Capitalism Paves the Way for Germany’s Strong Recovery
Business + Economy

Capitalism Paves the Way for Germany’s Strong Recovery

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BERLIN – A reporter returning here after a 20-year absence rubs his eyes during a wintry stroll down Friedrichstrasse, Berlin’s upscale Fifth Avenue.

In the distant days of the Cold War, it was a drab, semi-deserted street best known for Checkpoint Charlie, where border guards searched foreign tourists entering and leaving communist East Berlin. Soviet and American tanks went eyeball to eyeball on the street in 1961. Then came the fall of communism, the reunification of Germany, a decade of frantic construction and a new face for Berlin.

Just up the street from the dismantled checkpoint, Gucci and Louis Vuitton now show off expensive luxury items and an auto showroom displays the latest model of the Bugatti Veyron, world’s fastest sports car. Asking price: $1.7 million.

While U.S. unemployment hovers near 10 percent,
Germany’s is 7 percent,
lowest in 18 years.

Friedrichstrasse is a shining symbol of capitalism triumphant. Its crowds of free spenders with good jobs raise an obvious question: How has Germany found the success in the global economy that eluded most other developed countries?

A week in Berlin is too brief to provide a definitive answer. Germany has its share of problems, including a shortage of skilled labor, a declining population, rising tensions among a large, unassimilated Turkish minority, and demands from abroad that a wealthy Berlin do more to help Europe ease out of the worst financial crisis in decades.

But a U.S. visitor is struck by glaring contrasts. While U.S. unemployment hovers near 10 percent, Germany’s is 7 percent, lowest in 18 years. A week earlier, Christmas crowds swarmed Berlin’s white-tented Christmas markets, spending freely while quaffing quantities of Glühwein, the hot, spicy red wine that is a favorite of the season.

Germany was not immune to the global downturn. Its GDP fell 3.5 percent in 2009. But the country avoided massive layoffs. Large German companies instituted “Kürzarbeit” — short hours — that let workers keep their jobs while working less. The government made up some of the lost wages. While U.S. corporations cut workers, Kürzarbeit encouraged companies to keep underutilized employees on the job, preserving skills and avoiding family dislocation.

For decades, outside experts predicted that Europe would pay the piper for overly generous welfare state policies. That came true for a number of EU zone countries last year, but not for Germany. While Chancellor Angela Merkel cut spending drastically, high taxes, strong unions and a generous safety net neither stunted growth nor bankrupted the treasury, now flush with reserves. National health insurance covering almost everyone is funded partly by premiums paid by employers and workers, as in the U.S. — but at far less cost due to vigorous competition between insurers.

“It is hard for us to understand that in such
a fiscal crisis, and with such a need for public investment,
that you have tax cuts for those who don’t need them.”

Many German businessmen, politicians and officials seem genuinely bewildered by recent turns in U.S. fiscal and economic policy. “It is hard for us to understand that in such a fiscal crisis, and with such a need for public investment, that you have tax cuts for those who don’t need them,” said Ralf Fücks, president of the Heinrich Böll Foundation, which has close ties to the minority Green Party that shared power with the Social Democrats from 1998 to 2005.

Nowhere are the contrasts sharper than in energy policy. While energy and climate legislation stalled in the last U.S. Congress, Germany has been moving aggressively to restructure its energy sector. Renewable fuels such as solar, biomass and wind now account for 17 percent of total energy output, compared to 8 percent in the United States.

Though still heavily dependent on natural gas (30 percent), nuclear power (22 percent), and coal (31 percent), Germany aims to rely on renewables for 80 percent of its energy needs by 2050, said Dr. Claudia Kemfert of the Hertie School of Government. In the works are ambitious plans for a Europe-wide grid that would funnel power to users far more efficiently than the current balkanized system. Desertec, a consortium of German and European energy companies and investors, is eyeing prospects for vast solar energy farms in the Sahara Desert that could transmit electricity to Europe.

Although only about 1 percent of Germany’s current electricity needs are met from solar panels, some analysts predict that could reach 25 percent by 2050. The industry already employs 44,000 people, and Germany, a cloudy country, has half the installed solar capacity in the world.

Chinese and U.S. companies now lead in production of solar panels, with some of the most advanced solar technologies. Germany hopes its subsidized domestic market will be a breeding ground that eventually will give it an edge — much as Japan used its home market to build its export capacity for TVs, radios and cars in the 1970s and 1980s. German companies such as Q-Cells, one of the world’s leading exporters of silicon-based cells and modules, envision a vast, 21st century power market in Africa, Asia and Latin America that will bypass centralized electricity systems the way cell phones already bypass state-run telephone networks.

So far, German utilities and consumers have been willing, if grudgingly, to underwrite the government’s long-term strategy by paying slightly more for kilowatts generated by solar technology. By federal law, utilities are required to give priority access on their grids to electricity from hundreds of localized solar suppliers — some as small as a few rooftop panels — and to pay a hefty premium for it. Utilities absorb the higher costs and are limited in how much can be passed on rate payers, said R. Andreas Kraemer, director of Berlin’s Ecologic Institute.

Such “feed-in tariffs” for promising renewable technologies are almost nonexistent in the U.S. But last month the California Public Utilities Commission approved a variation on the German system, directing the state’s three large investor-owned utilities to procure one gigawatt of electricity from localized power projects over the next two years. Unlike in Germany, California power producers would have to auction their electricity at the going market rate to avoid distorting electricity prices.

Comparisons between U.S. and German energy policies are risky because the two countries face vastly different challenges. Germany has little oil or gas, and coal mining is being phased out due to the high cost of subsidizing it. Combined with a strong cultural bias against nuclear power, this makes the renewable alternative a top priority. Even so, there has been pushback against the high costs of the feed-in tariff. Open-ended subsidies caused investors to build seven times more capacity than the government predicted. As a result, the subsidy will end in 2011.

Unlike Germany, U.S. policy is based on the availability of vast resources of relatively inexpensive coal and natural gas, as well as some oil, and those industries exert strong political influence. Attitudes also play a role, said Fücks. “The U.S. has a culture of no limits, of infinite possibility, and of infinite technical potential. German culture is much more about limits, scarcity and saving.”

Morgan's recent trip was sponsored by the American Council on Germany, an independent, nonprofit organization that promotes transatlantic dialogue between journalists, government officials and business leaders.