Germany's Economic Engine: Why the German Model Has Held Up Even as So Many Other Major Economies Have Collapsed

Article excerpt

American and British commentators have told three stories about the German economy over the past decade, all of them derogatory. Articulating a standard conservative view, Adam Posen of the Peterson Institute for International Economics in 2006 characterized Germany's performance as "lastingly poor." In a similar vein, Jude Blanchette, blogging for the libertarian Mises Institute, predicted in 2003 that nothing but "rot and indolence" lay ahead.

Another version of the indictment states that even though Germany was once an economic powerhouse, its best days are over. Thus in 2003, Larry Elliott of The Guardian reported that the German economy had "sputtered to a virtual halt" and, in the view of many, had succeeded to Britain's 1970s-era role as the "sick man of Europe."

A third story holds that, to the extent Germany is surviving at all, it is only by giving up the distinctive elements of its economic model and embracing American norms. Edmund L. Andrews, for instance, claimed in The New York Times in 2000 that "the structure and ethos underlying Fortress Germany have begun to crack like a house on a California fault line." Supposedly the Germans were taking a leaf out of Silicon Valley's book by moving to a freewheeling employment model, and many recent university graduates were forsaking a secure, carefully nurtured career with a long-established employer for a bumpier ride with an entrepreneurial start-up.

Yet, as the Chicago-based Germany-watcher Gary Herrigel points out, none of this is true. "The Germans have certainly reformed their system to make it more flexible," he says. "But they have had no intention of adopting the American model. They have not been moving in the direction of more free-market mechanisms or the individualization of the economy."

It is high time the German economy got some respect. It has been faring much better lately than either the United States or Britain, despite the scornful predictions of Anglophone economic observers. The problems attributed to the German economic model since reunification have been greatly exaggerated, if not entirely imaginary, and German corporations are now exceptionally well positioned to capitalize on recovery once global demand picks up. The rest of the world can learn vital lessons from this success through good global economic times and bad.

The case against the German model relies largely on one data point: Germany's official growth rate has often lagged in recent years. But the growth story is more nuanced than most English-speaking observers have realized. And by virtually every other measure, the German economic model stacks up well against that of the United States:

Per-capita income. Measured at ruling exchange rates as of 2008, Germany's per-capita income was $44,600. That was within hailing distance of America's $47,500--an impressive performance in itself and all the more so when you realize that the typical German worker put in just 1,432 hours in 2008 versus 1,792 hours for the typical American.

Life expectancy. Germans now live nearly 14 months longer on average than Americans. By contrast, as recently as the early 1980s, life expectancy in the former West Germany trailed the United States by fully 17 months (and, of course, East Germany was even further behind). A nation's life expectancy is a function of several key aspects of national well-being, and as such it is a useful reality check on purely money-based economic rankings. In particular, it tests a nation's ability to provide its citizens with decent health care.

Trade. Germany's trade performance over the longer term has been nothing short of spectacular. From 1998 to 2008 the German current account went from a deficit of $5.9 billion to a surplus of $267.1 billion. The contrast with the United States could hardly be starker: The American current account deficit shot from $233.8 billion in 1998 to $568.8 billion in 2008. …