Why is Germany doing so well?

There’s been a lot of talk since America’s dismal employment situation summary was released on Friday about why Germany has done so well during the global economic recovery.

Here’s David Leonhardt of the NY Times:

The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government.

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Leonhardt points to a few things aiding recovery: exports, the lack of a housing bubble, and fiscal stabilisers.

Here’s another interesting factoid from that article:

The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country.

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Is this related to German success?

Leonhardt followed this with a few charts in a post at the NYT’s Economix blog.

Despite the longer-term rise in German wages, the past decade has been marked by wage restraint. And that has made German goods more cost competitive in exporting.

My concern is the global growth slowdown. In February, I wrote:

if the European periphery spirals down, it will drag Germany down with it via trade and financial linkages. Germany needs to develop internal demand, especially if it is going to pay for its social programs. Nearly 5 million people in Spain are out of work. Unemployment is low in Germany, which could offer hope for the Spanish jobless. Germany has the lure of high wages and Spanish workers have the benefit of being highly education and skilled. Outmigration from Spain to Germany could be a win-win for both nations and a reinforcement of the advantages of European integration.

Overall, we should credit Germany for building a recovery based not just on exports, but on capital investment and saving. One reason that Germany is a manufacturing and export powerhouse is because it has invested in those businesses. Certainly, wage restraint over the past decade by German labour unions has kept German companies in the mix. But, at heart, the German export story is about investment in human and physical capital. And that is definitely worthy of emulation.

What is the secret to Germany’s economic success?

The video below adds some useful colour (hat tip Jenny).

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11 Comments
  1. Anonymous says

    First, if I was an apparently teenage associate editor of anything and wanted to be taken seriously during a TV interview, I would wear something a bit more professional than a pseudo-adventure shirt and I would tuck the bloody thing in.  He seems intelligent but it looks like he just stepped in from a basement frat party.

    Second, does it really mean anything to compare unemployment rates between countries that I assume use different methodologies to derive those rates?  The American numbers have been bent, folded and manipulated for years.  The Germans are probably gaming their numbers, too.  Is there a comparison that strips out these variables?  The US would probably still come out worse, perhaps even “worser”, but I’d like to compare apples to apples.

    Third, Germany out-sources work to other countries just like the US but I think they do a better job in-sourcing cheap labor through fairly lenient guest worker regulations.  What impact does this have on unemployment numbers?  Did they reduce the number of guest workers in order to free up jobs for German citizens?  Are unemployed guest workers counted in their unemployment figures or just sent packing?

    We could learn a lot from Germany and I hope we do – especially related to career oriented education and their focus on manufacturing.  I just want to make sure we are looking at real facts rather than media-factoids.

    1. Positroll says

      re your 2)
       I think Leonhardt is using OECD numbers, that are standardized. National German numbers have unemployment at 7%, but they count a lot of people that the US don’t. Even the OECD numbers are still painting the US in a too rosy light, though:
      – unemployment payments in Germany continue longer after job loss than in the US; welfare payments even for single men can go on forever. Both require however, that the umeployed registers as such and is available for the job market (unless he is ill or handicapped etc). So Germans without work almost always register as such (the numbers of people with reular [i.e social security payments paid by company]  has been on the rise continually in Germany, in line with the decline of unemployed), whereas Americans can drop out of the labor market numbers completely.
      – Germany has 0,4% of its population in prison. US: 1,4%. Mostly young working age males. That’s another percentage point that doesn’t enter into the OECD numbers but should be included in any fair comparison.

      re your 3) No, guest workers don’t disturb the picture.
      Historically, there are two groups of guest workers:
      – one group is from countries that are now almost all part of the EU (Portugal, Spain, Italy, Croatia).
      They are all at least EU citizens (many of them / their kids are also German now) and can’t be sent “home”. On the contrary, many Spanish are coming to Germany right now and since May1, also nationals of the eastern EU countries are free to emigrate to Germany and work there (e.g. Polish plumbers …)
      – Same is true for the Turks. they are protected under an association treaty with the EU at a level almost as good as the EU one (its very difficult even to get rid of turkish drug dealers if they ever had a legal job in Germany)
      Nowadays, it’s extremely difficult for non-EU nationals to enter Germany for work purposes (unless they got a Ph.D., are cooks of a regional cuisine that is underrepresented in Germany or have similar exceptional skills).

      I didn’t listen through the interview, but I think this piece http://prospect.org/cs/articles?article=germanys_economic_engine gives a pretty good explanation of the German model.

    2. DavidLazarusUK says

      Yes the US figures for unemployment are way out of line with reality. In the US many people are not counted if they have been unemployed so long that they ceased to be counted. In Germany because of the payment of benefits they still are counted. US figures are probably closer to 18% but for many months the fall in US unemployment has been simply being that peoples benefits expired, or adjustments to the births deaths figure. In Germany without an cut off of benefits the government have an incentive to actually get people back to work, as they still cost the government. 

      The savings culture in Germany is deep rooted. The biggest food retailers are the discounters Aldi and Lidl, in the UK they are the bottom rung of the supermarket ladder. They also expect quality because cheap goods can be a false economy. Hence they nearly all drive german built cars. Manufacturers and tradesmen are helped by a tough regime on qualifications and skills. This maintains employee skills. The one thing that the US would never consider is workers on company boards. These are employees who help maintain conditions for workers and can veto board decisions. This creates much more collective agreement and helps keep disputes to a minimal level. 

      The high taxes do mean that there is a high incentive to reinvest rather than pay the tax man, this maintains productivity. The lack of high taxes in the UK is harming us, because it means that business owners drain companies of money because it makes tax sense. 

      German manufacturing has moved up the quality ranks because that is where the margins are. They also have far few competitors. The US has been in a race to the bottom and that has harmed productivity and increased competition. 

  2. Anonymous says

    First, if I was an apparently teenage associate editor of anything and wanted to be taken seriously during a TV interview, I would wear something a bit more professional than a pseudo-adventure shirt and I would tuck the bloody thing in.  He seems intelligent but it looks like he just stepped in from a basement frat party.

    Second, does it really mean anything to compare unemployment rates between countries that I assume use different methodologies to derive those rates?  The American numbers have been bent, folded and manipulated for years.  The Germans are probably gaming their numbers, too.  Is there a comparison that strips out these variables?  The US would probably still come out worse, perhaps even “worser”, but I’d like to compare apples to apples.

    Third, Germany out-sources work to other countries just like the US but I think they do a better job in-sourcing cheap labor through fairly lenient guest worker regulations.  What impact does this have on unemployment numbers?  Did they reduce the number of guest workers in order to free up jobs for German citizens?  Are unemployed guest workers counted in their unemployment figures or just sent packing?

    We could learn a lot from Germany and I hope we do – especially related to career oriented education and their focus on manufacturing.  I just want to make sure we are looking at real facts rather than media-factoids.

    1. Positroll says

      re your 2)
       I think Leonhardt is using OECD numbers, that are standardized. National German numbers have unemployment at 7%, but they count a lot of people that the US don’t. Even the OECD numbers are still painting the US in a too rosy light, though:
      – unemployment payments in Germany continue longer after job loss than in the US; welfare payments even for single men can go on forever. Both require however, that the umeployed registers as such and is available for the job market (unless he is ill or handicapped etc). So Germans without work almost always register as such (the numbers of people with reular [i.e social security payments paid by company]  has been on the rise continually in Germany, in line with the decline of unemployed), whereas Americans can drop out of the labor market numbers completely.
      – Germany has 0,4% of its population in prison. US: 1,4%. Mostly young working age males. That’s another percentage point that doesn’t enter into the OECD numbers but should be included in any fair comparison.

      re your 3) No, guest workers don’t disturb the picture.
      Historically, there are two groups of guest workers:
      – one group is from countries that are now almost all part of the EU (Portugal, Spain, Italy, Croatia).
      They are all at least EU citizens (many of them / their kids are also German now) and can’t be sent “home”. On the contrary, many Spanish are coming to Germany right now and since May1, also nationals of the eastern EU countries are free to emigrate to Germany and work there (e.g. Polish plumbers …)
      – Same is true for the Turks. they are protected under an association treaty with the EU at a level almost as good as the EU one (its very difficult even to get rid of turkish drug dealers if they ever had a legal job in Germany)
      Nowadays, it’s extremely difficult for non-EU nationals to enter Germany for work purposes (unless they got a Ph.D., are cooks of a regional cuisine that is underrepresented in Germany or have similar exceptional skills).

      I didn’t listen through the interview, but I think this piece http://prospect.org/cs/articles?article=germanys_economic_engine gives a pretty good explanation of the German model.

    2. Anonymous says

      Yes the US figures for unemployment are way out of line with reality. In the US many people are not counted if they have been unemployed so long that they ceased to be counted. In Germany because of the payment of benefits they still are counted. US figures are probably closer to 18% but for many months the fall in US unemployment has been simply being that peoples benefits expired, or adjustments to the births deaths figure. In Germany without an cut off of benefits the government have an incentive to actually get people back to work, as they still cost the government. 

      The savings culture in Germany is deep rooted. The biggest food retailers are the discounters Aldi and Lidl, in the UK they are the bottom rung of the supermarket ladder. They also expect quality because cheap goods can be a false economy. Hence they nearly all drive german built cars. Manufacturers and tradesmen are helped by a tough regime on qualifications and skills. This maintains employee skills. The one thing that the US would never consider is workers on company boards. These are employees who help maintain conditions for workers and can veto board decisions. This creates much more collective agreement and helps keep disputes to a minimal level. 

      The high taxes do mean that there is a high incentive to reinvest rather than pay the tax man, this maintains productivity. The lack of high taxes in the UK is harming us, because it means that business owners drain companies of money because it makes tax sense. 

      German manufacturing has moved up the quality ranks because that is where the margins are. They also have far few competitors. The US has been in a race to the bottom and that has harmed productivity and increased competition. 

  3. TradersCrucible says

    I think this is pretty good explanation, but it ignores the real benefit of the crisis to the euro.  The euro down at 1.3000 is a huge benefit to the German export sector.  Even at 1.4500, the euro is dramatically undervalued compared to where a neu-mark would trade.   

    If you look at the breakdown of post crisis-GDP, so much of the growth is driven by exports. 

  4. TradersCrucible says

    I think this is pretty good explanation, but it ignores the real benefit of the crisis to the euro.  The euro down at 1.3000 is a huge benefit to the German export sector.  Even at 1.4500, the euro is dramatically undervalued compared to where a neu-mark would trade.   

    If you look at the breakdown of post crisis-GDP, so much of the growth is driven by exports. 

  5. Verlorene Generation says

    To my feeling the real reason for the strong performance of Germany in 2010 is a high leverage. German economy is a higher leveraged bet on the EU and world economy to which it is tight by it’s large exports. This lead both to a stronger than average decline during the Great Recession and a stronger than average rebound thereafter. Germany exceptionally profited from the deficit spending around the world. If world economy suffers a double-dip, I’d expect Germany to perform especially bad again.

    1. Edward Harrison says

      Agree that leverage to exports is a major factor for Germany. See this new post:

      http://pro.creditwritedowns.com/2011/06/chart-day-deep-recession.html

  6. Verlorene Generation says

    To my feeling the real reason for the strong performance of Germany in 2010 is a high leverage. German economy is a higher leveraged bet on the EU and world economy to which it is tight by it’s large exports. This lead both to a stronger than average decline during the Great Recession and a stronger than average rebound thereafter. Germany exceptionally profited from the deficit spending around the world. If world economy suffers a double-dip, I’d expect Germany to perform especially bad again.

    1. Edward Harrison says

      Agree that leverage to exports is a major factor for Germany. See this new post:

      http://pro.creditwritedowns.com/2011/06/chart-day-deep-recession.html

  7. Positroll says

    S. Duffy:
    In Germany, health care normally isn`t negotiated by the employer. To simplify somewhat, the employer  deducts a fix percentage of the workers income and pays it into the public system. So if the worker`s pay increases, his deductions from the paycheck also increase automatically (but stay the same percentage wise). The percentage depends on the the finacnial health of the health care system, and in the 2000s many efforts were made to reduce unnecessary health spending in order to keep price increases low.

    That said, a European style halth care system sure would help US employers:
    – no need to spend precios time on negotiating with the health insurers
    – no risk that one employee with bad health leads to increases in the payments for the other employees
    I won`t comment on the advantages for the employee.
    If you want to learn more, read Hill, Europes promise (2010)

    Ed Harrison:
    The government played a role, but since in Germany wages are fixed by the “social partners” ( federations of employers and unions) who are constitutionally protected int his respect, the government was limited to inviting  the social partners and banging their heads togehter till they agreed – in their own enlightened self interest – to a deal: wage moderation  by the unions were swapped for promises by the employers to avoid firing workers and to reduce outsourcing.

    R Heider :

    1) The numbers refer to the top 1% and are correct imO.
    Your feelings are also correct: unequality in Germany did increase somewhat since “Agenda 2010” was introduced by chancellor Schröder, but only regarding the gap between the middle class and the lowest 20% of Germany society. Since the wealth of the top 10% is still efficiently taxed (unlike US) , Germany can afford a more generous welfare state, though, so these lowest 20% still receive welfare services far ahead of what the US poor receive: basic social aid payments for all + housing + heating costs +  free schools at still better quality than US schools, + lots of public institutions like libraries and pool they can use for miniml costs + BAFÖG stipends to get their kids to university if they are gifted …
    In short: Germany has continued to  tax its upper class, successfully defends its middle class, and still supports its underclass at levels that would be unthinkable in the US.

    2) Re: unemployment: Are you talking about the US or Germany? in Germany, gov programs aimed at limiting the effect of the crisis on the unemployment level had a VERY positive effect on the recovery. On the height of the crisis, more than 1,5 mio German workers were on “short work” programs (currently less than 100.000 if my memories are correct). They didn`t loose their skills and often even took part in educational programs to improve their skill level. Once demand picked up again,  German exporters could at once start to fire on cylinders again. State coffers didn`t pay more than they would have paid for unemployment anyway. Many German workers  / consumers continued spending because they knew that their employer wouldn`t fire them on the spot but could resort to 18 months of shortwork first (at 80% of former pay).

    1. Edward Harrison says

      Right. That was my understanding. Of course, that would never fly in the US because it would be deemed too socialist. Even the negotiating power of unions is seen as a negative. The Mitbestimmung concept is completely alien to the US.

      1. Positroll says

        Which is really funny (in an absurd way) considering he current version of Mitbestimmung was imposed on the German economy after 1945 by the New Dealers in the occupying US forces. Thomas Geohegan makes this point repeatedly in his book “Were you born on the wrong continent” …

    2. Edward Harrison says

      Positroll,

      One other thing regarding philosophical divides on employment contracts. The hire and fire mentality is something that strikes me as corporatism masquerading as liberty. In the US and the UK to a degree, this neoliberal dogma of making labour markets more flexible is simply a ruse to give business more leverage over labour. It tilts the playing field away from workers and toward businesses in a way that has led to an increasingly unequal income distribution.We see that the sovereign debt crisis in Spain is being used to insinuate these same nostrums into that society as a way of promoting internal devaluation. Isn’t the German approach better?  German workers still have relatively high per capita income (especially on an actual exchange rate basis as opposed o purchasing power parity). And German unemployment is lower than it is in the US. I don’t see this demonising of unions and the hire and fire mentality as particularly useful. Longer-term, this undercuts economic growth and does not decrease unemployment as we are now seeing.

      1. Positroll says

        Fully  agree. Of course, there is also the Danish model of flexicurity (flexible security), that seems to work rather well: relatively easy hire and fire, but a very strong social saefty net taking care of those fired, including very intensive retraining.  Personally I have doubts, though, whether this model could be sized up from Danemark (pop: 5 mio?) to Germany or even the US … (and of course such  level of “socialism” would never be accepted, unless a second great depression gets people thinking hard over their preconceptions …

  8. Positroll says

    S. Duffy:
    In Germany, health care normally isn`t negotiated by the employer. To simplify somewhat, the employer  deducts a fix percentage of the workers income and pays it into the public system. So if the worker`s pay increases, his deductions from the paycheck also increase automatically (but stay the same percentage wise). The percentage depends on the the financial health of the health care system, and in the 2000s many efforts were made to reduce unnecessary health spending in order to keep price increases low.

    That said, a European style halth care system sure would help US employers:
    – no need to spend precious time on negotiating with the health insurers
    – no risk that one employee with bad health leads to increases in the payments for the other employees
    I won`t comment on the advantages for the employee.
    If you want to learn more, read Hill, Europe`s promise (2010)

    Ed Harrison:
    The government played a role, but since in Germany wages are fixed by the “social partners” (federations of employers and unions) who are constitutionally protected int his respect, the government was limited to inviting  the social partners and banging their heads together till they agreed – in their own enlightened self interest – to a deal: wage moderation  by the unions were swapped for promises by the employers to avoid firing workers and to reduce outsourcing.

    R Heider :

    1) The numbers refer to the top 1% and are correct imO.
    Your feelings are also correct: unequality in Germany did increase somewhat since “Agenda 2010” was introduced by chancellor Schröder, but only regarding the gap between the middle class and the lowest 20% of Germany society. Since the wealth of the top 10% is still efficiently taxed (unlike US) , Germany can afford a more generous welfare state, though, so these lowest 20% still receive welfare services far ahead of what the US poor receive: basic social aid payments for all + housing + heating costs +  free schools at still better quality than US schools, + lots of public institutions like libraries and pool they can use for miniml costs + BAFÖG stipends to get their kids to university if they are gifted …
    In short: Germany has continued to  tax its upper class, successfully defends its middle class, and still supports its underclass at levels that would be unthinkable in the US.

    2) Re: unemployment: Are you talking about the US or Germany? in Germany, gov programs aimed at limiting the effect of the crisis on the unemployment level had a VERY positive effect on the recovery. On the height of the crisis, more than 1,5 mio German workers were on “short work” programs (currently less than 100.000 if my memories are correct). They didn`t loose their skills and often even took part in educational programs to improve their skill level. Once demand picked up again,  German exporters could at once start to fire on all cylinders again. State coffers didn`t pay more than they would have paid for unemployment anyway. Many German workers  / consumers continued spending because they knew that their employer wouldn`t fire them on the spot but could resort to 18 months of shortwork first (at 80% of former pay).

    P.S. Employers have to apply for short work payments from the state – if they think that their business will not recover anytime soon, they are free to fire their workers instead. OTOH, since short work is available for up to 18 months, very few companies were that pesimistic …

    1. Edward Harrison says

      Right. That was my understanding. Of course, that would never fly in the US because it would be deemed too socialist. Even the negotiating power of unions is seen as a negative. The Mitbestimmung concept is completely alien to the US.

      1. Positroll says

        Which is really funny (in an absurd way) considering the current version of Mitbestimmung was imposed on the German economy after 1945 by the New Dealers in the occupying US forces. Thomas Geohegan makes this point repeatedly in his book “Were you born on the wrong continent” …

    2. Edward Harrison says

      Positroll,

      One other thing regarding philosophical divides on employment contracts. The hire and fire mentality is something that strikes me as corporatism masquerading as liberty. In the US and the UK to a degree, this neoliberal dogma of making labour markets more flexible is simply a ruse to give business more leverage over labour. It tilts the playing field away from workers and toward businesses in a way that has led to an increasingly unequal income distribution.We see that the sovereign debt crisis in Spain is being used to insinuate these same nostrums into that society as a way of promoting internal devaluation. Isn’t the German approach better?  German workers still have relatively high per capita income (especially on an actual exchange rate basis as opposed o purchasing power parity). And German unemployment is lower than it is in the US. I don’t see this demonising of unions and the hire and fire mentality as particularly useful. Longer-term, this undercuts economic growth and does not decrease unemployment as we are now seeing.

      1. Positroll says

        Fully  agree. Of course, there is also the Danish model of flexicurity (flexible security), that seems to work rather well: relatively easy hire and fire, but a very strong social safety net taking care of those fired, including very intensive retraining.  Personally I have doubts, though, whether this model could be sized up from Danemark (pop: 5 mio?) to Germany or even the US … (and of course such  level of “socialism” would never be accepted, unless a second great depression gets people thinking hard over their preconceptions …

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