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Special> 40th Anniversary of Sino-German Diplomatic Relations> Beijing Reivew Exclusive> Features
UPDATED: August 30, 2010 NO. 35 SEPTEMBER 2, 2010
The German Model
It is time for other EU members to start paying attention to Germany and try to emulate its success

In early August, Germany announced its best GDP growth figures in a decade. In the second quarter of 2010, Germany's GDP grew by 2.2 percent, and is on track, say some analysts, to post 3 percent for the year. Its exports remain robust.

While other developed economies are talking bullishly about increasing their exports, Germany is actually doing it, and remains a model. High quality hi-tech machinery, automotives and components remain its strong points. In a profile of the German economy in the Financial Times on August 16, it was stated that a quarter of the German GDP was in industry. For the UK, this number is under 17 percent. While other EU countries have focused on the service sector in the last two decades, Germany has maintained the closest thing to a mixed and balanced economy.

Manufacturing prowess

ELECTRIC MOBILITY: German Chancellor Angela Merkel, along with Martin Winterkorn, Chairman of the Board of Management of Volkswagen AG, inspects electric and hybrid cars on display at Berlin's Brandenburg Gate on May 3 (XINHUA/AFP)

Germany's role at the heart of Europe has always been critical. Since the beginning of the 20th century, it has been the largest European economy. After the devastation of World War II, West Germany rebuilt its industrial capacity, much of it with assistance from the U.S. Marshall Fund. It may seem ironic that the allied powers who defeated Germany in war should want to see the country with a strong economy again. But lessons had been learned from the agreements reached at the end of World War I. These settlements, according to John Maynard Keynes, the economist who attended the Versailles Peace Talks, forced on Germany unsustainable reparations which decimated the economy and created the very social discontent the Nazis were able to exploit. A successful German economy was seen as crucial to peace in Europe, and during the last six and a half decades, that has proven to be the case.

In 1989, following the reunification of West and East Germany, the economic costs of merging a planned economy with one that embraced the market proved temporarily costly. But as the 1990s proceeded, a united Germany began to pick up economic steam, and remained easily the largest European economy. Its great strength was, and is, its manufacturing capacity. Car production through BMW and Audi, and machine manufacturing through Siemens and Bosch, among others, meant that it was the world's largest exporter. It was able to absorb huge social welfare costs for workers because of its success as an exporter.

It is also as a manufacturer and exporter that Germany forged a powerful relationship with China. Its companies were some of the earliest to come to China after 1978, when the opening-up policy started, and they were also some of the most successful. Volkswagen acquired big joint venture factories in Shanghai. Benz and BMW became the carmakers of favor for the newly emerging rich in the Chinese coastal areas.

As an embassy official at the British Embassy Commercial Section in the early 2000s, I remember the constant refrain when I traveled around China was that we needed to study how the German companies did it. Their technology was admired, their efficiency was renowned and their ability to work in China without political problems was legendary. Despite the fact that the UK consistently remained the largest EU investor in China, it was German companies that had the highest profile. No amount of promotional events the UK held seemed able to shift this predisposition by Chinese for German companies.

Not clear sailing

This is not to say that Germany had clear sailing during the last decade. Its unemployment rate remained high, at almost 10 percent. Attempts by politicians to do something about high social welfare costs went nowhere because of the very strong opposition of, among others, the unions. The global economic crisis hit Germany as hard as any other country in Europe. And then there was its membership in the euro zone, which meant that, in May, as the Greek economy plummeted due to huge government debt, fellow eurozone members looked to Germany to bear the brunt of a bailout.

Despite this year's impressive growth statistics, however, Chancellor Angela Merkel's coalition government has become increasingly unpopular because of its intention to pass the same sort of austerity measures that the UK, France and now even the United States are looking at. Merkel, one of the EU's most admired leaders, has suffered mounting problems since the resignation of one of her key allies, Horst Kohler, the country's president, earlier this year. Christian Wulff was elected as his replacement in late June, but the contest was very close, much to Merkel's embarrassment. There is widespread anger over proposed cuts to the social welfare system, and dissatisfaction with the amounts of money Germany was finally able to commit to the Greece bailout, even though in the end the IMF and other partners were involved.

Economists also look at Germany's close export links with China as a double-edged sword. While the EU collectively has a huge trade deficit with China, Germany is one of the few countries which has something close to parity in its import and export figures with the People's Republic. A third of Germany's cars are exported to China. Its machinery has a good market there. But overreliance is as worrying as underachievement. A fall in Chinese demand could seriously affect German growth. And there are few other markets at the moment where it might be able to make up the shortfall.

There is also a broader political issue. What does a strong German economy mean for Europe? And what does it mean for China's relations with the EU? The whole EU project started as trade cooperation in the 1950s. But the vision of the founders, including Jean Monnet, was more ambitious. They knew that Europe could never again suffer the devastating wars that had occurred in the first part of the 20th century. Millions were killed and the regional economy was decimated. A prime motivator for the creation of first the European Economic Community, and then the European Union, was to ensure that Europe was never again plunged into war.

It is true that for over 65 years now, that objective has been achieved. Through processes of enlargement, the EU has grown from nine, to 15, and now to 27 member states. The issue of Turkey's accession remains the most controversial current challenge. Another is the full implementation of the Lisbon Treaty, finally passed last year, which was meant to bring greater unity to the EU's foreign policy coordination and its internal mechanisms. Members of the EU, and all the other European states, have enjoyed the most prosperous, unified, and successful era in their long history. At its best, the EU has enabled different nation states to balance their own interests with the benefits of belonging to a greater collective. Whatever the many frustrations, this has been a remarkable achievement.

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