What Makes Germany Germany?

Economists have caught a case of Germanophilia.

Ever since Europe's industrial juggernaut grew at a nine percent pace earlier this year -- the best in two decades -- Americans have looked across the ocean with envy. As we cut costs, outsource jobs, drown at double-digit unemployment and run up huge trade deficits, Germany seems to be doing the opposite: reaping the benefits of cheaper labor, keeping German workers in German jobs, and running surreal trade surplus numbers (surreal, considering the health of the rest of Europe).

What's your secret, Berlin? That's the question I posed to Dr. Tim H. Stuchtey, director of the Business & Economics Program at American Institute For Contemporary German Studies (his answers here). And that's the question Bloomberg BusinessWeek asked in a good cover story.

There's no good place to begin a story about what makes a country special, but there's a decent plan to begin the story about what makes Germany successful, today. Let's go back to 2003, when Chancellor Gerhard Schroder, a Social Democrat, stiff-armed his party and proposed to downsize Germany's social system in a program called "Agenda 2010." The plan included big tax cuts, reduced pensions, and more cost-sharing in health care. For workers, the plan was more innovative. Unemployment benefits got the axe, but training programs were set up to ease workers into new industries when old ones died. Promises for higher wages gave way to promises for lower wages with greater job security.

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The short-term impact of Shroder's agenda was spotty. Poverty increased, the poor suffered, unemployed continued to rise for a few years, and Shroder was out of power in three years. But Agenda 2010 looks like it paid off right on schedule. Germany's unemployment rate is practically at pre-recession levels. Shroder's replacement, Angela Merkel, promoted "work sharing," in which the government basically pays employers to cut hours rather than fire workers. And Agenda 2010 paved the way for cheaper labor, and cheaper labor helped German companies fly high in the global market.

Does that suggest that the United States could benefit from its own Shroderian Agenda of lower taxes, smaller labor benefits, more health care cost-sharing, and cheaper pension guarantees? Maybe. But it's also important to point out the other factors working in Germany's favor that we can't create.

1. The Euro. When a country like Germany exports like crazy, its currency tends to increase in value. That makes its products more expensive, which makes its exports decline. But that's not happening in Germany, because Germany is on the Euro, which has lost value in the debt crisis. So in a weird way, the European debt crisis is helping Germany's exports even as it hurts Germany's main customers, who are Europeans.

2. Germans Save. German's are famously thrifty. This benefits the country in two ways in the short term. First, higher savings helped Germany withstand the financial crisis, because they weren't deeply in debt like Americans. Second, German companies are forced to sell beyond Germany throughout Europe and the rest of the world. Americans are ravenous consumers. So if you're a company selling stuff in Iowa, why would you pay to access overseas markets if Americans will buy everything you produce right here?

3. Health care. Germany spends half as much as the United States per capita on care. Employer provided care is perhaps the most important contributor to the high cost of labor in the United States.