The German Engine – Blown for Good or Just taking a Pit-stop?

Article published on Dec. 1, 2003
community published
Article published on Dec. 1, 2003

This article has not been vetted by an editor at Paris HQ

Like Ralf Schumacher during his September training session, the economy that gave us BMW, Audi and Volkswagen has crashed. The question everyone in Europe should be asking is: can the German model be saved, or they out of the race for ever?

"Guangzhou, January 4th... The first world’s fair in the hypermodern convention centre of the south Chinese metropolis has just opened." At the heart of the show economic leaders like Japan and the United States have set up their stands. Germany, however, is nothing more than a tiny, unimportant player relegated to a far corner. There, its diplomats to the world's fair "wait around with embarrassment for a call from the Korean prime minister . . . He had important commitments, but he has agreed to appear out of old loyalty."

This tale is an excerpt from Henzler and Spaeth’s ‘Can the Germans Still be Saved?’ published almost a decade ago. It is not a report of a real event, but merely tongue-in-cheek speculation – the trade fair in question is set in 2022. Yet it is a fairly representative piece of the incessant self-questioning analysis that has infected Germany’s opinion columns in the last ten years.

And not, entirely, without reason. For ten years, the German economy, once the motor of Europe, has stalled. GDP/capita was $26,600 last year, putting Germany 9th among European countries. Thanks to Finland’s robust growth, this year’s figures will probably push them into tenth position. Britain is not far behind and on present trends will overtake in just two or three years: meanwhile, even trailers like Spain or Slovenia are catching up. Ireland, considered at the time of German reunification to be a backward economy, is now in pole position, with $30,500.

Like Ralf Schumacher during his September training session, the economy that gave us BMW, Audi and Volkswagen has crashed. In the last ten years, average annual growth in Germany has been a dismal 1.3%, less than half of the UK (2.8%) or Spain (2.8%), and well behind Finland (3.5%), Luxembourg (4.5%) or Ireland (7.8%). In other words, while Germany takes a pit-stop, other countries aren’t just catching up. They’re overtaking.

Yet the odd thing is Germany isn’t alone on the sidelines. Other continental countries, like Austria, France, Switzerland, or Italy, have done little better. Indeed, Switzerland, with 1.0% growth year on year, has actually been doing worse.

Not yet out of the Race

So what is wrong in these countries? In the 1960s sociologist Daniel Bell wrote a path-breaking book, entitled The Coming of Post-Industrial Society. In it he argued that, after the industrial revolution of the 19th century, in which Western nations oriented their economies away from agriculture and towards manufacturing, there will be a new ‘post-industrial’ revolution, in which countries at the forefront of technological advance would shift from producing industrial goods to new service sector industries like management, computer software, and the cultural industries. We can see today that his predictions were largely correct. In all advanced nations, led by the US and followed by Scandinavian and Anglo-Saxon countries, the service sector now dwarfs the industrial and the agricultural sectors, and is the main fuel for accelerated growth.

Yet Germany is still stuck somewhere in the 1970s. While companies in the United States have branched out into new technologies like computers, telecoms and biotech, Germany opted to produce more refined versions of its existing products, like cars and machine tools. But there are only so many cars and tools the world can buy. In 1997 Germany accounted for a staggering 20% of world trade in machinery and automobiles, but contributed to only 7% of trade in information technology. Yet it is in computing, and not in machine tools, that today’s profits are to be made.

So the problem is not – as neoliberal economists like to claim - the German mode of business organization: the so-called ‘Rhineland Model’, stressing heavy investment in worker training, high salaries, large research spending and an ever improving series of products within a given field. The problem is rather that German companies are not in the right fields in the first place – they should be developing mobile phones, computers, software, and biotech, instead of exhausting the possibilities of different models of cars.

20… 10… The Final Countdown

To come back to Henzler and Spaeth’s question – can the Germans still be saved? Well, there are already positive signs. In 1995 the German government announced Bioregio, a contest for the allocation of regional biotech subsidies, and the number of biotech firms tripled. Meanwhile, Germany is a world leader in the development of so-called ‘open-source’ software, which looks like it could begin to break the Microsoft monopoly in many areas. In addition, if Schröder’s Agenda 2010 finally passes, it will make it easier for entrepreneurs to establish start-ups, so that in the 21st century, Germany will be once again at the cutting edge of new technologies.

For the sake of Europe, we had better hope that such measures soon take effect. The German economy is not only a potentially crucial force in driving Europe’s economies forward, but also a strong inspiration for European integration – and the principal source of investment for the Central European countries joining the Union next year. And though Agenda 2010 has drawn many critics from the German left, social democrats across the continent are hoping for its success - because Germany’s ‘Rhineland model’ is the only alternative to Anglo-Saxon capitalism, and when it crashes, the credibility of any alternative to the ‘Washington consensus’ also hits the wall.