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?

  • Reinhard Hunger for TIME

    There is no particularly special technology needed to make a chainsaw. It's really just plastic and metal parts screwed together with old-fashioned nuts and bolts. The Chinese already make chainsaws. But that hasn't stopped German power-tool manufacturer Stihl from selling its made-in-Germany chainsaws around the world, even though its top-end models are among the priciest on the market. In fact, 86% of the products Stihl makes in its high-cost German factories are exported. How Stihl manages that says a lot about the impact a revived German economy is having on Europe and the world — both good and bad.

    The family-owned firm, based near Stuttgart in Germany's south, could shift more production to its lower-wage factories in China and Brazil, but management is committed to manufacturing many of its most advanced products at home. In contrast to the American habit of outsourcing as much as possible, about half the parts in a German-made chainsaw — from the chain to the crankshaft — are produced in Stihl factories, and many of them are made in Germany. And instead of laying off staff during the Great Recession, as so many U.S. firms did, Stihl locked in highly trained talent by offering full-time workers an employment guarantee until 2015. Stihl even added specialists to its product-development team during the downturn. The result is high-quality products that command price tags big enough — professional Stihl chainsaws cost as much as $2,300 in Germany — to make manufacturing profitable even with the nation's high wages. U.S. companies "don't try hard enough to keep production inside the country," says Stihl chairman Bertram Kandziora.

    Stihl defines how Germany resurrected its economy — and how the U.S. might too. The small, often family-owned enterprises that make up the backbone of German manufacturing have historically specialized in the unsexy side of the industrial spectrum: not smart phones or iPads but machinery and other heavy equipment, metal bashing infused with sound technology and disciplined engineering. But in recent years, German firms, aided by farsighted government reforms, have turned that into an art form, forging the most competitive industrial sector of any advanced economy. The proof is a boom in exports, which jumped 18.5% in 2010, that is the envy of the developed world.

    That surge has carried Germany out of the Great Recession more quickly than most major industrialized countries. GDP rose 3.6% in 2010, compared with 2.9% in the U.S. While joblessness in the U.S. and much of Europe has spiked to levels not seen in decades, unemployment in Germany has declined during the crisis, to an estimated 6.9% in 2010 from 8.6% in 2007, according to the Organisation for Economic Co-operation and Development (OECD). "Germany is in a very competitive position today, more than ever," proclaims Stéphane Garelli, director of the World Competitiveness Center at the Swiss business school IMD.

    Germany's revival has reversed its role in Europe. Less than a decade ago, Germany was a bumbling behemoth beset by chronic unemployment and pathetic growth. As its more aggressive neighbors such as Spain, Britain and Ireland rode the craze in global finance to stellar performances, they looked at Germany as their stodgy old uncle, unable to change outdated, socialist habits and adapt to a new world. But the financial crisis proved just the opposite. While Spain, Ireland and other former euro-zone highflyers tumble into debt crises, victims of excessive exuberance and risky policies, a steady but reformed Germany has emerged as Europe's dominant economic power. According to the OECD, Germany accounted for 60% of the GDP growth of the euro zone in 2010, up from only 10% in the early 2000s. "We changed from the sick man of Europe to the engine," says Steffen Kampeter, parliamentary state secretary at Germany's Ministry of Finance in Berlin.

    Germany's engine, however, has spewed toxic fumes. As manufacturers rev exports, the rest of Europe has been unable to compete. Some 80% of Germany's trade surplus is with the rest of the European Union. The more German industry excels, the more other Europeans feel that Germany's success comes at their expense, cracking open schisms within the euro zone just when the region can least afford them. "There is frustration with Germany," says André Sapir, a senior fellow at Bruegel, a Brussels-based think tank. "Germany is moving ahead, but what are they doing for the rest of Europe?"

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