Michael Fry: How Germany became Europe’s powerhouse

HOW DO the Germans do it? In 2011, a year of woe for most industrial countries, Germany’s economy probably grew at a respectable rate of 2 per cent, as much as Britain achieves in a reasonably good year. We had a bad year by contrast, and will have been lucky to see growth of 0.5 per cent.

As ever, German success came largely through exports – in 2011 worth £800 billion, the highest figure in history, amounting to a third of national output. Admittedly these exports went in large part to other members of the euro which can no longer afford them, so producing a continental currency crisis. But Germany was also successful in expanding its exports to China, India and new markets round the world – in fact it did better at that than the old imperial power, Britain. It was one reason why our exports amounted to less than £500bn, about a quarter of national output.

This is nothing new. Germany overtook Britain in economic terms more than a century ago, and even the disastrous defeats in two world wars only temporarily deflated its ascendancy. The absorption by West Germany of East Germany, with its wreck of an industrial structure, did slow the growth of the reunited country for a few years. But that problem too appeared to be on the way to solution till the credit crunch struck in 2008 – and once its effects are over, a better rate of growth may be achieved again. Germany, in any event, is visibly the powerhouse of the European Union, and on it rest most hopes of general recovery. That is why 26 of the 27 member countries are now following the path the Germans have pointed out to them.

So again, how do the Germans do it? It is a question I have asked myself during the last few months of living in Germany, about to resume for the rest of the academic year. One thing I have learned is that the prosperity is not universal. I rent a little flat in a suburb of Leipzig, a city much improved in the last two decades, yet still marked by its East German past. When I take a tram into the centre I pass through a huge half-derelict housing scheme which makes Drumchapel look elegant, and which contains an underclass displaying the same scruffy helplessness as its counterparts in Scotland: the sort of place the neo-Nazi skinheads come from. Looking at Germany from the bottom up may be a good place to start.

West Germany was long renowned for its comprehensive and generous system of social security, compared with which the British one began to look patchy and mean as the welfare state crumbled in the 1970s and 1980s. Especially for Germans with a good record of regular employment (the great majority), there was cradle-to-grave provision that also eased the difficulties of losing a job or of retirement.

Proud as the Germans were of this system, envied by many in Britain, it has not lasted. Without exactly failing, it steadily piled up problems. Flexible it was not, and despite the good intentions it tended to increase rather than decrease unemployment over the country as a whole. It was fine for those already in jobs but bad for those looking for a job. For some years the German jobless rate rose above the British one.

Once the Germans decided to tackle this problem – and it was actually the Social Democrats who made a start – they moved quite ruthlessly.

The systems of social security and unemployment were put on the same basis, which meant a cut in benefits for those out of work; benefits that were cut again, sometimes to nothing, if they did not accept jobs offered to them. It was in fact a fairly harsh new order, harsher than the British one. But the clinching argument was that it brought unemployment down, to stand now at 5.5 per cent, compared with 8 per cent in Britain.

In other words, reunited Germany injected into the labour market something of the same anxiety as Thatcherite Britain had done 20 years before. In both countries the system wielded a big stick, yet it also offered the carrot of getting people more quickly off the dole and into new employment. The problem for Britain was that it opened up huge political and social divisions, with bitter memories that linger yet. In Germany trade unionists protested too, but it would be fair to say that a fresh political and social consensus has formed round the new system.

Of course there were unforeseen results. In both countries the reforms also helped to create a novel category of menial jobs in the service industries, offering the workers no prospects but at least better than no jobs at all.

In both countries, services now form the largest part of the economy, though that is true of the whole developed world. Yet in Germany it did not lead to a rapid shrinking of the skilled working class. One big difference between Britain and Germany is the huge range of manufacturing industry there that we have largely lost. The catalogue of brands known right round the world says it all: Mercedes-Benz, BMW, Adidas, Audi, Porsche, Volkswagen, DHL, T-Mobile, Lufthansa, SAP, Nivea and more.

Germany has been the driver, innovator and beneficiary of an ever more globalised economy that Britain once used to be and would like to become again – the exception to the pattern being finance. Germans do envy the British this particular success, but the credit crunch has ruled out any imitation of a deregulated financial industry. It was on this point that Britain broke with its partners at the summit in Brussels last month, when David Cameron walked out on Angela Merkel.

She seemed to regret it no more than he did, for anything that threatens instability turns the Germans right off.

Here is a real and deep cultural divergence between the two nations.

Germans during the 20th century lost everything several times over, in war, revolution and inflation, all of which the British who fought them escaped – only to face steady, genteel impoverishment instead. As a result, in modern Germany there has been a level playing field for all and, apart from a bit of proletarian truculence in the former East Germany, differences of class appear to be minimal and the degree of social cohesion high.

In Britain the differences of class may not be so visible as they used to be, in anything from accent to clothes, though in recent years inequalities of income have actually widened. But in a society that has never suffered instability the dividing lines of the past are more likely to last anyway.

For Germans, equality is reinforced by some of their institutions. For example, there is no, or almost no, private education. In any given neighbourhood most children go to the same school. In a big city there may be a hierarchy of schools based on academic excellence and a more exacting curriculum, but they will all be state schools and not private ones. In smaller towns and in rural areas the system is comprehensive, just as in the Scottish, if not the English, tradition. At any rate, the notion that rich kids should go through a private system of their own and then on to the best universities is alien to Germany.

Just as there is an even social spread, so there is an even regional spread, or at least a more even regional spread given that East Germany still has a way to go. But no city dominates the country in the way London dominates Britain, with all the political problems that brings in its wake, from the routing of high-speed trains to Scottish nationalism. Only three of Germany’s 100 largest companies have their headquarters in Berlin. The stock exchange is in Frankfurt, the largest media group in the one-horse town of Gütersloh. Most of the country’s and many of the world’s cars are built in Wolfsburg, Stuttgart or Munich.

The stability the Germans seek may shade over into provincial dullness. But there can be no doubt that it has secured for them the economic prosperity and the political liberty that had eluded them for much of their modern history, in the rollercoaster transformation from a collection of petty states into a successful modern republic.

No wonder, then, that today they recommend a slightly dreary German sort of stability as the cure for all the troubles of the European Union. It will be one of the most extraordinary developments of the 21st century if, against the odds, they manage it.