Older and wiser A special report on Germany March 13th 2010

GermanySURCOV.indd 1 1/3/10 13:32:14 The Economist March 13th 2010 A special report on Germany 1

Older and wiser Also in this section Inside the miracle How Germany weathered the recession. Page 3

The green machine A second wind for German industry? Page 5

Much to learn Germany’s education system is a work in progress. Page 6

What a waste Germany scandalously underuses immigrants and women. Page 8

Getting closer But eastern and western Germany may never quite meet. Page 10 For all its stolid reputation, Germany has become surprisingly ‡exible, says Brooke Unger. But it needs to keep working at it Steady as she goes LM, like many German towns, is ar• crisis. Although Germany’s economy has Angela Merkel and the art of the possible. rayed around a central church like an plunged, its unemployment rate has so far Page 11 U expectant congregation. Its Gothic spire is barely budged, a ŒGerman miracle, econ• the tallest in the world. The city is also fam• omists proclaim (see chart 2, next page). As A muted normality ous for being the birthplace of Albert Ein• the global economy recovers, Germany’s United Germany is becoming more stein. But Ulmers do not live in the past. will do better than the rest by selling cars, comfortable in its skin. Page 13 They are too busy making things, or work• chemicals and capital goods to markets ing out how to make them better, and dis• such as China, India and Brazil. ŒGermany patching them to the rest of the world. The is still out†tter to the world, says Bert Rü• family•owned Mittelstand †rms that clus• rup, a former head of the government’s ter in and around this modest town along• council of economic Œwise men. side the Danube river were among the The crisis seemed to discredit the ŒAn• prime bene†ciaries of Germany’s export glo•Saxon model of growth based on †• boom, the main source of growth until the nancial wizardry and property bubbles‹ world economy slumped in late 2008. and vindicate the German one, in which Acknowledgments In addition to the people quoted in this report, the author That disaster has not shaken Ulm’s self• workers co•operate with bosses, managers is grateful to the following: Jutta Allmendinger, Reinhard con†dence. Since the †nancial crisis Ger• invest for the long term and manufactur• Pollak and Wolfgang Merkel, Wissenschaftszentrum Berlin many’s economy has shrunk more than ing holds pride of place over services. The für Sozialforschung; Jörg Dräger, Bertelsmann•Stiftung; Sebastian Dullien, HTW Berlin; Jeanne Fagnani, CNRS; most, by around 5% in 2009 (see chart 1, chancellor, Angela Merkel, is promoting a Clemens Fuest, University of Oxford; Matthias Gabriel, next page). That of Baden•Württemberg, Œcharter for international economic man• ChemiePark Bitterfeld Wolfen; Markus Grabka, DIW; Ulm’s home state, dived by as much as 8%. agement based on Germany’s Œsocial• Christine Grunert, Stadt Ulm; Ulrike Guérot, European Council on Foreign Relations; Wolfgang Herrmann and But the region around Ulm itself held up market principles. Crisis•prone members Bernhard Rieger, TU München; John Kornblum, Noerr LLP; better than the rest of the state because its of the euro zone could cure their woes by Cornelia Kristen, Georg•August•Universität; Roland economy is diversi†ed, reckons Otto Sälz• becoming more like Germany, many Ger• Manger, Earlybird; Paul Nolte, Freie Universität Berlin; Lothar Probst, Universität Bremen; Kai Peter Rath, Anja le, managing director of the region’s cham• mans think. Its hottest export could be the Hartmann and Eckart Windhagen, McKinsey; Holger ber of industry and commerce. Some local German model itself. Schäfer, IW Köln; Hilmar Schneider, IZA, Bonn; Daniela †rms are in hard•hit industries like cars Schwarzer, SWP Berlin; Dennis Snower, Institut für Weltwirtschaft, Kiel; Werner Tillmetz, Zentrum für and machine tools but many are not: Ulm Repeat after me Sonnenenergie• und Wassersto •Forschung; Ingrid also makes pharmaceuticals and James Germany does have some important les• Weinhold, MABA. Bond’s favourite †rearm, the Walther PPK. sons to teach the world, as this special re• The region’s unemployment rate rose from port will explain. But the idea that Ger• A list of sources is at 3.3% to 4.6%, still well below the national many has got everything worked out Economist.com/specialreports rate. ŒWe are the strongest region in Ger• requires some big quali†cations. It has an many, crows Mr Sälzle. ageing population, a growing share of An audio interview with the author is at Feistiness is an all•German trait these which is either of non•German origin or Economist.com/audiovideo days, bolstered rather than subdued by the poorly educated, or both. And Germany’s 1 2 A special report on Germany The Economist March 13th 2010

2 towering export surpluses are at risk be• that of its neighbours. If it is not careful, so cause its trading partners cannot sustain will its living standards. It will have more de†cits for ever. Strikingly, too, the German pensioners and fewer workers. One possi• model is no longer all that German. Over ble future is that it will become less innova• the past decade the country has rewritten tive and less productive, and indeed less its recipe for success, incorporating many German in ways it would not welcome. foreign ingredients, including some from But that is not inevitable. the much•maligned Anglo•Saxons. Ulm shows that a springy economy The great thaw makes the challenges easier to tackle but Germany strikes people as being set in its does not remove them. People with a Œmi• ways. Revolutions, whether of the Thatch• gration background‹immigrants, their erite sort in Britain or the spasms of discon• children and grandchildren (including eth• tent in France, hold little appeal. From his• nic Germans who arrived after the fall of tory’s convulsions Germany has learnt to the Berlin Wall)‹account for 37% of the prize a quiet life. The fall of the Berlin Wall city’s 116,000 inhabitants and a majority of in 1989 and uni†cation a year later was ex• its children under ten. Those who came as citement enough for a while. Change, if it Œguest workers in the 1950s and 1960s must happen, is painstakingly negotiated quickly adopted Swabian habits of thrift by everyone concerned, from political par• and hard work, says Ulm’s mayor, Ivo Gön• ties to the governments of the 16 Länder ner, but Œthe kids have problems. Many (states) to the Œsocial partners (trade un• are unsure where they belong; some have ions and employers’ representatives). not mastered German. Yet the country has spent the past de• Ulm and Neu Ulm, its Bavarian sibling cade smashing its own taboos. In 1999 it across the river, became brie‡y notorious sent its armed forces into battle for the †rst in 2007 when police captured would•be time since the second world war as part of terrorists who were on the verge of blow• Integrating young immigrants into the a NATO operation to protect Kosovo from ing up American installations in Germany. workforce is the Œbiggest challenge by far. Yugoslavia. In the same year Germany re• Two of the suspects, one a convert to Islam, Much therefore depends on how grace• luctantly surrendered the D•mark, an an• belonged to radical out†ts in the twin fully Germany becomes greyer and chor of its post•war identity, in favour of towns. These have nothing to do with the browner. Other countries have even fewer the euro, with notes and coins appearing established immigrant community, Mr babies, but none Œhas such long•term ex• in 2002. In 2000 the government changed Gönner insists. But foreigners are often as• perience in low fertility, notes Reiner the de†nition of what it is to be German, sociated with the threat of terrorism. Klingholz of the Berlin Institute for Popula• which had been based on bloodlines since A bigger worry is what will happen as tion and Development. The number of imperial days, by giving non•ethnic Ger• ageing Swabians retire. By 2025 a quarter children per woman dropped below the mans born in the country a right to citizen• of the workforce will be older than 55, replacement rate of 2.1 in the 1970s. The ship. Meanwhile ŒDeutschland AG, the compared with 15% now, and the number women born then in relatively small num• clannish system of cross•shareholdings of school•leavers will shrink by a third. bers are in turn having small families. Until among banks and enterprises, was killed Within ten years the region will be short of 2002 Germany let in enough immigrants o by Anglo•Saxon notions, and no one 60,000 workers, 7,500 of them engineers, to stave o demographic decline, but the wants it back. That brought Œmore share• the soul of the Mittelstand. Mr Sälzle won• in‡ux has slowed. In 2008, for the †rst time holder democracy into the real economy, ders whether the next generation is ready in a quarter•century, more people left the says Frank Mattern, who heads the Ger• to step in. ŒWe’ve imported the education• country than came in. man operation of McKinsey, a consultancy. al problems of Turkey and Italy, he says. The newcomers are not as well educat• More contentious than all of these was 1 ed as the native Germans, but they have more babies. Ulm is not unusual. In some Growth plunged... 1 towns in the Ruhr region the share of un• ...but jobs held up 2 GDP, % change on previous year der•†ves with migrant backgrounds tops Unemployment, % of labour force 60%. Overall, they account for a third of the 6 youngest children. By mid•century half the 20 Britain Spain 4 population will have non•German origins, says Klaus Bade, head of the Expert Coun• 15 2 + cil for Integration and Migration in Berlin. Spain Germany 0 By then Germany will be a di erent 10 Germany France – sort of place. It will have 8m•14m fewer France 2 people than it does now, and perhaps a 5 4 smaller population than Britain and Britain France. If Turkey joins the European Union 6 Germany could be pushed into fourth 0 2000 01 02 03 04 05 06 07 08 09* 2000 01 02 03 04 05 06 07 08 09 place, the spot Italy occupies now. Ger• Source: OECD *Estimate Source: Eurostat many’s economy will shrink relative to The Economist March 13th 2010 A special report on Germany 3

2 a series of economic reforms prompted by the pressure. This did wonders for compet• ent, supposedly more reform•minded co• stubbornly high unemployment and inti• itiveness, sharpening Germany’s depen• alition with her preferred partner, the liber• mations of demographic decline. Agenda dence on exports, but wages stagnated and al Free Democratic Party (FDP). 2010, the handiwork of a left•wing co• the middle class shrank even as high•in• Germany may not need another alition of Social Democrats and Greens in come earners enjoyed a tax cut. Ger• abrupt shake•up. It no longer su ers from 1998•2005 led by Gerhard Schröder, tried to many’s income distribution was fast be• an arthritic labour market, an obese state tackle many of Germany’s economic mal• coming less equal. or a su ocating tax burden. As the labour adies. It made joblessness more painful force shrinks, the number of jobs is likely but provided more support for jobseekers. Punishing the messenger to become less of a worry than the number That, along with buoyant world trade, In the 2005 election voters evicted Mr and quality of people available to †ll them. seemed to help. Unemployment dropped Schröder from power and demoted his So• But this special report will show that plen• from 5m in 2005 to 3m in 2008; in the last cial Democratic Party (SPD) to second †d• ty of problems remain to be solved. Be• two years of the upswing long•term unem• dle in a grand coalition led by Mrs Merkel’s tween 2000 and 2009 the share of Ger• ployment fell by 40%. conservative Christian Democratic Union mans who considered society unfair But Agenda 2010 both symbolised and (CDU). Disgruntlement with Mr jumped from 54% to 71%. The state is better contributed to changes in economic and Schröder’s reforms fuelled the rise of the at supporting idle citizens than preparing social relations that Germans †nd unset• ex•communist Left Party, largely at the them for today’s world of work. Social tling. New forms of work and welfare SPD’s expense. Mrs Merkel proved to be welfare is not yet ready for the coming de• spread: Œmini•jobs, temporary employ• more social democratic than her combat• mographic storm. The economic recovery ment and, most menacingly, Hartz IV, the ive predecessor. She avoided giving of• is still shaky and, if it lasts, will be followed handout that awaits anyone who does not fence, sought consensus, inched reform by years of †scal belt•tightening. Unless †nd a job quickly. Workers in western Ger• forward when she could and back when export surpluses keep rising, Germany many were already scrambling to compete she thought she had to. In last September’s will need to †nd new sources of growth. with more ‡exible eastern Germans and elections she was rewarded with a victory Mrs Merkel’s job is not to haul Germany cheap labour on Germany’s doorstep in that allowed her to boot out the SPD from out of a ditch but to retune the engines of central Europe, and Agenda 2010 increased her government and form a more coher• its success‹in some ways a harder task. 7 Inside the miracle

How Germany weathered the recession

HIS is what we love, exclaims Jan ploy nearly 1m workers, more than any employees. When such a deal is negotiated ŒTStefan Roell, presenting an intricate• other industry, and export almost 80% of with the works council it is binding on the ly worked ingot of gleaming steel as their production. Often the product is not workforce, a Œhuge advantage, he says. He though it were a piece of jewellery. It be• merely a machine, but also a panoply of invites the council’s chairman to every longs somewhere in the innards of a test• services that go with it. management meeting. ing machine made by Zwick Roell, the †rm Last year they took a beating. Sales This symbiosis owes something to the he owns. One model rips the eyes o ted• plunged by a †fth to ¤160 billion; Zwick intimate scale of a Mittelstand enterprise, dy bears (to see if children can), another fared no better. The wonder was that engi• but it also relies on an institutional mach• pokes computer keyboards. Mr Roell neering †rms shed a mere 40,000 jobs. ŒIn ine as intricate as one of Zwick’s testing wants the visitor †rst to admire the part, narrow commercial terms we can’t justify contraptions. Mr Roell recruits skilled next the Swabian craftsmen who fash• that, says Hannes Hesse, head of the As• workers through an apprentice system ioned it and then the German genius for sociation of German Machine Builders in with roots in medieval guilds. He manages making expensive and indispensable Frankfurt. His members are betting that de• labour relations within a framework set by things. His customers expect German thor• mand will bounce back, but it is a gamble. negotiations between employers’ associa• oughness, he says. Three possible misfortunes could scupper tions and trade unions. This arrangement Ulm•based Zwick Roell, which has 950 recovery, he reckons: another terrorist at• survives because Germans have a knack employees and sales of ¤150m ($202m) a tack, another tremor in the banking system for changing the way something works yet year, is a typical Mittelstand †rm. Until the and a failure by banks to supply enough keeping its basic structure intact. 1930s it made buttons from cow horn im• credit to his members or their customers. ported from Argentina, but when plastic The jobs miracle could yet falter. Slowly but surely took over it switched to testing machines. The last time Zwick made a regular em• Twenty years ago it was a byword for rigid• Like many Mittelstand enterprises Zwick ployee redundant was in 1992. That is be• ity. Wages and working conditions were works backstage, making things that are cause the workforce reacts to economic set in sector•wide negotiations that al• used in making other things. The thou• shocks like a well•engineered suspension lowed individual †rms little scope for va• sands of Zwick•like †rms that constitute system. When the crisis hit, Mr Roell shed riation, tying employers’ hands. Out• the engineering sector are a cornerstone of some workers on temporary contracts and wardly little has changed, but the contracts Germany’s industrial economy. They em• cut the working hours and pay of regular have changed character. In the 1980s Œthey 1 4 A special report on Germany The Economist March 13th 2010

Surprisingly nimble 3

Unit labour costs, average annual % change, 2000-08 Manufacturing, latest available year National-currency basis $ basis % of employment % of total gross value added 4 2– 0+ 2 4 6 8 0 5 10 15 20

France Germany

Germany Japan

Britain France

Japan United States

United States Britain

Sources: US Bureau of Labour Statistics; OECD

2 were like the Bible, says Martin Wansle• all, the trade union for the industry. Top of utions, Zwick’s engineers go for a tailor• ben, chief executive of the German Cham• the reformers’ hit list is Germany’s rigid re• made approach. The complexity•loving bers of Industry and Commerce. ŒNow gime for protecting workers from dismiss• culture on the factory ‡oor is shaped by they provide important guidance. al. But without that protection workers Germany’s Œdual system of vocational This was not a bloodless coup. Many would not allow hours to pile up in work• training, which combines classroom learn• East German enterprises, caught between ing•time accounts, says Alexander Herzog• ing with hands•on experience. At Zwick low productivity and paying D•mark Stein, also of the Hans•Böckler•Stiftung. Roell it is reinforced by a Swabian passion wages, shunned sector•wide labour con• The crisis has drawn the two sides clos• for inventive tinkering, or tüfteln. ŒI can de• tracts. High unemployment, the threat of er together. Both are determined to defend legate things that in other countries need production moving to central Europe and Germany’s export success. It helps that supervision, he says. Mr Schröder’s reforms cranked up the pres• they can blame the recession on outsiders It is a pact that depends partly on the sure. As unions lost members, employers and bankers rather than on each other. owner not appearing to be too greedy. Mr defected from the industry federations. More important, employers have so far Roell reinvests two•thirds of the †rm’s pro• Only half of west German private•sector kept their side of the ‡exibility bargain by †ts. The Mittelstand survives Œbecause fam• workers are covered by sector•wide con• keeping up employment. ilies don’t want the money, he says. ŒThey tracts, against two•thirds in 1998, says Rein• Much of the credit for Germany’s jobs want the business to continue. And they hard Bispinck of the Hans•Böckler•Stif• miracle goes to Kurzarbeit, a scheme under are not easily put o : ŒIf people tell you tax tung, a think•tank close to the trade unions. which government hands out subsidies to is a big issue they haven’t done their home• †rms that retain surplus workers, but there work. Bureaucracy is a bigger problem. Give and take is more to it. Joachim Möller, head of the Mr Roell grumbles that he has to install in• And even when they do, the contracts are Institute for Employment Research (IAB), ternal safety doors on his lifts, Œridiculous riddled with Œopening clauses. At †rm part of the Federal Employment Agency, stu which keeps me from doing my job. level bosses and works councils formed argues that ‡exible working hours have All in all, though, he feels that Germany’s Œalliances for jobs under which workers been an important factor in holding up skilled workers and its infrastructure make sacri†ced pay to secure employment. employment. When the recession hit, it Œa wonderful place to do business. Working•hours accounts allow companies workers had built up a large number of ex• But the success of †rms like Zwick Roell to adjust the amount of work done to tra hours in their working•time accounts is not synonymous with Germany’s. peaks and troughs in production without that could be wound down as work dried Manufacturing’s share of output and em• paying overtime. This ‡exibility powered up. But †rms were also looking ahead to a ployment has dropped, though it remains exports, lifted economic growth and fat• prospective scarcity of labour. larger than in most competitor countries tened pro†ts. It enriched everyone, the un• In 2009 the number of people of work• (see chart 3). Workers with permanent fac• ions grumble, except workers. Wage rises ing age in western Germany shrank for the tory jobs have done relatively well recent• have lagged behind productivity gains and †rst time. The †rms hit hardest by the crisis ly. Since 2005 the pay of IG Metall’s mem• in‡ation since 2000, driving down unit la• were precisely those that had the biggest bers went up by a total of 14%, says Mr bour costs relative to those of Germany’s problems recruiting skilled labour before Hofmann‹less than the rise in productivi• competitors (see chart 3). it. ŒMost companies will see a signi†cant ty, but still Œsatisfactory. The price of ‡exi• Though bosses readjusted the settings impact from a shortage of quali†ed la• bility was higher for workers in weaker in their favour, they did not smash the bour by 2014 or 2015, says Harald Krüger, sectors or with Œatypical contracts. machine. In some ways Mitbestimmung, head of personnel at BMW, a Munich• Schlecker, a chain of discount chemists, re• workers’ rights to in‡uence decision•mak• based carmarker. Despite the crisis, BMW cently shut down some shops and sacked ing, was strengthened. Job alliances, for ex• was careful not to cut its annual intake of the workers, but at the same time opened ample, draw works councils into company 1,000 apprentices. bigger ones with temporary sta at lower strategy. In December workers at Mer• All this provides a perfect setting for Mr pay. Public outrage forced a retreat. cedes’s Sindel†ngen factory near Stuttgart Roell to indulge his passion for pro†table went on strike after the company said it perfectionism. His machines are four Let’s have a party would shift production of its C•Class cars times as expensive as competing testers Stagnant pay and domestic consumption to Alabama, so Mercedes promised to made in China, his second•biggest market. have increased Germany’s dependence on maintain employment at the plant until The company actually makes its own box• exports. Between 2004 and 2008 its net ex• 2020. That pledge Œwould be worth noth• es so that the gear arrives in perfect condi• ports accounted for nearly 40% of GDP ing without new products and invest• tion. Although Mr Roell has competitors, growth. Its trade surpluses are the mirror ments, points out Jörg Hofmann, head of he acknowledges no peers. Where his image of de†cits run by countries now no the Baden•Württemberg branch of IG Met• main American rival prefers standard sol• longer able to a ord them, including sever•1 The Economist March 13th 2010 A special report on Germany 5

2 al of its partners in the euro zone. Ger• Germany, he feels, should therefore But not that many Germans are wor• many may not have been responsible for throw its own party by rebalancing ried about the current•account surpluses. the headlong rush into consumption that growth away from exports and towards The country is getting older, so it makes caused the imbalances but, says Thomas domestic demand. Unusually, this puts the sense for it to accumulate investments in Mayer, Deutsche Bank’s chief economist, Deutsche Bank economist in the same more youthful places. The surpluses could Œwe were caterers to the party. It is still in camp as the trade unions, though their be smaller, perhaps, but the main concern progress. Between the mid•1990s and 2007 remedies di er. The unions want higher is keeping Germany in medal position current•account imbalances rose from 2% wages, backed by a statutory minimum among world exporters. If America and of global GDP to 6%. They have since eased wage, which would boost domestic de• Europe buy less, China, India and Brazil back to 4%, but with public rather than mand and suck in more imports. Mr Mayer will buy more. The next generation of ex• private spending fuelling demand. That would encourage more low•wage jobs, port blockbusters is already coming up, as cannot last, Mr Mayer thinks. which would beef up Germany’s services. the next section will show. 7 The green machine

A second wind for German industry?

HE Roding Roadster, a sports car un• †rm that is pushing 40. Germans who technology at TUM. Germany is in pole po• Tveiled at last September’s Frankfurt want to convert bright ideas into riches go sition in several fast•growing Œgreen tech motor show, has a powerful motor and to America, says McKinsey’s Mr Mattern. areas, including renewable energy and lightweight construction that promise a Only 4% of the working•age population is automotive eˆciency. But the arrival of thrilling ride. But at Munich’s Technical engaged in early•stage entrepreneurial ac• the Tesla shows that Germany could still University (TUM), which the Roding’s de• tivity, according to the Global Entrepre• lose the race. signers attended, there is even more buzz neurship Monitor, against America’s 8%. about the Tesla, a battery•powered car How much does that matter? Germany Sharpen up from California. It shows that electro•mo• has done pretty well with cars, machines Decision•makers are haunted by the bility Œcould be fast and fun, says Markus and chemicals, medium•tech products as thought that the country’s only marketable Lienkamp, who teaches car technology at measured by the share of turnover invest• raw material is brainpower and that the TUM. Annoyingly, Tesla opened a dealer• ed in research and development (R&D). number of brains is shrinking. Germany ship in Munich on BMW’s doorstep. Just because innovation is hidden does not underspends on education and R&D (see Germany invented the modern inter• mean it is not there. ŒA BMW has more chart 4, next page), and just a †fth of scien• nal•combustion engine and intends to be a software than the space shuttle, says tists and engineers are aged 25•34, the low• leader in any future automotive technol• Manfred Broy, a professor of information est share in the EU. As catalysts of new ogy. It has helped to spread the idea that ideas, German universities lag behind modern life can be transposed into planet• American and British ones. Venture capital friendly technology. The government’s had a late and inauspicious start, just be• promise to put 1m electric cars on the road fore the dotcom bubble burst in 2000, by 2020 is one of many initiatives to en• which stunted its subsequent growth. sure that Germany cashes in. So Tesla’s Mrs Merkel, herself a physicist, has at• brash entrance into the green enclosure tended to these de†cits with methodical was met with a mixture of derision and doggedness. Her 2005•09 grand coalition fear. Surely slapdash American engineer• stepped up support for government•fund• ing will be put to shame by the inventive ed research institutes and launched an Œex• perfectionism of the German Tüftler, car cellence initiative to promote elite univer• folk mutter. But that is a hope, not a certain• sities and programmes. Her new coalition ty. Mr Lienkamp welcomes the threat. plans to spend an extra ¤12 billion on edu• ŒWhen a German engineer gets angry, he cation and to o er a big tax break for R&D. advises, Œwatch out. ŒWe’ve sent a signal on education and re• Germany is confused about its techno• search that no one else has sent, says the logical identity. On the one hand it em• education minister, Annette Schavan. braces the new. It ranks fourth among Much of this money will ‡ow into real• countries in the number of patents †led ising Germany’s biggest idea: that German per person and comes close to the top in in• engineering and environmentalism will ternational surveys of innovation. On the join forces to provide industry with a sec• other hand it has few enterprises emerging ond wind. ŒWhoever is †rst to conquer from garages to wreck everyone else’s green•tech markets will have an enduring business model. The closest German export advantage and create jobs, Mrs equivalent to Google is SAP, a software Tesla against Tüftler Merkel has declared. 1 6 A special report on Germany The Economist March 13th 2010

2 Green tech is a broad and slippery con• there is as hot as anywhere else, as the so• Fahrfreude (driving joy). They use the cept. Just about anything can be done lar industry is already †nding out. The Chi• catchphrase ŒEˆcientDynamics to de• more cleanly, and it would be surprising if nese have jumped in with lower prices. scribe their e orts to reconcile the two. Germans were not the †rst to do it in indus• Last year demand slumped along with These are mostly Œeasy things like †ddling tries they lead. The German government prices of silicon, the main raw material for with aerodynamics or pumping coolant has been sending steady green signals to solar cells, dealing a double blow to †rms Œon demand, says Hans Rathgeber, the market for years. It passed a trend•set• locked into higher•priced silicon contracts. BMW’s head of vehicle architecture. Im• ting recycling law in 1991and was a pioneer Now the government wants to accelerate provements to conventional cars will go of Œfeed•in tari s, obliging utilities to buy the cuts in the feed•in tari for solar power, most of the way towards meeting the EU power generated by renewable sources at which is four times the going rate for elec• emissions targets, says McKinsey’s Mr Ma• prices that re‡ect their higher costs. Now tricity. Q•Cells, the biggest †rm in ŒSolar lorny. The †nal stretch will require adop• renewables account for 15% of electricity Valley in the eastern German state of Sax• tion of radically new technologies, such as and German manufacturers of solar cells ony•Anhalt, has already shifted some pro• battery power. and wind•power turbines are among the duction to Malaysia. High•value•added Will German carmakers master a tech• world’s leaders. photovoltaic products will be made in nology that came of age as a power source Germany, says Q•Cells’ Marko Schulz, but for video games? The answer matters not The place to be simple products will move abroad. only to the industry but also to the coun• In energy•saving †xes for cars with tradi• It might seem odd that makers of fast try’s future as an innovator. BMW says that tional engines, such as lightweight materi• cars for people unfazed by the cost of fuel electric vehicles will not replace conven• als and stop•start brakes, ŒGermany is should worry about retooling them for a tional cars or hybrids for the foreseeable worldwide absolutely in front, says Chris• greener age, but the Germans reckon future: their range is too short and they tian Malorny of McKinsey. Even the Mittel• greenery plays to their strengths. Besides, take too long to charge. But the company stand has joined the general green mobili• they have little choice. Under EU law car• will be ready. It is developing new Œmobil• sation, in part because its German makers have until 2020 to reduce CO2 ity concepts for large cities. Last year it customers demand it. Licon, which makes emissions signi†cantly. BMW is deter• signed an agreement with Bosch, a Ger• machinery for the car industry, puts ener• mined that this should cause no loss of man parts•maker, and Samsung, a Korean gy•storing brakes on its own machinery. electronics †rm, to buy batteries for an ur• Using a broad de†nition, Roland Berger, ban electric car. What makes a BMW is not a consultancy, reckons that the global Middling 4 the fuel source or even the engine. Accord• green•tech market was worth ¤1.4 trillion Research and development spending ing to Ulrich Kranz, the company’s resident in 2007 and is likely to grow to ¤3.1 trillion % of GDP, 2008 or latest available year futurologist, cars are Œa huge interactive by 2020, outstripping vehicle production. system  that BMW manages. Germany is well positioned, with market 0 1 2 3 4 But even futurologists can be surprised. shares of 30% in power generation and Japan Pro†table ideas can come from anywhere. 20% in Œsustainable mobility. Green tech United States That is why Mr Lienkamp at TUM leads a could create 1m new jobs by 2020. ŒThis is a Germany team that is developing its own ideas for a good and growing story, says Roland France commercially viable electric car. An inno• Berger’s Torsten Henzelmann. Britain vative society is one that hedges its bets by But Mrs Merkel’s hopes of conquering having as many thoughts‹and think• Source: OECD green markets are optimistic. Competition ers‹as possible. 7 Much to learn

Germany’s education system is a work in progress

ERMANY invented the modern uni• on, says Mrs Schavan, the education min• And given that Germany produces far Gversity but long ago lost its leading po• ister. Azubis (trainees) acquire not just a fewer university graduates than many sition to other countries, especially Ameri• professional quali†cation but an identity. comparable countries, some wonder ca. These days the land of poets and But the dual system is under pressure. whether the dual system is producing the thinkers is prouder of its Œdual system for The number of places o ered by compa• right quali†cations for the knowledge• training skilled workers such as bakers and nies has long been falling short of the num• based professions of the future. ŒThe dual electricians. Teenagers not bound for uni• ber of applicants. Almost as many young• system is for 200 years ago, says Alex• versity apply for places in three•year pro• sters move into a Œtransitional system, a ander Kritikos of DIW, a research institute grammes combining classroom learning grab•bag of remedial education pro• in Berlin. ŒYou have to ask: is it still the right with practical experience within compa• grammes designed to prepare them for the system if we want to be innovative? nies. The result is superior German quality dual system or another quali†cation. Of• The system is governed by a consor• in haircuts as well as cars. Dual training Œis ten it turns out to be a dead end, especially tium representing almost everyone who the reason we’re the world export champi• for male immigrants. counts: the federal and state governments, 1 The Economist March 13th 2010 A special report on Germany 7

2 the chambers of commerce and the un• vealed that German 15•year•olds scored in ions. It regulates access to 350 narrowly de• the bottom third among schoolchildren †ned trades. You can train to become a from 32 countries in tests of reading and goldsmith, or if you want to manage a Mc• maths‹has not worn o . Overall, Ger• Donald’s you learn Systemgastronomie. many’s performance remains mediocre. Baking bread and pastries are separate dis• More than a †fth of 15•year•olds cannot ciplines. Schools outside the system may read or calculate properly; 8% of teenagers not train Azubis for a reserved trade. drop out of school. It makes sense to combine theory and practice, says Heike Solga of the Social Sci• A war of ideologies ence Research Centre in Berlin, but the There is Œno consensus on the content and dual system is rigid and discriminatory. goals of education, says Mrs Schavan. The And because the trades are so specialised, arguments extend from primary schools to getting a job at the end can be hard. In 2005 universities and are as much about tradi• more than a third of graduates were unem• tion and status as about learning. Many ployed a year after completing their Germans are loth to scrap a system so course. Ms Solga thinks the number of How am I doing? closely identi†ed with the country’s eco• trades should be greatly reduced, the early nomic and cultural success. stages of training made more general to whether this way of doing things is fair, A controversy now raging in Hamburg, make switching easier, and the right to and whether it is working. Although in• a port city and one of Germany’s smallest train Azubis opened up to a wider range of come is distributed relatively equally, op• states, illustrates the strife. In 2008 the schools. ŒIt should not be about where you portunity is not. ŒGermany is one of the Christian Democrats, normally champi• learn but what you can do, she says. most rigid among the relatively advanced ons of the three•tier high•school system, societies, says Karl Ulrich Mayer, a sociol• formed their †rst state•level coalition with Once a scholar, always a scholar ogist at Yale University. the left•leaning Green Party. The Greens The type of secondary school a German Germans remember the economic mir• won agreement for a radical school re• attends, the degree he obtains and the ex• acle years of the 1950s and 1960s nostalgi• form, mainly by extending primary ams he passes classify him for life. The dis• cally as the era of the Œrising generation. schooling (and thus shortening secondary tinctions are made earlier and more rigidly But that growth lifted everyone without schooling) by two years. The idea was that than in other countries. ŒNowhere are cre• changing their relative positions much. if streaming children by ability is done lat• dentials as important as in Germany, says And with inequality rising, that rigidity er, the slower ones will have a better Stefan Hradil, a sociologist at the Universi• seems less acceptable. Renate Köcher of Al• chance of doing well and the brighter ones ty of Mainz. lensbach, a polling †rm, says that lower• will at least fare no worse. Many children are typecast at age ten, class Germans are a‰icted with Œstatus fa• Middle•class parents of Gymnasium• which is when most German states decide talism, hopelessness about prospects for bound children rebelled. The ŒGucci prot• which of three kinds of secondary school improvement for them and their children. esters collected more than enough signa• he or she will attend. Traditionally the Teenagers’ performance in internation• tures to get the reform put to a referendum. Hauptschulen, the lowest tier, were the al tests is more strongly correlated with The parents fear that their children will be main suppliers of recruits to the dual train• family background than in almost any oth• dragged down by academic laggards in the ing system, but they gradually became er country, says Ludger Woessmann of Ifo, name of social justice, although such evi• dumping grounds for children who could a research institute in Munich. Even with dence as is available points in the opposite not keep up. Upon leaving (sometimes the same marks, a child whose parents direction. The rebellion evokes wider sym• without passing the †nal exam), nearly went to university is four times as likely to pathy. In conservatives’ eyes, Hamburg’s 40% of these students †nd themselves in attend a Gymnasium as one born into a government is laying siege to a noble and the precarious transitional system. The working•class family. ambitious idea of education that is still dual system now draws its intake mainly But social exclusiveness has not pro• possible within the state school system. from the middle•grade Realschulen, the tra• duced excellence. The 2001 ŒPISA Almost any education reform o ends ditional training ground for white•collar shock‹a set of OECD †gures which re• somebody. In a move to strengthen feder• workers, and even Gymnasien (grammar alism in 2006, the federal government was schools), the main route to university. banned from investing in areas reserved The state bureaucracy acknowledges Not enough thinkers 5 for the 16 Länder (including education), four career paths: the simple, middle, ele• Population* with degree-level education, % of total which makes serious reform even harder. vated and higher services. Bureaucrats in But the immovable object is being battered one category can rarely aspire to careers in 0 10 20 30 40 by irresistible forces, including demo• a higher one. Teachers in Gymnasien enjoy United States graphic change and the demands of the a higher status than those at other schools. economy. Progress is halting but the direc• Japan and have their own trade union, the grand• tion is fairly clear: the system is being ly named Philologenverband. A Meister• Britain streamlined, schools are being made more brief, the highest vocational credential, is France accountable and the hierarchy is becoming not just a badge of competence but in Germany less rigid. As with so many things in Ger• some trades a keep•o sign to competitors. many, change proceeds by sleight of hand. Source: OECD *Aged 25-64 Germans are now asking themselves The 2001 PISA results, which not only 1 8 A special report on Germany The Economist March 13th 2010

2 compared Germany with other countries noon programme of some sort doubled higher education. More than 40% of the but individual German states with each between 2002 and 2006. students at such universities come from other, put state education ministers under The three classic tiers are coalescing schools other than Gymnasien. pressure. The states that performed worst into two, as is happening in Hamburg and The universities are embroiled in a row narrowed the gap with the best perform• in Schleswig•Holstein, partly because the of their own. They have given up the re• ers by half within six years, says Mr number of children is shrinking. All Ham• vered Diplom to comply with Europe’s Bo• Woessmann. Both states and the federal burg’s second•tier schools will o er the logna process, which mandates (mostly government are sharpening their instru• Abitur. North Rhine•Westphalia’s CDU• shorter) bachelor’s and master’s degrees. ments for measuring schools’ perfor• FDP government last year enacted a law re• This is meant to make the German system mance. Starting in 2005, the states for the quiring teachers in lower•tier schools to be compatible with others in Europe (and en• †rst time submitted to binding quality trained to the same standard as Gymnasi• courage students to move around), and to standards for secondary schools. ŒFor Ger• um teachers. award more useful degrees. Hard•core tra• many this is a paradigm shift, says Jürgen With the number of young people ditionalists oppose the reform in principle, Baumert, head of the Max•Planck•Institute shrinking and the demand for skills rising, but the main objections are its sometimes for Human Development in Berlin. states are making it easier for dual trainees sloppy implementation and the scant re• Paradigms in the way schools are man• to get bachelor’s degrees, eroding the caste sources available to universities in general. aged do not suddenly shift, but they do distinction between vocational and uni• Too much of German education re• evolve. School leaders in some states are versity training. BMW now sends a quar• mains hidebound. ŒThe rule is still the gaining a modicum of autonomy, includ• ter of its apprentices to universities of ap• teacher standing in front of a class of 30 ing the freedom to choose their own teach• plied science, the practice•oriented junior and the kids taking notes, says Kaija ers. Though half•day schools are still the siblings of traditional universities, which Landsberg of Teach First, an education norm, the proportion o ering an after• account for about a quarter of students in charity. Immigrant children su er most. 7 What a waste

Germany scandalously underuses immigrants and women

EINZ BUSCHKOWSKY, the mayor of bottom) and paying women to stay at society make the most of underemployed Hthe Berlin district of Neukölln, is fam• home with their children (he thinks the immigrants and women? Should immi• ous for being blunt. He is in charge of an money would be better spent on pre• grants become Germans, and if so, what ethnic goulash: 140,000 of his 305,000 school education so that immigrant chil• sort? These questions are interconnected. constituents are Turks, Arabs, Yugoslavs or dren could learn proper German). He is For di erent reasons, immigrants and other migrants. The local unemployment equally impatient with liberal multicultur• women play a disproportionately small rate is 26%, and probably twice that among alism. Immigrants have a chance, he says, role in Germany’s labour force. Many im• the immigrants. Work disappeared when Œwhen they not only live in Europe but be• migrants never recover from their start in subsidies to industry were withdrawn come European. an Œeducation•free monoculture, as Mr after the fall of the Berlin Wall. But Neu• Neukölln may be untypical, but it raises Buschkowsky puts it: a home where family köllners are all too willing to live o Hartz questions that preoccupy the whole coun• members and cartoon characters speak a IV social•security bene†ts, which provide try. How much welfare is too much? When language other than German, a spell in a a family with children with enough to get should the state assume responsibility for Hauptschule followed by the transitional by. ŒLong•term welfare paralyses people, looking after children? How can an ageing system and a life on the dole. Nearly one• Mr Buschkowsky observes, sounding third of Germany’s Turks, the largest group more like an American Republican of the of immigrants other than ethnic Germans, 1980s than a leading member of Berlin’s Underemployed, underpaid 6 have no secondary•school diploma, and Social Democratic Party. Children grow up Wage gap*, %, 2007† just 14% qualify to go to university. Some thinking Œmoney comes from the state, 16% are dependent on welfare, twice the Women’s share of total part-time drop out of school and then raise children employment, %, 2008 share of native Germans. In 2005, the last who repeat the cycle. 40 20 0 20 40 60 80 year for which data are available, the un• Neukölln’s problems loom large partly Germany employment rate among Turks was 23%, because it is in Berlin which, unlike Paris or compared with 10% for native Germans. London, is poorer than the country it gov• France erns. In Ulm, which has more factories, Britain Underworked, underpaid Hartz IV is a less appealing option. Still, Mr Women take a di erent route to underem• Buschkowsky’s message matters any• Japan ployment. Their problem is not education: where in Germany. He lambasts not only United States they make up a majority of those who pass welfare dependency but also conservative *Difference between total median earnings the Abitur as well as of university students. shibboleths like the three•tier high•school (for both sexes) and men’s median The trouble starts afterwards. The wage Source: OECD earnings †Or latest available year system (Œonce at the bottom, always at the gap between men and women is 23%, 1 The Economist March 13th 2010 A special report on Germany 9

2 among the widest in the EU. That is partly The government has maintained a cau• leading. Germany lacks the republican as• because though women’s participation tious momentum, balancing welcome sertiveness of France, which bars school• rate is above average for Europe, many of with a demand that immigrants adapt to girls from wearing headscarves, and the those women work part•time (see chart 6, German ways. Under a Œnational integra• populist self•con†dence of Switzerland, previous page). The Œone breadwinner tion plan orchestrated by the grand co• which voted to ban minarets in a referen• model of family life‹now updated to 1½ alition, language training for immigrants dum last November. But that does not breadwinners‹remains the cultural norm and their children is being expanded and mean that it is more relaxed about mi• in west Germany. In a 2006 survey 27% of businesses have promised to create extra grants. In some ways it is less so. For exam• women aged 15 to 39 in that part of the training places for migrants. The coalition ple, citizens of non•EU countries cannot country agreed with the statement that set up a standing ŒIslam Conference to ne• hold dual citizenship, which they are able Œfamily life su ers when the woman has a gotiate relations between the religion and to do in France and the Netherlands. When full•time job. In east Germany the †gure the state. Its main successes, according to Thilo Sarrazin, a former Berlin †nance was only 9%; in France 13%. Mr Bade, were to establish that Muslims minister, last year put forward the claim, Institutions have not caught up with see no contradiction between their faith which many saw as bordering on racist, the majority of west German mothers and Germany’s constitution, and to agree that most of the city’s Turks and Arabs who would contemplate full•time work. in principle to teach Islam in state schools, were Œneither willing to integrate nor capa• Child care remains scarce. Just 8% of Ger• as Judaism and Christianity already are. ble of it, polls found that a majority of man children aged two or younger are in In 2008 Cem Ozdemir, a Swabian of Germans agreed with him. crèches for more than 30 hours a week; in Turkish origin, became co•chairman of the If integration means a willingness to France the proportion is 17%. For slightly embrace German identity, he is right. Only older children the di erence widens. Un• a third of Turks have given up their pass• surprisingly, in Germany only 17% of moth• ports to become German citizens, and ers with two or more children work any• even the most successful among them thing like full time, whereas in France more have reservations. Ufuk Topkara, a young than half do. naturalised German perfectly at home Germany as a whole is underem• with his Turkish•German identity, main• ployed. Germans in work put in an average tains that Œthe moment you speak German of 1,430 hours in 2006, the third•lowest rate you are German, but explains that many in the OECD. Even after the labour•market of his Turkish friends disagree: ŒThey go on reforms, long•term unemployment re• about being Turks living in Germany. If on mains well above the OECD average. More the other hand integration means speak• than half a million immigrants cannot do ing German, belonging to the middle class the jobs for which they trained because and obeying the law, then his friends are Germany does not recognise their quali†• already there. The problem is that too cations, a case of credentialism gone wild. many do not recover from a poor start in A country in demographic decline cannot life. About half of young children in Neu• a ord such waste. By 2035 Germany’s GDP kölln need remedial German classes be• per person will fall by 8•15% relative to that fore they go to school. There is no sanction in other rich European countries and in if their parents refuse to take them. America, calculates Axel Börsch•Supan of Now the government wants to make it the Mannheim Research Institute for the easier for mothers to go back to work after Economics of Ageing. Give them a job childbirth. The grand coalition introduced To head o such relative decline, Ger• Œparents’ pay, a bene†t linked to the new many needs to re•engineer not only the Greens, the †rst hyphenated German to parents’ salaries that allows either of them welfare state but its attitudes towards im• lead a big party. The †rst Turkish•origin po• to take up to 12 months o . This has started migrants, women and people over 60. lice inspector debuted on ŒTatort (crime to make a di erence to family life. The Against its conservative instincts it has scene), a popular television series, in the share of fathers taking paternity leave‹ made a start. In the past ten years it has same year. When Mrs Merkel named Phil• normally for an extra two months‹has done more to integrate minorities than in ipp Rösler, who was born in Vietnam, as jumped from 3.5% to more than 20%; the the previous 40, says Klaus Bade, the immi• health minister in her new government, most doting ones, surprisingly, are in con• gration scholar. When Œguest workers there was little comment. Second•genera• servative Bavaria, where more than a quar• from Turkey, Italy and Greece ‡ooded in to tion immigrants fare better than their par• ter of new fathers take the bene†t. alleviate labour shortages in the 1950s and ents. Ethnic Turks born in Germany are By 2013 crèche places will be available 60s, Germans thought they would eventu• twice as likely to pass the Abitur as those for a third of children younger than three, ally leave again; during the 1980s the gov• born in Turkey itself, though still only half and children over one will be entitled to a ernment tried to pay them to go. Now it ac• as likely as native Germans to do so. Those place if the parents want it. That may be cepts that Germany is an Œimmigration who manage to obtain professional quali• diˆcult to achieve in practice. Local gov• country. A citizenship law passed in 2000 †cations generally prosper in their careers, ernments, which foot part of the bill for which said that people not born German but this progress is partially masked by day care, are in dire †nancial straits. The ex• could become so was followed in 2005 by new arrivals of unskilled immigrants, of• pansion in most states remains Œgrossly an immigration law that inched open the ten for marriage. underfunded, says Gisela Erler, owner of doors for skilled foreigners. Neither side is sure where all this is Familienservice, a company that operates 1 10 A special report on Germany The Economist March 13th 2010

2 crèches. She reckons it will take 20 years sive policy of encouraging women to work family•friendly. ŒThe best worker isn’t al• before the promised number of decent• and young children to attend German• ways the one who stays till 8pm, says Mr quality places can be provided. But what speaking pre•schools. The conservatives Krüger, the personnel chief. BMW now lets has been put in motion, she notes, is none• invoke freedom of choice. ŒPeople know workers take sabbaticals and up to 20 days’ theless Œa huge step. what’s best for them, says Stefan Mappus, extra holiday a year in return for lower pay. No politician openly opposes that, but the premier of Baden•Württemberg. ŒIt’s He wants to arrange things so that working conservatives in Mrs Merkel’s CDU have sad that when you want to strengthen the part•time does not mean dropping out of persuaded her also to accept a bene†t family people accuse you of defending an professional life. But family friendliness called Betreuungsgeld, made to mothers obsolete model. alone will not shield BMW from the com• who prefer to stay home with their chil• In business, pragmatism reigns. BMW ing demographic storm. By 2016, says Mr dren. For people like Mr Buschkowsky, this supports four kindergartens in Bavaria and Krüger, Œwe won’t make it without engi• is a disastrous departure from the progres• is trying to make the work culture more neers from other parts of the world. 7 Getting closer

But eastern and western Germany may never quite meet

HE capitalist West had Kodak, Agfa and reserve. Next to Wolfen is Solar Valley, a apportioned. Easterners are acutely con• TFuji. East Germany snapped its photos cluster of renewable•energy companies. scious of what the merger has done to on ORWO †lm, which had drawbacks. The But Bitterfeld and Wolfen, now one them. For most westerners the conse• images were easily smudged and the col• town, have not yet recovered from the quences have been more remote, so they ours were weird. In Wolfen, where ORWO shock of uni†cation, and may never do so. tend to underestimate them. was manufactured, people said you could The super•eˆcient successors of the old Uni†cation was bound to be expensive develop the †lm by dipping it in the river socialist enterprises need far fewer people because of the way it was done. Once the Mulde. Neighbouring Bitterfeld, a hub of to work for them. The town has lost 44% of border was open, West Germany had to of• the East German chemical industry, was its population, says its mayor, Petra Wust. fer some semblance of its own prosperity known as the Œdirtiest city in Europe. The young headed west to jobs and better to the east or face mass immigration. So it Since German uni†cation in 1990 the pay. In the east the celebration of the 20th exchanged D•marks for Ostmarks at a rate federal and state governments have spent anniversary of uni†cation next October that had no basis in economic reality. Pen• ¤230m on detoxifying the area. ORWO no 3rd will be tinged with melancholy. sions were brought close to western levels. longer makes †lm. Bitterfeld still produces For western Germany uni†cation was a Trade unions, fearful that eastern workers chemicals, but hundreds of well•groomed national triumph. It restored full sover• would swamp western factories, insisted †rms have replaced the cheerless Kombi• eignty to the whole of Germany, both le• on rapid wage increases in the eastern nat (industrial conglomerate), and the gally and psychologically. It removed the states. Even the electricity supply needed chemical park now looks out over a nature oddity of a separate East Germany, a thorn an immediate upgrade: east German pow•1 in the Federal Republic’s ‡esh. But the cost was mind•boggling. In the past two de• cades about ¤1.6 trillion has ‡owed from west to east to pay for pensions and public• sector salaries, build roads, smarten up cit• ies and encourage investment. Last year alone the net transfer was ¤80 billion, about 3% of German GDP. Uni†cation is no longer new and excit• ing, but it remains incomplete. Few doubt that it was inevitable, or question the basic political principles of the uni†ed republic. In a recent poll by Forschungsgruppe Wah• len, a research out†t, 91% of east Germans (ŒOssis) and 85% of west Germans (ŒWes• sis) said uni†cation was the right choice. Another survey, by Infratest dimap, found that 91% in the east support democracy as a form of government, though less than half are happy with the way it actually works. But Ossis and Wessis still have di erent perceptions of history and politics and of The way things were in Bitterfeld the way the burdens of uni†cation were That’s better, but where is the work? The Economist March 13th 2010 A special report on Germany 11

2 er plants fell foul of EU rules and were used to take care of nearly 200 children. vanced to the Rhine. Uni†cation led to an switched o , so the region was wired into Now there are 80. Œeconomic cleansing of the west, argues the western grid. The teachers there understand that Ulrich Blum of the Institute for Economic The west’s nervous generosity sealed communist East Germany was doomed. Research in Halle. It was partly †nanced by the fate of thousands of overmanned east• Rosemarie Krämer has not forgotten that a rise in social•security contributions, ern †rms making goods that had become the wait for a new car was 15 years and that which made labour more expensive and unsellable in any part of the country. Be• to get your own apartment you †rst need• indirectly led to the Agenda 2010 reforms. tween 1990 and 1992 they shed some 2.3m ed a husband. She realises the party was Post•communist labour practices in the industrial jobs. Talent drained away. Since wrong to demand ideological compliance east inspired greater western ‡exibility. 1989 about 4.3m easterners have left the re• from kindergarten teachers. ŒWe wanted a And the east is already providing models gion, to be partially replaced by 2.7m west• new system, says Mrs Krämer, Œbut what for coping with demographic decline. erners. All in all, eastern Germany lost a we have now is not what we wanted. The move to more liberal shop•opening tenth of its population. Eastern Germany’s Most of the mothers, who under hours started in the eastern state of Saxo• unemployment rate is nearly double that communism would have gone out to work ny, in part because east German women of the west, though that is partly explained as a matter of course, now spend their days spend more time at work. In 2007 three• by a higher female participation rate. in tiny apartments up several ‡ights of quarters of them were in the workforce, stairs and collect Hartz IV. The children get against two•thirds in the west, and their Worth it, despite the pain little guidance at home and the teachers pay was much closer to that of their male But these disruptions do not negate the have to treat them with kid gloves at colleagues. They are happy to park chil• huge gains in material and political well• school, so they ‡ounder. Kita Buratino’s dren in crèches, which remain more plenti• being that uni†cation brought about. The carers mourn the loss of subsidised bread, ful than in the west. Eastern mothers work gap in living standards has shrunk: GDP †eld trips to the Baltic and holidays to cele• 12 hours a week longer than western ones. per person in the east has risen from 40% brate women and teachers. Solidarity Although the overall birth rate in the east is of west German levels in 1991to nearly 70% among people is disappearing from the low, highly educated women do not have in 2008. Life expectancy is six years higher new east Germany, Mrs Krämer thinks: ŒIt fewer babies, as in the west. Eastern Ger• than before. Infrastructure‹roads, tele• has become a society with sharp elbows. mans see themselves as leading the way. phone lines and so on‹is so good that The western eagle’s embrace has left ŒWhat’s behind us faces west Germany westerners are envious. Nor has it all been most Ossis feeling bruised. Nearly two• now, says Wolfen’s mayor, Mrs Wust. bought with western handouts. Manufac• thirds think they are treated as second• Parity with western Germany is the turing accounts for about a †fth of eastern class citizens and three•quarters feel disad• wrong benchmark, argues Mr Blum. East• GDP, not far o western levels, and unit la• vantaged compared with Wessis. But re• ern Germany may never overcome some bour costs are lower. The recession hit the sentment is not rejection. Large majorities of its disadvantages, such as its relative west’s export•oriented industry harder of both groups see the peaceful revolu• lack of big cities and the exodus of its elite. than the east’s. tion‹an eastern achievement that led to The biggest investors are †rms from out• In North Wolfen, a collection of prefab uni†cation‹as a fortunate event and think side the region, so there are few highly paid apartment buildings put up in the 1960s, it has been a success, according to a poll by jobs in company headquarters. Eastern the losses seem to outweigh the gains. the Konrad•Adenauer•Foundation, which companies innovate and export less. Even Once coveted, the apartments are now be• is linked to the CDU. so, the forecasters say that within a decade ing abandoned. Once in a while a building Adenauer, the †rst post•war chancellor, or so eastern Germany as a whole should is demolished. In the old days Kita Bura• thought that Œeast of the Elbe the Asian be as rich as the poorest western Länder. tino, the neighbourhood’s kindergarten, steppes begin. The steppes have now ad• That will be uni†cation of a sort. 7 Steady as she goes

Angela Merkel and the art of the possible

T IS hard to think of another big country sibling, the Christian Social Union (CSU)‹ the CDU and CSU’s combined 34% was Iwhere a recent election was such a non• acquired a new coalition partner, the liber• their worst result in 50 years. Only the event. Both America and Japan responded al Free Democratic Party. strong showing of the FDP, which won a to the economic crisis by electing govern• The result was both an endorsement record 15% of the vote, spared Mrs Merkel ments of a di erent colour, and Britain and a rebuke. Voters rewarded Mrs Merkel from having to continue a grand coalition may do the same in a few months’ time. In for her deft handling of the economic cri• that her party did not want. Germany, after a ‡accid campaign last Sep• sis. Polls show that Germans’ trust in gov• Guido Westerwelle, the FDP’s leader tember, voters made a judicious adjust• ernment rose during the crisis. Yet turnout and now Germany’s foreign minister, pro• ment. Angela Merkel was re•elected as in the election was a record low of 71%, and claims that the election result will bring chancellor but the grand coalition she had the two big parties that have dominated about a Œspiritual•political transforma• been heading did not survive. Her conser• post•war politics were humiliated. The tion. His party is Germany’s most forth• vative union‹the CDU plus its Bavarian SPD’s 23% of the vote was a disaster, and right defender of free enterprise and a 1 12 A special report on Germany The Economist March 13th 2010

Mrs Merkel’s strategy will become clear only after North Rhine•Westphalia’s own election in May, which will decide the sur• vival of the state’s CDU•FDP coalition as well as the federal government’s majority in the Bundesrat, the upper house of the legislature. The more important battleground is the modernisation of Bismarck’s welfare state, which pays for pension, health and other bene†ts by taxing employment. According to one calculation, the unfunded future cost of these programmes pushes up pub• lic debt from 65% of GDP in 2007 to an im• plicit 250% of GDP. While investing more Merkel and Westerwelle give it a whirl in the young, Germany must brace itself for ageing. 2 smallish state. It returned to power after 11 dled start. The coalition agreement is spe• Some progress has been made on pen• years in opposition by promising to slash ci†c mainly about two issues, taxes and sions. The grand coalition decided to raise taxes and Œmake work pay again. If Mr education, notes Andreas Pinkwart, an the pension age, gradually, by two years to Westerwelle has his way, the new coalition FDP leader and vice•premier of North 67. But it also rolled back reform, for exam• will begin to move Germany out of the Rhine•Westphalia, Germany’s most popu• ple by issuing a pre•election pledge that shadow of Œfather state. lous state. There is to be extra money for pensions would never drop even if wages education and research, ¤24 billion of an• did. ŒThe next generation will pay dearly, Keep it mellow nual tax relief and a simpler income•tax says Friedrich Breyer of the University of But such transformations are not Mrs Mer• system. This will have to be reconciled Konstanz. Partly because of the reforms so kel’s style. Her four•year partnership with with a recent amendment to the constitu• far, says Hans Fehr of the University of the SPD, normally a political foe, was a tion obliging the federal government to get Würzburg, by 2030 pensioners Œwill expe• soothing blend of measured progress and close to eliminating its structural de†cit by rience a dramatic drop in income. That ar• opportunistic retreats from Mr Schröder’s 2016, and the Länder to do so by 2020. As gues for a further shift from state to private reforms (which many Social Democrats the anchor of Europe’s currency, the euro, †nancing. The Bundesbank calculates that had come to regret). She sat out factional Germany has an interim target of bringing to keep pension contributions at their cur• †ghts, making the course she eventually its budget de†cit below 3% of GDP by 2013. rent rate of 20% of wages, the pension age chose look Solomonic. Her stewardship of That is Œan absolute must for Germany to will have to rise to 69 by 2060. the new alliance is likely to be similarly be credible in the European context, says cautious. She operates best behind the Axel Weber, president of the Bundesbank, Doctor, doctor scenes and above the fray. the central bank. This year and next the Reform of health care may be the govern• Nor are the voters in the mood for ad• de†cit is likely to exceed 5% of GDP. In ap• ment’s most ambitious undertaking. Ger• venture. The FDP’s surprisingly strong pointing Wolfgang Schäuble, a tough• many is already the fourth•biggest spender showing during capitalism’s worst post• minded elder statesman of the CDU, as †• on health after America, France and Swit• war crisis does not look like a mandate for nance minister, Mrs Merkel signalled that zerland. It does not have America’s unin• less state and more market. Its campaign she has every intention of meeting the def• sured millions but su ers from un•Ger• emphasised tax cuts rather than a leaner icit targets. man ineˆciency. Germans are Europe’s state. In a poll conducted for the German The government has not yet explained most dedicated patients, visiting their doc• Banking Federation, 61% of voters wanted how it hopes to reconcile these goals. Deep tors an average of 18 times a year. Dr Rösler, more social protection and just 23% fa• spending cuts would †t with Mr Wester• the FDP health minister, wants to decouple voured more market. The political middle, welle’s ideas for a transformation. But the health and employment costs and encour• which Mrs Merkel intends to colonise, liberals have not made a consistent case for age patients to economise. His main idea is wants a balance between social sensitivity shrinking a state that is not particularly big to convert part of workers’ contributions and economic responsibility, says Klaus• by OECD standards (see chart 7, next page), into a †xed monthly payment that would Peter Schöppner of TNS Emnid, a pollster. so attention has focused on the demand act as a sort of insurance premium. More Mrs Merkel’s mandate is to reassure. for tax cuts which, faced with record de†• eˆcient insurers could charge lower fees. Her style makes sense for many of Ger• cits, even most FDP voters now reject. To lighten the burden for low earners, Dr many’s problems. It worked in the crisis, to So far Mrs Merkel has contained the Rösler would subsidise them through the which she reacted pragmatically and ‡exi• clashes. She managed to keep down a re• tax system. bly. It seems right for issues that require the bellion by state premiers from her own Hartz IV, though only †ve years old, is patient pursuit of long•term solutions, party against the coalition’s †rst big initia• also ripe for reform. Some 5m people con• such as education and the integration of tive, an ¤8.5 billion package of tax cuts sidered capable of working collect the wel• ethnic minorities. But some of the hard called the Œgrowth acceleration law. The fare bene†t but only 1.4m are actually em• choices now facing Germany may need a next round is likely to spark further insur• ployed. Activating the economically inert di erent approach. rection. The coalition’s approval rating has group would pay multiple dividends: it The new government has had a mud• sagged, along with support for the FDP. would spur growth, channel immigrants 1 The Economist March 13th 2010 A special report on Germany 13

2 into the labour market and, some econo• the election campaign it said so little about But his coalition with the FDP could lose its mists believe, give a †llip to the underde• slimming down the state. majority, which could force the CDU to veloped service sector, easing Germany’s Yet as pensioners tug one way, upward• form either a grand coalition with the SPD dependence on exports. Currently people ly mobile young voters pull another. They or a partnership with the Greens. That with low•paid jobs can keep part of the Œdon’t want to be spoon•fed by the state, would be a rebu to Mrs Merkel’s govern• bene†t, which ought to encourage work, says Peer Steinbrück, who was †nance ment and perhaps a fatal blow to Mr West• but the settings are skewed. Once income minister in the grand•coalition govern• erwelle’s transformation agenda. exceeds ¤100 a month, bene†ts quickly tail ment. Mr Westerwelle recently tapped into o , in e ect imposing a tax rate of 80%. popular resentment against Hartz IV bene• Colour combinations All of this is highly contentious. Unions †ciaries by complaining that in Germany But Mrs Merkel might sense an opportuni• howled at the increase in the retirement Œthere seem to be only people who get tax ty. The CDU and the Greens already govern age to 67. Dr Rösler’s idea of a ‡at fee for money but no one who earns it. Heinz jointly in two small states, in Hamburg by rich and poor alike is vociferously op• Bude of the Hamburg Institute for Social themselves and in Saarland as part of a ŒJa• posed by the CSU, and the subsidy plan †ts Research detects a middle•class disen• maica coalition (named for the colours of ill with the FDP’s enthusiasm for tax cuts. chantment with welfare, akin to America’s the country’s ‡ag) that includes the FDP. The constitutional court recently told the before Ronald Reagan. Such exotic alliances are bound to become government to rip up its formula for setting The North Rhine•Westphalia election more common. The rise of the Left Party Hartz IV bene†ts and start anew. Most re• will not settle the matter, but it will give makes it more diˆcult for traditional co• forms imply a shift in responsibility from Mrs Merkel’s government its †rst †rm indi• alitions such as CDU•FDP to build major• state to citizen. With more than 40% of Ger• cation of whether it is on the right track. ities in the Bundestag. A CDU alliance with man voters receiving a state transfer of Jürgen Rüttgers, the state’s CDU premier the Greens in North Rhine•Westphalia some kind (including pensions), politi• (and the party’s most vocal defender of could pave the way for something similar cians tread carefully. Œsocial policies), is likely to be re•elected. at federal level after the 2013 election. Mrs Merkel wants to introduce reforms, The CDU’s origins are in the Catholic but whether and when she does so will de• Centre Party of pre•war Germany, the pend on her keen sense of what is political• Well-nourished but not obese 7 Greens’ in the protest movements of the ly possible. The calculation will not be sim• Government spending, % of GDP, 2009* 1960s. But the CDU has embraced environ• ple. Germans have a low tolerance for mentalism, and today’s Greens are mostly measures that widen inequality. The Agen• 0 10 20 30 40 50 60 prosperous burghers with a liberal bent. da 2010 reforms tested that tolerance, Sweden Entrepreneurs in Baden•Württemberg, an• SPD alienating the ’s core supporters and France other candidate for such a coalition, vote fuelling the rise of the ex•communist Left CDU but their wives are often Green, says Party. More than two•thirds of Germans Britain Winfried Kretschmann, the party’s parlia• disapprove of earlier reforms to pensions Germany mentary leader in the state. Such a partner• and health care, according to a 2007 poll by Japan ship would be harder to forge at federal FDP the University of Stuttgart. Even the United States level, but Mrs Merkel might like to have a now takes pains to show a social con• go. Whatever the colour of the coalition, Source: OECD *Estimate science, which is one reason why during she intends to head it. 7 A muted normality

United Germany is becoming more comfortable in its skin

ERMANY is plagued by a severe 2006, when its black, red and gold ‡ag ‡ut• both more assertive and more useful to its ŒGeconomic malaise and by uncer• tered above cars and balconies as though allies. Its armed forces get involved in con• tainty about its place in the world, wrote patriotism had never gone out of fashion. ‡icts in the Balkans, the Middle East, Africa The Economist in a special report in 2002. A Atonement for Germany’s awful past is and Afghanistan, to which Germany is the lot has changed in eight years. These days woven into the constitution and still third•largest contributor of troops. In Janu• Germany lectures other countries on eco• shapes foreign and domestic policies; it is ary, under pressure from America, it nomic management and sends troops to one reason why Germany is Israel’s best agreed to raise the maximum number of Afghanistan. It may still not be a Œnormal friend in Europe. But now it is invoked less soldiers it could send to Afghanistan from country. But now that the Federal Republic often as an excuse to avoid doing some• 4,500 to 5,350 and to double its aid for civil• is a matronly 60 and uni†cation is ap• thing that would otherwise make sense. ian reconstruction. proaching a post•adolescent 20, the likely The economic crisis, ironically, has been a Germany now defends its national in• shape of normality is becoming clearer. psychological boost; to Germans, the so• terests more frankly, especially in Europe. Germany has become more at ease cial•market economy looks more like a sol• Helmut Kohl, the chancellor who guided with itself. That became obvious during ution than a cause. Germany to uni†cation, was responsible the football World Cup held in Germany in This portends a Germany that can be for the last great act of self•denial, the sur•1 14 A special report on Germany The Economist March 13th 2010

2 render of the D•mark. The tone changed with his successor, Gerhard Schröder, who made it clear that Germany would not reach for its cheque book every time the European Union put out its hand. He also signed a deal to build a gas pipeline from Russia that bypasses Poland and the Baltic states (and now works for the consortium that is constructing it), suggesting that a more self•con†dent Germany would also be a more sel†sh one. This marks a generational change. Re• sponsibility is passing from the ‘68ers, moral prosecutors of the crimes commit• ted by their parents, to the youth of 1989, notes Joschka Fischer, whose progress from radical street †ghter to foreign minis• ter sums up the arc of his generation. The next one has less need of the EU to keep it Better one than two on the straight and narrow, or of NATO to protect it from attack. Last summer Ger• rity Council. Germany is coming to the Germans protest. Even though they many’s constitutional court ruled that the resemble France in balancing European co• disapprove of the Afghanistan operation, EU lacked the democratic legitimacy to hesion with the pursuit of national status, 60% accept that such missions are un• push European integration further. says Gunther Hellmann of Johann Wolf• avoidable, according to Allensbach, a poll• Yet the ‘89ers face new anxieties that gang Goethe University in Frankfurt. ing organisation. Germany’s most popular keep them hanging on to the old struc• politician is Karl•Theodor zu Guttenberg, tures. Germans were the biggest bene†cia• Once burned, always shy the aristocratic defence minister. Similarly, ries of the post•war bargain under which Yet unlike the victors of the second world the EU inspires little enthusiasm, but few Europe outsourced its security to America war it remains, in the words of Constanze people doubt that Germany’s destiny lies and used the money it saved to build the Stelzenmüller of the German Marshall within it. National pride is partly linked to welfare state, notes Jan Techau of the Fund, a Œself•shackled republic. Ger• a sense of international duty. NATO Defence College in Rome. But Eu• many’s NATO partners see it as passive, re• Germany’s friends no longer worry rope is no longer the front line and Ameri• active and foot•dragging. Post•war paci• much that pride will ever become hubris ca’s focus is shifting to the Paci†c. Euro• †sm remains vigorous. Germans respect again. A federal state with a declining pop• peans fret that China and America will their armed forces but a 2007 survey by the ulation embedded in democratic alliances make global decisions over their heads. Bundeswehr found that only 42% of the is unlikely to be a threat. But they do fear The answer to that is for the Europeans population were proud of their achieve• that its sense of duty will ‡ag. As Germany to speak with a more coherent voice and to ments, compared with 87% of Americans. comes of age, it seems unsure whether to strengthen their partnership with the Most want Germany to pull out of Afghan• assume more responsibilities or merely Americans. Terrorism, climate change and istan as soon as possible. more prerogatives. Its allies are depending the rise of China are probably best faced by What is striking, however, is how little on Germany to become wiser with age. 7 investing more in the main alliances, not less. But the alliances themselves are un• O er to readers Future special reports der strain from a variety of causes. It falls to Reprints of this special report are available at a America’s economy April 3rd Germany to help. price of £3.50 plus postage and packing. Innovation in emerging markets April 17th Angela Merkel, a more self•e acing A minimum order of †ve copies is required. Television May 1st character than Mr Schröder, has sent International banking May 15th Corporate o er mixed signals. She was instrumental in se• Water May 22nd Customisation options on corporate orders of 100 South Africa June 5th curing the passage of the Lisbon treaty, or more are available. Please contact us to discuss which strengthens the EU’s role in justice, your requirements. migration and foreign policy. Yet when it Send all orders to: came to picking the †rst holders of the top jobs created by the treaty‹the president of The Rights and Syndication Department the European Council, which represents 26 Red Lion Square WC1R 4HQ heads of government, and the high repre• London Tel +44 (0)20 7576 8148 sentative for foreign a airs‹she joined her Fax +44 (0)20 7576 8492 fellow leaders in choosing †gures too puny e•mail: [email protected] to compete with them. In European emer• gencies Mrs Merkel has been watchful of For more information and to order special reports Previous special reports and a list of German treasure and national preroga• and reprints online, please visit our website forthcoming ones can be found online tives. Like her predecessor, she wants a per• Economist.com/rights Economist.com/specialreports manent seat for Germany on the UN Secu•