The Demise of the Mittelstand
Germany has an incredibly rich history of innovation, with the first patents being issued by the government in the early 18th century. The father of electromagnetism, Michael Faraday, was a British citizen who studied at Germany's University of Göttingen. In 1847 Werner Siemens founded his company which would eventually become a huge multinational corporation for engineering products. And even today Germany is home to world leaders in fields as diverse as automobile manufacturing and pharmaceuticals.
However, times have changed and this isn't the same country that it used to be when it comes to small businesses and innovation. A study by the Bertelsmann Stiftung in 2012 found that small firms were making up a much larger share of the German economy than they had a decade earlier. What's gone wrong? The first problem is that Germany has saturated its market with too many competitors. According to research from the OECD, there are only 2,200 companies left in Germany that employ more than 500 workers, which is less than one-third of what it was in 1989. The other problem has been an inability to adapt and adjust to changing markets – something that helps businesses thrive in developed economies but makes them vulnerable in countries where their citizens have become accustomed to living a certain way for decades.
How the German Economy Became Over-Regulated
Germany's economic model has been export-driven since the 1870s and the country has often relied on a few key industries to drive its economy. The problem is that in order to expand those industries and make them more efficient, they were heavily regulated by the government. This led to significant innovation of course, but it also made it difficult for German businesses to keep up with changing markets and consumer tastes in foreign countries.
This is reflected in Germany's approach to employment laws and labor unions. During World War II, Germany experienced major manpower shortages because so many men had gone off to fight for the army. So in 1943, under the leadership of then-Chancellor Adolf Hitler and his minister of economics Dr. Walther Funk, the country instituted a sweeping labor reform to make it easier for employers to hire new employees. This was at a time when shortages were still being experienced by the German economy, so it's no wonder that many Germans have been shocked when they've seen how easy it is for companies to find workers with which to compete in today's globalized economy.
The problem is that these changes were not meant to be permanent and there was virtually no protection given to workers who might lose their jobs because of them. The union movement has lost its influence over the last 30 years and now represents only seven percent of all employees in Germany. In fact, the country has very few regulations for labor unions to protect workers, which is hugely advantageous for employers.
According to researchers at the OECD, Germany also does not have a proper unemployment insurance system. So if you lose your job it's not entirely clear whether you can actually rely on funds to support yourself and your family in the future.
Entrepreneurs Find It Harder To Succeed In Germany
But perhaps the biggest challenge facing small businesses in Germany is that they find it harder to succeed thanks to their high tax rates and a range of other bureaucratic obstacles put in their way by the government. For example, if a company is making an investment for more than €500,000, it must get permission from a public agency. If it's investing in a new office building for example, it might find that construction will take much longer than expected because of the bureaucratic process needed to obtain consents from local and state governments.
Germany has over 3,700 pages of tax law and changing even one word in that legislation might require hundreds of hours of legal consultation with tax lawyers. This leads to much higher costs for business owners who have to rely on expensive consultants and advisers to help them navigate the complex waters of compliance with German labor laws. As a result, small business are finding it harder than ever to expand.
The OECD Has Warned Germany about Its Social Welfare System
The OECD describes German labor law as "a combination of high levels of statutory protection and low levels of social insurance to which these regulations frequently lead." In other words, Germany's macro-level regulations that apply to the work force create a lot of red tape for businesses but provide very few safeguards for workers who might unexpectedly lose their jobs. As the OECD puts it: "While German labor law is comprehensive, the significantly low level of social insurance protection may be an impediment for job security needs." European Commission researchers have found that 60 percent of German workers have no access to unemployment benefits.
Even more worrying was the OECD's conclusion that two-thirds of German workers are covered by very rigid rules that are not appropriate for their level of education. "High protection of workers, above all in the event of unemployment, faces several problems," the report found: "It prevents further mobility and keeps labor marketfficiency low." In the U.S., a fairly typical worker might lose his job and then find a new position in only six months. In Germany, you might have to wait three years or more to get work again.
#Spiegel: For refugees, Germany is a long way from home https://t.co/KxSNHd29pf pic.twitter.com/YhSzEH1ZJ6 — SPIEGEL English (@SPIEGEL_English) August 10, 2016
Germany's Economy Still Shows Promise
It is important to note that Germany's economy is still growing and research from the OECD has found that the country has maintained its high levels of productivity over the last decades despite losing a lot of manufacturing jobs in key industries like steel and chemicals. That trend isn't going to change anytime soon because Germany will continue to face increased global competition but it also hasn't hurt the quality of life enjoyed by German citizens. Despite all this upheaval, unemployment in Germany is still at a historically low level and wages are increasing faster than ever before.
There's also the fact that Germany's economy is very diverse and there are many different companies with seemingly endless opportunities to innovate and succeed. For example, according to the OECD, Germany has one of the most 'disruptive' retail sectors in Europe, the automotive industry has taken a lot of market share from large car manufacturers like BMW, and automakers are developing ways to use electric cars instead of traditional combustion engines. The automotive sector is also one of the most innovative in terms of using data analytics as a way to improve processes at car dealerships. German auto companies also have great relationships with suppliers in China and Japan.
Germany's economy remains strong but policymakers need to make sure the country can keep up with the challenges of globalization. Otherwise, its high wage levels, low unemployment and high standards of living might not be sustainable in the long term.
The post Germany's Economy is Booming But Challenges Remain appeared first on ValueWalk.
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Conclusion:
Germany's economy is still booming but policymakers need to make sure the country can keep up with the challenges of globalization. Otherwise, its high wage levels, low unemployment and high standards of living might not be sustainable in the long term. Germany was once one of the strongest economies in Europe but now it's barely growing at all. As the New York Times' Paul Krugman put it: "Germany’s economy is like the little engine that could — but now can’t." As ValueWalk has discussed on numerous occasions, Germany's economy simply cannot keep up with Europe as a whole, which remains mired in stagnation for one reason or another.