Australia could take a leaf from the restored German economy

For many years, Germany was regarded as the sick man of Europe’s economy. Wages and working conditions were set in sector-wide negotiations that allowed individual firms little scope for variation, tying employers’ hands. With a high cost structure, the country was plagued by slow growth and high unemployment. Its big manufacturers were moving out in the pursuit of lower costs.

How times change. Despite the recession, unemployment in Germany is lower than it was five years ago. True, Germany recently ceded its place as the world’s biggest exporter to China but it remains an export powerhouse and accounts for about 20 per cent of Europe’s GDP. With a population of about 82 million, it boasts world class infrastructure and convenient access to over 500 million EU customers. As an export power, Germany remains streets ahead of its competitors. According to Luxembourg-based statistics agency Eurostat, Germany’s trade surplus in the first 11 months of 2009 was 122.4 billion euros ($US166.6 billion), followed by the Netherlands in a distant second place, with 35.4 billion euros. As a share of GDP, its current-account surplus this year will be bigger than China’s.

Indeed, Germany is now outperforming many countries including the United States. Germany reported a current-account surplus that increased that 9.1 billion euros ($US12.35 billion). Compare that to the United States current account deficit of $115.6 billion. Unemployment in Germany is 8.2 per cent compared with 9.7 per cent in the US.

Germany’s fiscal situation suffered in the last year, just like every other country in Europe. But its deficit, now 3.3 per cent of gross domestic product, is well below the level of Europe’s other large economies.

Germany’s success owes much to ground breaking policies implemented this decade. With fear of debt so deeply entrenched in its culture, born during the inflation of the Weimar Republic, Germany took steps to reduce labor costs even before the fiscal crisis, at a time when wages in nearby countries were kept afloat by a debt-fueled boom. The German government introduced reforms to the labour market and welfare systems in 2003-04. Spurred on competitive pressures from Europe’s single currency, German business held down real wages. As a result, unit labour costs fell by an annual average of 1.4 per cent in 2000-08 in Germany, compared wi th a decline of 0.7 per cent in America and rises of 0.8 per cent and 0.9 per cent in France and Britain respectively.

Germany’s, once a military superpower turned economic superpower, has been in the news lately after agreeing to an EU-led bailout of debt-stricken Greece. Some say Germany demonstrated during those negotiations that it was a paragon of its stereotypical virtues: thrift and hard work. The bottom line: if Greece was to get any help, it had to persuade Europe’s most powerful economy.

In addition to those policies, the German miracle rests on a vibrant manufacturing sector. Germany’s economy is built around manufacturing and exports. In its stock market, its weightings are 15 per cent in consumer goods, 17 per cent in industrials, 18 per cent in basic materials and 14 per cent in utilities. There are 6000 German companies focused on machinery and equipment. There are the industrial giants like BASF, Siemens and Bayer but the real strength lies with the small and medium sized manufacturers who employ the bulk of the workers. Germany is Europe’s largest automotive export market by production and sales and the world’s biggest producer and exporter of chemicals. About 75 per cent of chemicals manufactured in Germany are exported. German companies are also leaders in research and development. German companies register 28 per cent of the world’s mechanical engineering patents. Germany has 277 international patents per one million inhabitants, the highest ratio in the world. German companies are also leaders in renewable energy and nanotechnology industries. More than 300,000 people are employed in Germany’s cleantech industries and Germany is the top exporting country with a 16 percent share in global cleantech trade. Despite cloudy weather, it is the world’s largest solar power market. Germany has also puts its economic and political clout behind the Large Hadron Collider, the huge new European particle accelerator and atom smasher now exploring some of the most fundamental questions in physics.

Germany’s inroads are particularly impressive in light of its restrictive labour laws. Salaries in Germany are among the highest in the world. In Germany, there is no such thing as “employment at will”. By law, German employees must have written employment contracts covering such matters parties to the contract, work to be performed, gross salary and benefits, vacation, starting date of employment, place of performance and notice periods. Contracts limiting work to a period of time are hard to get under German law and are permissible only when there is an objective reason for the limitation, like for example, project work. Over a five day week, average working time is between 35 and 40 hours but generally may not exceed eight hours a day. A daily working time of up to ten hours productive working time is still possible. However, over a period of six months, the average daily working time should not exceed eight hours. Germany also has very strict laws on firing people. There is notice period determined by law and termination of employment can only happen at of the end of any calendar month.

Prices in Germany are also relatively inflated compared to other countries. Producer prices in Germany are now rising at their fastest annual rate since 1982, with firms face rising energy costs. In April, the cost of electricity was 24 per cent higher than in the same month last year while natural gas prices rose 29 per cent.
So how does Germany do it? There are several forces at work here. Germany’s Federal Ministry of Education and Research (BMBF), which funds research projects and institutions and regulates general educational policy, provides valuable subsidies for advanced manufacturing industry including nanotechnology, renewable energy, pharmaceuticals and high tech. For the automotive industry, the German government has also provided an eco-rebate, which subsidizes consumers if they exchange vehicles that are at least nine years old for new ones. The scheme was launched months before the cash for clunkers program in the United States.

Some of the other initiatives are also distinctly German. There are the close links between German banks and German industry through the hausbank ("house bank") system where most corporations have a long-standing, largely exclusive arrangement with one main bank. The hausbank owns significant stakes in many of its corporate customers. This allows the bank to exercise considerable behind-the-scenes influence. This system funds Germany’s small and medium sized enterprises. Whereas advanced manufacturers in other countries are left to fend for themselves, German banks provide much needed support. It creates stability and ensures manufacturers are moving lock step with their financiers.

Germany’s manufacturers also enjoy a key advantage in research and development with close links with universities, a tradition that goes back to the Kaiser Wilhelm institutes of the 19th century and that has the support of the German government.

Increasingly, German companies are moving into developing countries with joint ventures. The list of places where Germany has joint ventures is nothing short of staggering. It includes Albania, Bonsia and Heregovina, Croatia, Macedonia, Moldova, Ukraine, Berlarus. In Africa, it has joint ventures in Algeria, Egypt, Ethiopia, Kenya, Libya, Madagascar, Morocco, Namibia, Sudan and Tunisia. In the America, there are German companies with joint ventures in Argentina, Brazil, Chile, Cuba, Mexico and Venezuela. There are also joint ventures in Armenia, Azerbaijan, Bangladesh, Bhutan, China, Georgia, India, Indonesia, Jordan, Kazakhstan, Krgyzstan, Laos, Mongolia, Pakistan, Tajikistan, Thailand, Turkmenistan, Uzbekistan, Vietnam and Yemen.

There are 4600 German companies in Russia, 3000 of them in Moscow. German direct investment in China totaled 90 million Euros invested in 390 projects.

Some German companies involved in overseas projects include energy supplier Wintershall which has been doing a joint venture with a Russian company Lukoil for the last 10 years, the oldest joint venture between a west European and Russian company. German chemical giant Lanxess is in a joint venture with China’s Yaxing Chemical Company.

Because Germany is such a big exporter, it will have links with countries and businesses around the world which makes the joint venture a natural fit. For German companies, the joint venture overseas keeps costs down and provides a more flexible work environment. Germany’s propensity for joint ventures suggests that many exports coming out of these markets might originate out of a joint venture with a German company.

What are the lessons from Germany? Government support for strategically placed manufacturing concerns that work off Australia’s competitive strengths (e.g a highly skilled workforce, a booming resources sector, geographical features that are perfect for stress testing products) is critical. Other important features are developing closer links between industries and universities, and creating a nexus between manufacturers and their financiers. The German model shows there is much to be learned.