The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (43 page)

If the Bundeskanzleramt looks more like a seat of learning than one of the foremost citadels of global power, that is perhaps because there’s a lot to take in, even in the immediate vicinity. The joyous destruction of the old Berlin Wall had led within two decades to an entire continent taking its economic cues from Germany. But Berlin’s actions in the Eurozone crisis risked a whole new divide across the continent. The white cube has become the architectural embodiment of Germany as Europe’s reluctant imperium.

‘The temptation is always to relax,’ says a senior German official. He was talking about the reform plans of the Eurozone problem nations, though he could have been referring to his surroundings in Berlin. At this time, in late 2012, crisis talk had abated a little. ‘We don’t want heightened stress, but we need to keep up the pressure. We need a combination of market pressure and peer pressure.’

This last sentence goes far in explaining Germany’s often misunderstood position vis-à-vis the tumult sweeping across Europe. ‘Need’ refers to the notion that this is not just a crisis, but an opportunity for reform. ‘Market pressure’ shows that Berlin feels rather unmoved by occasional spikes or crashes in markets – indeed, it welcomes the incentives for ‘good’ behaviour. ‘Peer pressure’ is a little more controversial, involving as it does attempts to cajole smaller sovereign states in the Eurozone to make unpopular long-term market reforms, for their own good. It works best at the point where such countries ask for financial help to reduce their public debt or rescue their bankrupt banks. This is why more sceptical observers of Germany might refer to the Bundeskanzleramt as the Temple of Sado-Austerity. But that is not entirely fair. The core sentiment, though, is not entirely wrong. Earlier in 2012, a G7 finance minister had told me at Davos: ‘The Germans feel the need to keep their feet on the neck of the small Eurozone countries, so we feel the need to keep our feet on theirs.’

Germany’s weary domination of Europe in the twenty-first century is more by accident than by design. Berlin gets criticised by London and Washington for doing too little. And then protesters in Athens and Nicosia dress up in Nazi garb to protest against the ‘Financial Fourth Reich’ when Berlin does too much. Germany is often described as being trapped by its interwar history – the experience of hyperinflation and mass unemployment followed by the era of Nazism and territorial aggression. The clearest reasons for its approach to the Eurozone crisis are, however, a product of much more recent economic history.

In Berlin they claim they are inviting the troubled economic apprentices of Europe to learn from the economic template of the German master tradesman – a template that one might call
Vorsprung Durch Fiskalpolitik
. Germany’s tough internal economic reforms that it carried through a decade ago took half a decade to bear fruit. As a key adviser to Chancellor Angela Merkel puts it, ‘Perhaps it’s very lucky for the European Union that Germany did its reforms earlier.’

A peculiar pleasure awaits visitors – most of them German – to the five-star hotel at Autostadt, the automobile theme park smack bang in the middle of Germany, near Wolfsburg. After touring the Volkswagen factory, and collecting their brand new VW from a robot-operated conical glass tower, who could say ‘
Nein
’ to a morning dip in an industrial canal? Most infinity pools offer the illusion of bathing in a sea or lake or glorious landscaped vista. At Autostadt, patrons relax in a heated pool that offers the illusion of swimming in a smoky brown-green canal built to service the towering 1930s chimneys of the Volkswagen Kraftwerk power station.

Efficiency, technology, an absurd obsession with cars, Nazi-era architecture: Autostadt ticks most of the boxes of the Teutonic stereotype. But VW was not just the quintessential German export. On this very site, the blueprint for the Beetle was developed. During the Second World War, the factory was diverted to manufacturing military vehicles and parts for V1 Doodlebug flying bombs and so became a target for Allied bombing. After the war the Beetle blueprints were found by the British military. Colonel Charles Radclyffe restarted production at a rebuilt factory after offering the plans to uninterested British manufacturers. Volkswagen went on to become the second biggest car company in the world, owning marques such as Audi, Bugatti, Bentley, Porsche, Skoda and Lamborghini. VW and the Deutschmark were the twin totems of the
Wirtschaftswunder
– Germany’s postwar economic miracle. At the beginning of the twenty-first century, the plant also became the template for Germany’s subsequent economic success, and eventually a blueprint for the Eurozone itself. But first, the orgies.

VW’s spending at five-star hotels around Europe featured strongly in the 2005 Federal election campaign. Gerhard Schröder would lose this election narrowly, leaving Angela Merkel with the keys to Berlin’s White House (although she chose to stay living in her modest flat). Executive entertainment billed to the company included high-class prostitutes, Viagra, and parties for middle-aged executives at a club in Hanover called ‘Sexworld’. At the heart of these stories was the German model of industrial harmony and cooperation between shareholder, worker and the state. VW is a fifth-owned by the Lower Saxony government, of which Schröder himself had been prime minister. A special law essentially prevented its takeover. VW’s personnel director Peter Hartz was a close adviser to Chancellor Schröder, who in turn became known as the
Autokanzler
. Payments and ‘bonuses’, authorised by Peter Hartz, were made to VW worker representatives. Under Germany’s
Mitbestimmung
, or co-determination laws, half the supervisory board of all major companies are made up of directly elected employees or union representatives. The workers and the owners would literally ‘co-determine’ large investment decisions, anathema to businessmen in the UK and USA. The model emerged out of the industrial strife that erupted in West Germany in the mid-1970s. The laws minimised strikes and helped underpin the long march of Germany to usurp the USA as ‘world export champion’ in 2003 (China subsequently took the title in 2009). The VW scandal showed how the social cooperation model had become a little too social. Union bosses were being bribed to acquiesce in plans to limit wage rises or transfer car production to cheaper locations. For their parts in the scandal, some worker representatives were jailed, an MP resigned, and Hartz himself was given a suspended sentence and a large fine.

Export growth did not mean jobs and wage growth. The year 2005 witnessed a peak in Anglo-Saxon smugness at the economic stagnation of Germany, the new ‘sick man of Europe’. Wage growth was non-existent, unemployment was at 11.5 per cent (over double the rate in the UK), and growth was down to a paltry 0.7 per cent – compared to Britain’s credit-boom-fuelled 3.2 per cent. An entire nation of Teutonic losers still thought there was money to be made from making things that customers wanted to buy – or making things that helped other countries make things that customers wanted to buy. These Germans were austere depressives, preferring to eschew the accoutrements of modern life such as credit, store loyalty cards and owning houses. And then, to top it off, the epitome of their manufacturing miracle, the Volkswagen Group, appeared to be mired in corruption, sex parties and Viagra.

This gloating
Schadenfreude
was entirely misplaced. The seeds of a spectacular German revival had already been sown – in precisely the same place. Peter Hartz, the VW personnel director, was also the mastermind of Chancellor Schröder’s wave of reforms to Germany’s labour market and welfare system. At VW, Hartz had become known for innovative policies that avoided compulsory redundancies at the politically sensitive company. ‘My experiences in the global corporation Volkswagen were very helpful,’ Mr Hartz told me. ‘We had already successfully implemented some of the proposals within the company. We also analysed all European systems, including Britain’s. Good suggestions from all over Europe, including England, contributed to our deliberations.’

The ‘Hartz IV’ reforms for the country were focused more on hiring rather than firing. Generous welfare payments for the unemployed (three-fifths of last wage) were slashed to a basic flat rate of €345 per month. Massive tax incentives were created for ‘mini-jobs’ – low-paid, often temporary work. Hartz promised that unemployment would halve. Initially it went up, over the 5 million level only previously seen in the Weimar Republic. The reforms were deeply unpopular, and led to Schröder’s narrow election defeat in 2005. Schröder was fired by the electorate – in part, for making his compatriots easier to fire.

Early in 2011 I travelled to Frankfurt to speak to Otmar Issing, the most influential German economic policymaker in the first years of the euro. ‘These reforms came from Schröder, who might have lost the elections because of them, but they worked,’ Issing told me. ‘If you do it too late you’re out of office before progress is visible. It took many, many years of wage constraint before Germany came out of the overvaluation in which it entered monetary union. Germany was the only larger country that didn’t see an increase in unemployment during the crisis, [so] minor reforms in the labour market, in sum, led to flexibility… which made this result possible.’

Indeed, the numbers were remarkable. As the crisis began to engulf Portugal as well as Ireland and Greece at the beginning of 2011, I went to Germany to report on the locals I imagined would be fed up with writing cheques for the ‘Club Med’. But the German economy was surging too much for anyone to care.

They are fond of pigs in Munich, as long as they are skewered and served up as a spit-roast. Business is booming in the tents that hold 10,000 revellers paying €9 a time for authentic Bavarian brews. The oompah band blares out Neil Diamond’s ‘Sweet Caroline’ at high volume, and thousands of
Lederhosen
- and dirndl-sporting Germans cry out, ‘Good times never seemed so good,’ before clinking their glasses. I had flown in from a crisis-ridden Athens. It seemed scarcely possible that I was in the same currency bloc or even economic planet as the previous day. Bavaria is home to what they call a high-tech ‘laptops and
Lederhosen
’ boom. Tobias and Christoph are German electricians from a nearby town. ‘There is no crisis here,’ says Tobias. ‘The problem is that we have to pay for every country in Europe. Where do the taxes to go? To Greece?’ Christoph interjects: ‘We make our good work here and then we have to solve the problem of the others.’

In the 1990s economics undergraduates were taught about ‘sclerotic’ Germany, with its structurally higher rate of unemployment than free-market Britain. It was an axiom of European economics. In mid-2005 Germany did indeed suffer from an unemployment rate of 11.5 per cent, compared with Britain’s 4.5 per cent. Since May 2009, however, Germany has had a lower unemployment rate than Britain. By mid-2013, UK unemployment had nearly doubled in eight years to 8 per cent, while in Germany it had more than halved, to 5.4 per cent. German ministers talked of being on the ‘expressway to full employment’. Employment broke new records.

In the Bavarian town of Aschaffenburg is the Linde forklift-truck factory. It is a classic German export niche. In any gold rush the fortunes are made selling shovels rather than actually finding gold. And in a global trade boom, fortunes are made in forklift trucks. Linde is the second biggest manufacturer after Japan’s Toyota. When I visited the factory in early 2011, it was the essence of a growing economy, at a time when Britain was contracting. Experienced German engineers meticulously checked their precision engineering, successfully competing on quality grounds with cheaper competition from Asia. Every single one of the bright red trucks, lined up like toys in Hamleys, was sold out. The order book was full for months in advance, and the orders were mainly from Asia. I was particularly struck by my meeting with a 17-year-old apprentice called Jens Zerkler. He was genuinely delighted at his chance. ‘I always wanted to do this,’ he told me. ‘It was clear after school that I would be an apprentice. It was my dream, my wish to come here.’

At the time, Germany was enjoying the fastest growth for twenty years. Germany was the China of Europe. And the crisis in the Eurozone?
Keine Krise hier
(‘no crisis here’). For the then chief economist of Deutsche Bank, Thomas Mayer, it was a story of sacrifices rewarded, with Germany benefiting from the Asian recovery. ‘During the earlier part of the past decade,’ Mayer told me, ‘Germany worked very hard to restructure companies, cut costs, look for new markets. At the same time the government did a number of reforms – tax, regulatory and welfare reforms. Everything came together in 2007, but then you have the Great Recession interrupting it. And with the world economy coming back now, the dividends of all this effort are paying out.’

The success in forklift trucks was replicated in other industries and across their supply chains. Germany has been brilliant at identifying and exploiting specialist high-quality export niches with a global market, and has spawned a range of medium-sized companies, the so-called Mittelstand, to supply these markets with items ranging from conveyor belts to industrial springs. One company has cornered the world market in antennae for skyscrapers. The top Mittelstand companies adhere to the ‘80 per cent model’ – an 80 per cent global market share, and 80 per cent of production exported. Such products are rarely glamorous, but all, in retrospect, are rather obvious commercial bets as emerging economies develop. Rather brilliantly, whether China or India wins the global industrial race for cars, or motorbikes or missiles, German companies will be on hand to equip the factories. Linde’s parent company is now part-owned by a Chinese enterprise, which is itself owned by the Chinese state. There is a long-run challenge, from China, for example in solar power, but Germany starts the G7 race to reindustrialise in rude health.

In German minds, their commercial success during the global financial crisis was a direct result of their acceptance of pain, suffering and tough medicine. Greece, Ireland, Spain, Portugal and Italy had done the reverse. They had enjoyed the good times arising from euro membership without paying the up-front price. This vaguely Faustian ‘morality’ notion has become baked into public discourse in Germany. ‘It is linguistically unavoidable in Germany – “
Schuld
” means both debt and guilt – so it’s automatic for Germans to see debt as something iniquitous (and it therefore takes a little more reflection to recognise the responsibility of the lender),’ says Richard Walker, a German TV anchor. ‘The media stokes this – referring to crisis countries as “
Schuldensünder
”, debt sinners, often without differentiating between the countries’ very different circumstances. Then the mix of austerity and reforms that Germany demands are referred to as “
Hausaufgaben
” – homework. That is of course virtuous – Germany has done it; countries that haven’t deserve to be on the naughty step. And those that do gain favour – like Portugal and Ireland at some points – get referred to as “
Musterschüler
” – model pupils.’