The German Economic Model

How is Germany doing it? How is there economy booming while the U.S. and other European Union economies remain stagnant during this recession? That is the question, but the answer is not that simple. Germany’s unemployment rate is decreasing and in 2010 was at 6.9%, much lower than the U.S. (9.6%) and other European countries whose unemployment figures are approaching 20%. Germany has also increased its exports by 22% over the past decade whereas, U.S. exports have remained flat and other European Union countries have seen exports drop by as much as 20% when compared to their national gross domestic product (GDP). In fact, German exports are growing at a rate faster than even China (15%)! These achievements were not a particularly easy task since Germany is tied to the same monetary unit – the Euro – as other flailing nations in the European Union. But there is no question a devalued euro has helped the German export machine.

While the U.S. and other European nations got caught up in extravagant short sighted spending (borrowing) over the past decade, the Germans were frugal and strategic. The Germans implemented many of the cost savings measures that the U.S. and other European countries are trying to accomplish now. For instance, the Germans raised their retirement age to save their retirement pension systems in 2007. When this occurred the German people did not protest, they understood it was necessary. Today, as France, Great Britain, Ireland, Greece, and the U.S. try to make changes in federal and union retirement systems, the people are protesting. The difference is that the German people and its work force understand it is more important to have a job that pays a little less than to not have a job at all. This is practical long term thinking as opposed to the short sightedness of U.S. union workers.

First, to improve exports and unemployment it is essential to keep manufacturing within national borders. To do so Germany changed its labor laws so companies can provide their best performing workers higher pay and fire those workers that are unproductive. In fact, middle class working Germans have seen an overall decrease in wages over the past decade. Instead of bargaining for higher wages, German workers are bargaining for job security. They are taking less pay for the guarantee they will have a job over the next decade (assuming they perform up to standards). This is a much different kind of thinking than the greedy short sightedness going on in the U.S. – were workers expect higher wages, benefits, and job security regardless of how well they perform. Still, German manufacturing costs are much higher than those in China. So it begs to question how are German companies successful at exporting more expensive products?

I worked for a global company that had an engineering facility in Germany. I was fortunate to have the experience to work with many German engineers and I can say with 100 percent certainty – the overall quality of the German engineer was better than the American engineer. After all, what is our perception if we see a product that is marked with “made in Germany”, “made in Italy”, “made in the U.S.”, or “made in China”? The perception is that the German made product is better – higher quality – which explains its higher costs. When a person splurges for a BMW, they know they are getting a high quality automobile that is safe. When a person buys a Ford – we are reminded that Ford stands for “Fix or Repair Daily”. It is all about perception and that perception is gained by making safe and high quality products. If U.S. companies can make similar changes: reward job performance, eliminate poor performers, and reward job security (not pay and benefits) they too can save manufacturing jobs while also increasing the quality and safety of their products. This is not rocket science. Some may claim this is class warfare but nothing increases poverty and welfare spending than high unemployment.

The bottom line is that Germany is redefining union powers and moving towards less socialistic policies such as lower corporate tax rates so industry can thrive. Sure, German corporations can move manufacturing overseas and make more profit, but they understand German workers are making huge sacrifices and they are rewarding that loyalty. All of Europe and the U.S. can learn from the unselfish German economic model where everyone is making sacrifices for the greater good.