Jobless Germany can learn from us

Europe's recession-hit giant must ask whether it can afford to preserve costly industrial harmony; The shops are half full, with items cut to a third of their price

There are beggars in Frankfurt. As an antidote to the endless gloom about the state of the UK - the lack-lustre economy, the sense of insecurity, the incompetence of our government - I went to have a look at the financial capital of what most people would still consider Europe's most successful economy.

If Germany's economic might gives it authority in shaping European politics - for example at the Inter-Governmental Conference in Turin today - it gives it even greater influence in shaping European economics. There is a German way of doing things: ordered, regulated, secure, based on consensus, with emphasis on manufacturing excellence. At the other extreme, I suppose, is our way of doing things: entrepreneurial, deregulated, insecure, confrontational, with emphasis on flexible services.

Ten years ago this would have been no contest. Of course consensus was better than confrontation, order better than chaos. Even two or three years ago, while some aspects of the British reforms of the 1980s were being admired and imitated, there was no real feeling of a need to learn. Now the scales between the two visions are more evenly balanced. In the German financial and business community there is a deep concern. Business knows that the German way of doing things has to change, but most of the rest of the country won't accept it. The reason for the need to change is told in one word: unemployment. Germany is back in recession.

Frankfurt is superficially as prosperous as ever. But wait: aside from those beggars, the shops are half-full and there are items cut to one- third of their original tag; there are retail sites to let; restaurants are empty; there are streams of taxis waiting for hire. Things may be fine for those in work, but many are clearly finding the going tough.

This shows in the figures. Headline unemployment is now over 11 per cent, against 7.9 per cent in Britain. Even allow for seasonal factors and look only at the former West Germany, and it is still over 9 per cent and rising. West Germany has lost more than a million jobs in the past four years; in Germany's showcase industry, plant and machinery, employment has fallen from 1,250,000 in 1991 to 980,000 last December.

German industry is going through the seemingly endless downsizing which we have learnt to accept here. In one sense this is a sign of its excellence, its ability to reorganise itself when times are tough. At one extreme, the great Daimler-Benz pulled the plug on its loss-making associate, the Dutch aircraft firm Fokker, and made enormous cutbacks at its subsidiary AEG. The restructuring of the chemicals company Hoechst has been just as remarkable because it has been done in less of a crisis atmosphere.

Middle-sized engineering companies, too, have responded to pressure by improving, yet again, their performance. VDMA, the plant and machinery firms' association, explained that its members produce 20,000 different products of which - and this is the remarkable bit - 4,000-5,000 are new each year. They succeed by making custom-built products, designed in close co-operation with the customers. Take the common criticism of German engineers in the past, that they produced products which were over- engineered. Fine, they make them simpler. Just a few days ago there was a story about a piece of heating equipment that used to have 170 parts and is now made with 60.

It is hard to convey this sense of excellence that is so deeply rooted in German mechanical engineering ... except perhaps to BMW or Mercedes drivers. Up to now every time the mark rises, every time wages are pushed up, every time the government imposes some new regulation or tax, somehow the sheer quality of the German engineering industry has enabled it to continue to hold its own. It is the best.

But it is also hard to convey the sense of shock last year, when, after an excellent recovery from the early 1990s recession, German manufacturers suddenly found themselves plunged back into trouble. They had done all the right things in 1993 and 1994, slimmed down, simplified ranges, cut out waste; exports had boomed. Then in February and March last year the mark shot up by 6 per cent and the employers agreed to pay increases of more than 4 per cent. Foreign customers stopped buying. Suddenly the whole of German industry had to cut all over again.

The result is insecurity. All the familiar concerns of the UK are now heard in Germany: the fact that companies get rid of some of the most experienced people first, because they are the most expensive or closest to retirement age; or that young graduates, even engineering ones, cannot get jobs.

If there is an obvious parallel there are, however, two key differences from the UK. One is the position of the unions; the other the attitude of the government.

Unlike in the UK, in Germany the unions are still part of the decision- making process. They still come to Helmut Kohl's "round table", prompting the comment that round tables are a dangerous form of furniture. To a British observer this all feels very 1970s: a much more sophisticated level of debate than the beer and sandwiches at No 10, and of course applied to a vastly more competent economy, but the same search for consensus at whatever ultimate cost.

And government is different. Mr Kohl's ruling coalition has just won a resounding victory in the regional elections. Voters are self-evidently happy. They want an interventionist state. They do not mind high tax rates, or at least they accept them if there are sufficient loopholes. (Taxes are high not only at the top. It is astonishing that, for those who earn between pounds 6,750 and pounds 9,500, every extra mark earned is offset by cuts in social security payments or increases in taxes and social security contributions.)

If voters back your policies there is no political pressure to change. If German industry is as wonderful as ever, government lags far behind.

It is always dangerous to project one country's experience on to another. The German way forward will be completely different from our own, not only because we have a different industrial structure but because we have different attitudes. Yet three people I spoke to volunteered that Germany could learn a lot from British labour market reforms. One of them said British industry was now taken very seriously as a competitor. Times have changed.