How Germany Became the China of Europe

Ten years ago, Germany's economy was a shambles. Now it's an export machine. What can America learn from an Old World tiger?

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Reinhard Hunger for TIME

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The German attitude toward the euro zone — that the weak must become strong — has filtered into the country's response to the European debt crisis. Berlin, which holds virtual veto power over E.U. decisions, has pushed prostrate euro-zone partners into painful reform programs in an attempt to rebuild investor confidence. In return, Germany has backed E.U. — International Monetary Fund bailouts from a $1 trillion fund created last May. But the budget cuts and other austerity measures that go along with the bailouts have only further inflamed the rest of Europe against Germany. Germans "look at Southern Europe, and they see us as a burden," says José Ignacio Torreblanca, head of the Madrid office of the European Council on Foreign Relations. "They think it is better to solve their own problems and the system will take care of itself."

Many economists believe that solving the debt crisis will require not just emergency cash for debt-ridden governments but also a tighter economic union. Yet German Chancellor Angela Merkel has consistently resisted or rejected proposals to address the euro zone's ills that entail greater sacrifices on Germany's part, like a recent call for a Eurobond jointly backed by the region's governments. Granted, Merkel has been hamstrung by voters who are in no mood to see their taxes diverted to profligate neighbors. But some in the region believe the Chancellor is putting her selfish needs over the good of Europe as a whole. Jean-Claude Juncker, the Prime Minister of Luxembourg, recently accused Germany of being "un-European."

Rebalancing Act
Such criticism stings in Berlin. "We see the euro as a peace- and freedom-keeping mission, not only an economic instrument," says Kampeter. "We'll do everything to stabilize this instrument." But Berlin has to do more. The answer to the world's Germany problem is similar to that of its China problem: both countries have to rebalance, to find new sources of domestic growth so they don't distort the global economy.

In Germany's case, that means helping Luka Rajkovic. The 49-year-old has spent his 25-year career on the assembly line of a Siemens power-equipment factory in Berlin. Fully aware that his job could be moved to lower-wage China, Rajkovic and his colleagues have accepted smaller pay raises in return for job security. Late last year, Siemens extended an employment guarantee to 2013. But the bargain leaves Rajkovic searching for bargains. With two children to care for, he delays costly purchases and hunts for sales. "What's the point of earning a little more and losing your job in two years' time?" he says.

All of middle-class Germany has made that choice, and as a result, it isn't benefiting as much as it should from the country's export boom. Markus Grabka, a researcher at the German Institute for Economic Research in Berlin, estimates that the disposable income of the German middle class hasn't increased at all in the past decade. About a fifth of the workforce, he says, is stuck in insecure and poorly paid jobs, often earning a dismal $550 a month. Ironically, the very factors that are fueling the German export machine — lower labor costs created by greater flexibility — are also pressuring the welfare of the middle class in the same way it has come under strain in the U.S. The solution may be to liberalize tightly regulated domestically oriented sectors — especially services such as education and retail — that are much less productive than manufacturing. Freeing those industries would create more jobs with better wages and boost the spending power of the German public. It would also help Germany offset its dependence on exports. "You've got the goose that lays the golden egg — the export sector — but that isn't enough to get the entire economy doing better," says Bart van Ark, chief economist at the Conference Board in New York City.

There is a clear awareness of that fact in Berlin. "We have learned that reform is not only a 10-year program but an everlasting challenge," says Kampeter. A more balanced Germany (much like a more balanced China) would minimize the negatives the country's economy is causing for the world and maximize the positives — the U.S., for example, could sell more of its products to German companies and consumers. But for Germany's new economic miracle to be truly secure, the reformist spirit needs to reach outside its borders. In an integrated Europe, Germany can thrive only with its neighbors, not in spite of them, and that requires that Berlin accept reform of the entire euro zone and Germany's role within it. A strong Germany has an opportunity to guide Europe out of crisis, if its leaders are willing to grasp it. "They can promote a future good for everybody," says Torreblanca. "But they don't want to lead." If that changes, Germany will benefit. So will Europe — and the world.

— With reporting by Claudia Himmelreich / Berlin

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