• Europe

• Business

• Economy

• Culture

• Technology

• Education

• Travel

• Lifestyle

• Just Curious

Imitating Mittelstand

There was scant January cheer in Germany this week, as economic forecasters announced preliminary figures detailing a slowdown in that country’s growth in the final quarter of 2011

It was not so much that the figures themselves were cause for serious concern –many governments would be ecstatic with Germany’s current 0.5% expansion rate – but that Europe’s powerhouse economy had finally, and suddenly, succumbed to the Eurozone crisis after months of bucking the continental trend.

Yet whilst this Teutonic announcement may have had some European’s reaching for their German dictionaries – schadenfreude is, after all, not a particularly easy word to spell – the Mittelstand economy continues to be by far the most prosperous in Europe, accounting for a staggering 27% of all activity in the 16 Eurozone countries. Perhaps this is why leaders of other nations spend so much of their time musing about how their countries can emulate Germany and become economic giants. UK Chancellor George Osborne has done this tacitly on many occasions with his iteration that Britain needs to beef up its manufacturing sector, whilst French President Nicolas Sarkozy’s took a more blunt Gallic approach in 2011 when he lamented that his country needed to become more like their partners across the Rhine. Expect more of the same from him as France moves towards presidential elections in 2012.

The rest of the EU, however, is not just envious about Germany’s economic statistics. Most of them have at one time or another equalled or bettered that countries numbers, and even during the happy times of the early 2000s, Germany never delivered the dazzling double-digit growth that was the hallmark of the period. No, instead they dream of imitating Germany’s model, complete with a wealth of small and medium enterprises specialising in the manufacture of high end products as well as a buoyant design sector. For the pastoral French and financial services-obsessed British, the idea of an engineering-led recovery is particularly attractive, not least because it would allow them to export their way out of recession, selling to the World’s perennial growers - China, Brazil and India.

Unfortunately, this might prove difficult and, even if it is managed, it will take many years to achieve. Successful family-run manufacturing firms do not just spring up overnight, requiring years of time and inward investment before they turn healthy profits – a problem, when capital is in short supply and expediency is a necessity.

Ruminating on what policies would allow these companies to develop is a luxury that most governments don’t have – the need to bring about growth within three months is too pressing and expensive for long term policies and, even if time were not an issue, imagine the uproar across Europe if politicians were to announce tax breaks for businesses at a time when public purses are under greater scrutiny than ever before. Moreover, those with longer memories will know that Germany had to put up with several years of hardship and restraint whilst other economies were booming in order to push through reforms facilitating future growth – unthinkable, given that most administrators have been forced to push through austerity measures just in order to stand still.

Even if they did manage to transform in this way, Europe would be left as a continent of producers, with few markets for their manufactured goods. It is an oft forgotten fact that the German economy was only able to flourish as a manufacturing hub over the last decade thanks to the free spending of Greek, Spanish and Irish citizens – something which is unlikely to be repeated any time soon, particularly following the introductions of ever harsher lending strictures on lending for high street banks.

In spite of such concerns however, Germany’s European partners would do well to begin thinking about how they can best imitate the Mittelstand model. After all, even if not everyone can reconstruct Westphalia, Europe’s other big economies – Britain, France, Italy and Spain – would be well advised to introduce reforms to rebalance their economies.

Certainly, this will be a hard task in the midst of an economic downturn - akin to attempting to repair an aircraft mid-flight whilst one is running out of fuel. But a few small changes would bring about some relief for citizens and, in the longer term, might even mean that they can compete with the German powerhouse (something which, historically speaking, no European nation has ever managed to do) when times are good again.

The first of these changes undoubtedly needs to be the introduction of more business-friendly policies, including taxation ‘holidays’ for start-up companies. It is indicative that Germany outstrips both France and the UK in terms of the number of its ratio of small and medium enterprises (SMEs), a fact which goes some way to explaining why it also repeatedly outperforms them when it comes to manufacturing output too. This can be easily changed through encouraging native entrepreneurs and attracting foreign ones, although innovation will not on its own be enough to solve Anglo-French woes. Even if one compares the performance of individual companies from each nation – thereby accounting for the German numerical advantage - German organisations still tend to outperform counterparts from the rest of Europe – a testament to the harmful effects of excessive red tape in equivalent countries.

British and French policy makers therefore need to cut back on some of the worker provisions introduced during happier times – the 35 hour week and strict regulations on hiring and firing, for example, need to be watered down if they are not going to act as barriers to future growth. Although it is true that German citizens themselves continue to enjoy such luxuries, they have managed to do so without hampering future growth – something that no other European nation has so far managed. Sadly for French, British and Italian citizens, their countries are – economically speaking – fundamentally different to Germany, and such right are completely at odds with necessity. Cutting them sends a clear signal that they are willing to do what it takes to encourage business.

Of course, the second necessary strand of policy reform will be even harder for governments and will involve wholesale reform of perceptions rather than simply the introduction of grim, pro-market policies. Private citizens need to be encouraged to think of manufacturing as a calling – a noble cause which is good for the nation as a whole. Financial services and agriculture – so long dominant in European agriculture – need to be allowed to shrink.

In Britain, for example, the best and brightest graduates almost always end up in working in financial services roles, depriving manufacturers and producer companies of the opportunity to recruit such individuals. In part this is due to the exorbitant sums offered to employees by banks, yet it is also because of the belief in the UK– fostered for much of the past 30 years and only now beginning to change– that the City of London is somehow the optimal work location people of talent, and that only there can they fulfil their full potential.

If Britain is to rediscover its production mojo, the government will need to work out how to change this fact – developing programmes in schools and universities to push the young towards certain careers, for example, or even through advertising campaigns to increase awareness of the possibilities offered by manufacturing. Italy and France should also consider how to scale down their government and agricultural sectors.

Of course, all of the above changes will take many years to come to fruition and – even if they do so – no one will be able to become ‘the new Germany’; the world, simply has moved on too much since then. Nonetheless, the introduction of changes to mimic Mittelstand can only be a good thing. It would certainly make future crashes less painful even if it only means 0.5% growth.

by Thomas Thatcher