it 20 years ago.

Germans entered 2011 in their most optimistic mood since 2000, according to Allensbach’s polls. Business confidence is at its highest since the Ifo institute began tracking it 20 years ago.

the country did not experience a property or credit bubble, and that it has kept its public finances admirably under control.

Germany’s success has been export-driven: unlike most other big rich economies it has maintained its share of world exports over the past decade, even as China has risen.

Germany has a cheaper-labour hinterland right on its doorstep in central Europe that has helped companies raise efficiency and hold down pay. Meanwhile, German firms happen to produce exactly the things that a booming China wants, from luxury cars to the machinery that enables Chinese factories to be the workshops of the world. So Germany has been a big winner on both the supply side and the demand side of globalisation. The euro also provided a bonanza, thanks to (unsustainable) demand in places like Spain and Greece.

German companies have excelled at seeking out unglamorous but profitable niches, and then focusing relentlessly on being the best.

Under Gerhard Schröder, a Social Democrat who was Angela Merkel’s predecessor as chancellor, the so-called Hartz reforms made labour markets more flexible and made work a bit more attractive compared with living on unemployment benefits.

German businesses also took a gamble during the downturn. With the help of government subsidies they held on to their workers, betting that order books would quickly fill up again. They did, so German companies retained the skills and the manpower to respond quickly to the upturn.

Yet the German model remains flawed in two important ways.

it is too dependent on foreign demand, reflected in an excessive current-account surplus of 5% of GDP last year, while consumer spending is feeble (one reason why enthusiasm for the government is low too, see article).

If every European country followed that example it would be a recipe for a slump. Instead, like China, Germany needs to rebalance its growth, with greater efforts to boost demand at home. More spending in Germany would also help struggling economies elsewhere in Europe. The second blot on Germany’s copybook is its poor record in improving productivity. In contrast to Germany’s industrial prowess, its bigger services sector remains overprotected and inefficient. More competition and less red tape would help.

Without a rise in domestic spending and progress in productivity, Germany’s success will falter. It is encouraging that consumer spending has started to play a bigger role of late. Productivity-enhancing reforms of services should be next. Half a German miracle is not enough. Read more at www.economist.com

 

See this Amp at http://amplify.com/u/aoxqg