Shaping up

Instead it was made more limber. Business outsourced some production to eastern Europe; fear of that process extracted concessions from German workers, who offered flexibility on wages and work hours in exchange for greater job security. In the subsequent decade manufacturing’s share of GDP rose even as it was falling elsewhere (see chart 3).

In the early 2000s, with growth still in low gear and unemployment in double digits, the then-chancellor, Gerhard Schröder, a Social Democrat, started another round of gruelling physiotherapy. His labour-market reforms reduced unemployment benefits and liberalised temporary work. Since she became chancellor in 2005 Mrs Merkel of the Christian Democrats has raised the pension age from 65 to 67 and amended the constitution to require state and federal governments to cut their structural budget deficits to more or less zero (the template for what is now a Europe-wide agreement).

Benefits thought to be sacrosanct were cut. Income inequality rose. But so did employment. Core workers in industrial firms—the muscle behind Germany’s manufacturing prowess—were not affected directly. But the rise in low-paid, insecure jobs has held down the cost of services, making it easier for factory workers to accept modest pay rises, points out Anke Hassel of the Hertie School of Governance in Berlin.

The original assembly of the German model also dates to a recessionary crisis following hard on the heels of a unification: a 23-year-long slump starting in 1873, two years after Bismarck finally succeeded in pulling Germany together into a single state. This Gründekrise and its prolonged aftermath forged new ideas about how capital, labour and the state should relate to one another.

An 1884 law created the dual-board system of corporate governance in its current form, with a managing Vorstand answerable to a separate supervisory board. Among the supervisors were bankers, who provided “patient capital”, and scientists, whose expertise was valued as highly. The vocational training system, set up during the 1880s, provided new producers of chemicals and machinery with skilled and loyal workers. Bismarck established the welfare state in part to cater to their needs. The way the health insurance system worked required capital and labour to co-operate, paving the way for works councils and, almost a century later, for mandatory representation for the workers on the supervisory boards of large companies.

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The “co-ordinated market economy” has withstood dictatorship, wars, revolutions and globalisation. It prizes trust, relying on the principle that nobody will “make full use of his freedom” by grabbing everything he can, says Werner Abelshauser, an economic historian at the University of Bielefeld. Its elements are “so tightly meshed”, he has written, “that it would be difficult to replace any one of them with an alien component.”

The trust and co-ordination may be national properties, but their roots are typically quite local. Before Bismarck, Germany’s provinces, principalities and palatinates often had rulers who were keen to establish local industries. In 1678 Brandenburg’s Great Elector gave Bielefeld the privilege of certifying the quality of local linen, cementing its position as a centre for the textile trade. Centuries later Beckhoff’s first customers made machines for the furniture industry that had developed out of the crate-making trade that had grown with the export of textiles.

Dozens of other regions can tell similar stories, and these concentrations have become part of the country’s contemporary success. On a list of 100 clusters picked by the European Cluster Observatory for their size, level of specialisation and location in “innovative regions”, Germany occupies 30 places.

Germany experimented with American-style standardised production during and after the second world war, which was one reason why it imported unskilled guest workers from Turkey and elsewhere. The Siren across the Atlantic called again in the 1990s and 2000s, urging Germany to deregulate, embrace services and maximise “shareholder value”. When that call was silenced by the financial crisis, “Germany had its consensus model to go back to,” says Gustav Horn of the union-linked Macroeconomic Policy Institute.