An Economic perspective from Germany..

As Germany proved during the 2008 downturn, a belief in solid
social and industrial partnership can keep the economy going
– as observed by Paul-Werner von der Schulenburg.

Paul-Werner von der Schulenburg, Partner
EMA Partners Germany

Discussing crises is nothing new.There have been many events in history that have been categorized by contemporaries as crises, while their descendents considered the situations to be merely stressful periods of time.

The same can be said of the so-called “global economic crisis of 2008 and 2009”. It should not be viewed as a catastrophe but as an entirely normal process that could occur again at any time. Events of this nature have taken place in the past and will continue to arise in the future. They are simply difficult periods in our lives that differ only in terms of how complex the solutions appear to those experiencing the situation and being impacted by its effects.

The solutions necessary to overcome a crisis are always complex. We must first question the specifics of the 2008-2009 crisis. Was it a financial crisis that gave rise to a debt crisis, an economic crisis or, perhaps a political crisis? Have we already overcome its impact? In September of 2008, after the collapse of Lehman Brothers, we were likely all under the impression that it was a financial crisis that would trigger a global economic crisis. The GDP slump in many countries, the dramatic decline in international trading, the turn down in business throughout financial sectors, as well the decrease in production – appear to have confirmed the conclusion.

Today, however, we know that these weren’t the main threats. The acute threat was actually a political crisis similar to the German political crisis of 1929, because radical grassroots organizations are not normally driven by rational thought. This was true back in ancient Rome and we are currently experiencing the power of grassroots organizations again in Greece.

Three years or more after the Lehman crash, many economies have recovered and financial systems are reporting positive gains. Some countries achieved this faster than others. According to experts, Germany was very successful in getting back on track and the figures appear to confirm this. The IMF has just forecasted up to 4% growth for Germany in 2011. Other institutes are expecting 1.5% growth in the Euro Zone and 1.8% in the EU. What are the reasons for this? After all, the Germans probably aren’t any more industrious than other countries with similar economies.

Economic and political experts now unanimously agree that there are five reasons for Germany’s rapid economic recovery. These reasons are summarized below, though they do not by any means represent the complete picture of global expert opinions.

TIMELY ADAPTATION OF THE GERMAN SOCIAL SECURITY SYSTEM TO FUTURE REUIREMENTS:

In 2002, Germany’s Social Democrat Chancellor, Gerhard Schroder, acted against the wishes of trade unions and the majority of his party supporters by introducing a concept that would fundamentally change the German social welfare system. For the first time, with the government’s assistance, German citizens were able to participate in the establishment of independent pension structures, and the healthcare system which were adapted to demographic change, adjusted according to the national budget, and the unemployment benefit system was remodeled. This provided incentives to individual citizens and encouraged them to take charge of their own lives. This change, initiated by Schroder, proved to be a blessing during the crisis.

THE GERMAN ECONOMY IS VERY SME-ORIENTED:

In Germany, the term SME doesn’t only denote a company’s size. It also includes aspects such as ownership structures and, in many cases, a specific and frequently patriarchal management concept. For example, there are successful SMEs with 200 employees and others with 20,000. 99% of all companies in Germany are SMEs and produce 60% of all jobs. In 2010, the SME sector was Germany’s employment engine. These enterprises coped with the crisis most effectively. Accordingly to their ethos, they made every effort to avoid redundancies because SMEs traditionally have a very close relationship with their employees. Also, they did not cut back on R&D activities, allowing them to sustain their innovativeness and continual progress.

THE GERMAN ECONOMY IS STRONGLY GEARED TO EXPORTS:

Unlike their counterparts in other countries, German enterprises are technology leaders, and they didn’t need to take refuge in services to any significant degree. Astute in global market intelligence meant they were aware of their customers’ requirements and were able to quickly satisfy their demands. This led to a very strong export industry. Despite being called the “Export World Champion, it should be noted that 60% of these exports go to EU internal market destinations, and only 25% to Asia and America. Germany’s dependence on exports proved to be an advantage during the recovery phase.

GERMANS HOLD THE SHARED VALUE OF AN EFFICIENTLY FUNCTIONING ECONOMY:

Although it often appears complex to outsiders, the typical German social partnership of employers, employees and the government proved to be a benefit during the crisis. Employers kept on employees, trade unions held back on their wage demands. The government supported this strategy by providing a “short term allowance” to compensate for employees’ wage reductions and prevent redundancies and unemployment. As a result, the German economy and its high tech products were back in familiar markets as soon as the global economy started to recover.

THE GERMAN FINANCIAL SYSTEM REMAINED STABLE AND INTACT:

Apart from one big bank, the HRE, and the politically influenced regional banks, none of the German national banks required any long-term government aid. The Deutsche Bank, Germany’s leading bank, didn’t report any losses, nor did it require any government aid. The majority of German enterprises received loans and guarantees – albeit with the help of the government – however the financial system as a whole was never in danger of collapse.

It appears that Germany has overcome a financial and economic crisis as a result of their solid industrial and social partnership. Now, reservations previously felt by foreign enterprises have been swept away, and they have finally understood that although investments in Germany aren’t always simple, they do promise long-term success and stability. The increase in foreign investments proves this – and, to the contrary – Germany has realized an export nation should not take a unilateral view of, and approach to globalization.

The potential crisis is not yet over. For example, the high national debt accrued during the crisis still harbors the threat of inflation if the government is not able to reduce it quickly. Unfortunately, a curious debate has arisen in Germany – with respect to whether the new, robust tax revenues should be used to reduce debt or reduce taxes. This has caused a fundamental division of the political sector into two camps: those in favour of increasing saving to overcome an economic crisis, and those in favour of promoting growth. Germans appear to have opted for growth, yet the situation remains interesting, and the discussion continues.