The German role model frays at the edges

Once capitalism crossed swords with communism. Now that war is over a new battle has begun between competing forms of capitalism. The Anglo-Saxon wheeler-dealer model, red in tooth and claw, is pitted against systems like the German social market economy which emphasise the values of social solidarity, long-term commitment and stability.

On the left of politics it is axiomatic that Germany offers an economically as well as socially preferable role model. The only problem lies in Britain's capacity to emulate the German approach. As our ill-fated attempts to introduce German methods of industrial training have demonstrated, German- style capitalism may be one thing we cannot import from Germany.

Yet there is a more fundamental problem: the role model itself looks increasingly flawed. In its annual report published earlier this week, the Organisation for Economic Co-operation and Development warns of subsidence in the imposing edifice of the German economy, reporting worries about competitiveness and more general concerns about German business culture.

The statistical fog that has descended upon the economy will clear shortly when the estimates of GDP in the first half of the year are published. But even before then, it is apparent that the recovery has not maintained the momentum with which it began 1995.

Indeed, the Deutsches Institut fur Wirtschaftsforsching (economic research institute) has calculated that west German output fell back in the first quarter of the year as consumption sagged following the reintroduction of the solidarity income tax surcharge of 7.5 per cent. Despite the usual lip-service paid to the money supply, a flagging economy lay behind last week's easing in monetary policy by the Bundesbank.

More worrying are the longer-term structural problems. Some of these have been caused by the sheer task of integrating an eastern economy that was far more backward than realised at the time of unification. Others are rooted in the model itself, which may be less suited to the challenges of the future than those of the past.

Growth may be bounding ahead in eastern Germany but it is not self-sustaining: the flow of subsidies still amounts to 6 per cent of GDP. The true rate of unemployment, the OECD says, is over 30 per cent. Without a freeze on wages, the jobs crisis will persist even when the capital stock is fully modernised, which will take a further ten years.

Given the financial burden of modernising the east, it is extraordinary that Germany is one of the few countries that conforms with the Maastricht objectives for sound finance. The budget deficit in 1994 was 2.5 per cent. Including the Treuhandanstalt and public enterprises, it was 4 per cent, and this is due to fall to just over 2 per cent in 1995. The inflation of the unification boom has been contained, with prices now rising by about 2 per cent.

Yet these achievements have come at a price. The unions' response to the tax clamp has been to push for - and get - high wage rises. The engineering pay deal this spring was equivalent to increases of 4.5 per cent this year and 5.5 per cent in 1996. Now VW is facing demands for 6 per cent.

But the unrest at VW has deeper roots. Despite extensive restructuring in the recession, managements are still encountering resistance to the reform of working practices - for example, the attempt to make Saturday a normal working day. The need for reform has been driven by the further appreciation of the mark this year. The squeals of anguish this drew from senior industrialists testified to the serious problem of competitiveness.

According to the OECD, Germany's continued export success has largely been because of its specialisation in products - mainly capital equipment - for which world demand has been growing fastest. It also attests to the continuing pull of the "made in Germany" label. On other counts, however - competitiveness, adaptability and innovation - performance was much less impressive. The impact of the recession was not enough to offset earlier increases in labour costs in the 1990s.

No wonder there is renewed alarm in Germany about the "hollowing out" of the industrial base. Siemens' decision earlier this month to locate its new pounds 1bn semiconductor plant on Tyneside brings 1,800 jobs to Britain at a time when employment growth is conspicuous by its absence in Germany.

In contrast to the two-way traffic that characterises foreign direct investment with Britain and most other countries, Germany stands out as receiving virtually no inward investment. High labour costs make this hardly surprising but it means that Germany is missing out from the benefits that accrue from technology transfer.

Yes, the land that brought you Vorsprung durch Technik, can learn from other countries. Indeed the OECD says that "German firms, while investing heavily in R&D, have a revealed comparative disadvantage in the production of high-tech goods."

Another worry centres on the failure to spawn new firms in the knowledge- intensive industries of the future. For example tight environmental regulations have shackled the expansion of biotechnology based on genetic engineering.

The OECD expresses the view that Germany's stakeholder form of corporate governance - long the apple of the eye to those who lament the short-term horizons of City shareholders - is not helping the creation of new firms. It does not mention the equally salutary example of that most established of firms, Daimler-Benz, which is now seeking to recover from the ill-judged diversification away from its core car manufacturing operation. Maybe a crude shove from short-termist financial markets might have been more effective than the long-termist stewardship of Deutsche Bank.

German capitalism has delivered the goods in the past. Given the formidable strengths of skills and capital investment, it may well continue to do so in the future - provided it makes reforms. But those reforms will take it closer to the Anglo-Saxon way of running an economy. Not the best time, then, to choose German capitalism as a role model - even if we could reform the British economy on lines which go against the grain of so many of our institutions.