Alex Orr: Retuned German economy can form the hub of a more powerful Europe

A DECADE ago, Germany was the sick man of Europe, plagued by sclerotic growth and high unemployment, with big manufacturers moving out in a desperate search for lower costs.

Despite the recession, and the economy shrinking by 5 per cent last year, unemployment is now lower than it was five years ago – a "German miracle" some economists claim.

As the global economy recovers, Germany's will do better than the rest through high exports. And although Germany recently lost its place as the world's biggest exporter to China, it still retains its exporting strength. As a share of GDP, its current-account surplus this year will be bigger than China's.

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The crisis seemed to discredit the "Anglo-Saxon model" of growth based on financial wizardry and property bubbles – and vindicate the German one, in which workers co-operate with bosses, managers invest for the long term and manufacturing holds pride of place over services.

Crisis-prone members of the eurozone could cure their woes by becoming more like Germany, many Germans think. Its hottest export could be the German model itself.

It is a feat that gives the lie to the picture, common in America and Asia, of Europe as a washed-up continent incapable of change. And, for the rest of Europe, there is a lot to be said for having a strong economy at the continent's geographical and political heart. Yet Germany's success is paradoxically also causing problems for its neighbours – problems that they, and Germany, need to address.

The country's impressive flexibility is the consequence of old virtues combined with new ones through an injection of some much maligned "Anglo-Saxon model" reforms.

The old consensus-building management system helped employers keep unions on-side when costs needed to be held down. And Germany is rightly proud of its ability to control costs and keep on exporting.

But it also needs to recognise that its success has been won in part at the expense of its European neighbours.

Germans like to believe that they made a huge sacrifice in giving up their beloved Deutsche mark eight years ago, but they have in truth benefited more than anyone else from the introduction of the euro.

Almost half of Germany's exports go to other eurozone countries that can no longer resort to devaluation to counter German competitiveness.

It is certainly true that Germany's neighbours have a great deal of work to do. France, Italy and Spain need to follow Germany in loosening up their labour markets; Italy, Spain and Greece need to tighten their public finances.

But Germany also needs to push ahead with liberalisation. Its web of regulations is too constricting; its job protection is too rigid; its health, welfare and education systems still need big doses of change; its service sector is underdeveloped, and it has an ageing population reinforcing dire demographics.

Germany's towering export surpluses are also at risk because its trading partners cannot sustain deficits forever.

A bold programme of German structural reforms would do much to boost consumption and investment – and, in turn, raise Germany's GDP growth, which remains disturbingly weak.

Germany could also afford growth-boosting tax cuts without risking the ruination of its public finances.

If only Germany would lift its head, it would see that this is in its own wider interest, both because it would be good for German consumers and because it would help the euro area to which it is hitched.

Europe's single currency, like the European Union itself, owes much to past German leadership. When that goes missing, both the currency and the club tend to suffer – and Germany is foremost among the losers.

The economic recovery is still shaky and, if it lasts, will be followed by years of fiscal belt-tightening. Unless export surpluses keep rising Germany will need to find new sources of growth, and the retuning of the German economy will benefit not only itself, but also its neighbours across Europe.

• Alex Orr is a board member of the European Movement