German economic model – American style

When I first entered the United States as a German exchange student in 1976, I found a nation in a deep funk. Coming from a squeaky-clean country that was socially at peace and economically successful, I discovered graffiti, learned about the widespread use of drugs in high schools, and was surprised to hear that hitchhiking in urban areas was unsafe. And any day, the US economy was going to be overtaken by Japan and, later, by Germany.

When I returned to America in the late 1990s, Germany had slumped and was called the "sick man of Europe" – burdened with high labor costs and stiff regulations and unable to unlock its potential.

The US, on the other hand, had evolved into the country of high growth rates and boundless optimism. It built the coolest gadgets, produced the coolest TV shows, and fielded the coolest sports teams. I learned about manicured lawns, the advantages of portfolio diversification, and the difference between a home, a mansion, and a McMansion.

Another 15 years on, I find the US (now my country of residence) in yet another funk, while Germany has suddenly morphed into Europe's economic "powerhouse." Nowhere in the industrialized world did gross domestic product increase as much per capita over the past decade as it did in Germany.

Yes, German economic growth has slowed in recent months. A huge debt crisis is shaking Europe – and Germany, too. But no Western country weathered the storm of the Great Recession as well. Unemployment is at a 20-year low. And if not for that big, competitive economy in its middle, Europe would be deeper in the doldrums than it already is. Little wonder that analysts and politicians are examining the secrets of Germany's success.

Having crisscrossed the Atlantic for 35 years, I have learned one thing: that tables can turn – and can be made to turn. There is neither an exceptionalist destiny in the globalized world nor an inevitable tailspin.

Transatlantic learning is valuable when a country is looking for techniques and tools for reform. But it can be a tricky exercise as well. Simple copying rarely works, and a pointer can be misunderstood to be a lecture.

When Treasury Secretary Timothy Geithner went to Europe in September to suggest a stimulus package to his eurozone colleagues – a proposal to "do-as-we-did-in-the-US," he was nearly sent packing. When former German Chancellor Gerhard Schröder, writing recently in this publication and others, suggested the US adopt a government-subsidized program to keep workers on the job during economic downturns, the idea did not resonate.

Mr. Schröder had simply overlooked differences in political culture. Welfare-state solutions for problems of a stalwart, free-market economy are recipes that a minority loves and a majority loves to hate.

So, can the US really learn from Germany? I'd say: Yes, please, but American style! When Germany tanked in the '90s, it slept through a whole phase of modernization. When Apple and Microsoft, Oracle and Google grew to become global powerhouses, Germany stood by. Except for the software company SAP, there simply are no German equivalents. There is no German Bill Gates or Steve Jobs.

Germans barely do IT innovation. Why, then, would a country be seen as a global role model for industrial modernization after it has just about skipped a full cycle of innovation?

Well, Germans may not be good at transformative innovation, but they are great at incremental innovation. Germans, the saying goes, make things that go inside the thing that goes inside the thing. They produce niche products, and do that well. By the end of, say, 10 improvement cycles, German tinkering has produced a completely new product.

Tinkering doesn't earn you Nobel Prizes, but it does help to build successful businesses. Today, the ascent of the emerging economies is powered by German high-tech machine tools, though they may be controlled by hardware and software that Americans invented. The same goes for medical equipment and all sorts of other high-tech gear.

And the lesson in all of this? America is sleeping through the green- and energy-economy boom, mostly because it chooses not to believe in it; it is thus missing out on an efficiency revolution that is transforming the globe while making countries and businesses rich. The German example shows that no Western country is doomed to fail permanently just because it takes an innovation and modernization pause. But a country needs to get back into the game – and on its own terms, building on its own strengths.

There is no use in copying German incrementalism when America is in the transformation business. The "Swabian Tinkerer" is not the role model when your guy is the "Silicon Valley Creator."

Just when America fell into disrepair at the turn of the millennium, Germany engineered its comeback.

The country took advantage of the newly introduced euro, thus avoiding appreciation and improving its competitive position. It streamlined the welfare state and bargained with trade unions to achieve long-term wage restraint while offering job security in return. It outsourced part of its industrial production to low-cost countries in Central and Eastern Europe, and as an exporter, it then took advantage of these countries' growing middle classes. Germany also aggressively embraced globalization and emerging markets.

Most of these recipes are not available to Americans. They cannot use a new currency; after two decades of flat incomes, wage restraint is hardly an option; and Eastern Europe is not in America's backyard.

That leaves globalization for Americans to embrace. They have done so with a half-hearted hug. They import, but do not export nearly enough to avoid a trade deficit. Yes, Apple and Microsoft, Oracle and Google are great exporters. But America's small- and medium-sized businesses do not play in the same league. Barely 3 percent of such businesses export. Overall, exports make up only 13 percent of America's economy.

For Germany, exports generate far more than a third of the country's income. In the past few years, Germany has increased exports by about 50 percent while reducing the number of unemployed by 40 percent. Most of the exporters are small- and medium-sized businesses. These entrepreneurs are overwhelmingly small-town business leaders with a small-town mind-set. Discovering the secret of their affinity for globalization should be worth multiple study tours and trade missions.

I am confident that Americans will accept the challenge of global competition because they must. And I fear that Germans will grow complacent because that is what success breeds. Therefore, the pendulum will swing yet again. At that point, it will be my pleasure to warn an American audience against writing off Germany too soon.

Thomas Kleine-Brockhoff is a senior transatlantic fellow at the German Marshall Fund of the US