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How the mittelstand drive Germany's economy

A surging German economy gave it little reason to cooperate with US at G20 summit.

German economy
A windmill outside a steel plant on Oct. 11, 2010 in Duisburg, western Germany. (Patrik Stollarz/AFP/Getty Images)

BERLIN, Germany — The backbone of Germany’s muscular economy isn’t in the big cities. It is in thousands of towns spread across the country, the homes of what Germany calls its mittelstand.

The mittelstand are the 3 million mid-sized businesses, often family-owned, that employ more than two-thirds of the country’s workers and contribute half of its GDP.

It is those businesses and their growing exports that German Chancellor Angela Merkel was aiming to protect at this week's G20 meetings in Seoul — an event that culminated Friday with world leaders agreeing to curb "imbalances" but putting off decisions on how to do so until next year.

Tital, a firm that makes precision titanium- and aluminium-cast products for the aerospace and race-car industries, is a classic example. Based in the small town of Bestwig in the Ruhr Valley, Tital has about 420 workers — mostly from the local area, trained through apprenticeships by the firm — and is owned by its management team.

The management doesn’t worry about quarterly growth figures but rather thinks long-term, said sales director Philipp Jerusalem. This approach allowed it to weather the financial crisis without needing to lay off any permanent staff.

“There is much more team spirit here,” Jerusalem said. “We would never jeopardize our long-term growth for short-term opportunities. Nobody is going to lose their job if we don’t grow for two years. It’s wiser to go slow and invest.

“That’s one of the secrets of the German mittelstand: most of them are managed by their owners; they grow long-term and they don’t have to please the financial community.”

Such firms are a major factor in Germany’s remarkable rebound. After suffering its worst recession since World War II, the economy will grow by 3.7 percent this year and 2.2 percent in 2011, according to the latest forecast.

Unemployment, now at 7.5 percent — compared to 9.6 percent in the United States — is expected to drop below 7 percent in 2011.

The mittelstand were also a key weapon in Germany’s tense war of words with the United States surrounding the G20 meeting in Seoul.

To the United States, Germany is relying too heavily on exporting its manufactured products — the sorts of things made by firms like Tital — and spending too little of its own money on other countries’ goods, harming their growth.

To Germany, the United States is trying wriggle out of its own torpor by pumping $600 billion into its economy with the QE2 stimulus, pushing down the dollar and helping its own exports while hurting countries like Germany.

Germany’s finance minister, Wolfgang Schauble, who plays bad cop to Chancellor Angela Merkel’s comparatively good cop, had the mittelstand in mind when he told Der Spiegel magazine this week that Germany’s exports were booming quite simply because its companies were more competitive.

“The American growth model, on the other hand, is in a deep crisis,” he said. “The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small- and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses.”

Schauble may have been jockeying ahead of the G20 summit, but economists here say his argument is essentially sound: Over the past decade, German industry has become a lean, mean machine.

“We have a really healthy manufacturing sector. These goods have high demand, especially from the emerging markets,” said Volcker Treier, chief economist at Germany’s Association of Chambers of Industry and Commerce.

Tired of being called the “sick man of Europe” in the 1990s, German industry, with the help of the government, began to streamline around the turn of the millennium. Workers agreed to forgo big wage rises in return for job security and companies began investing at home rather than overseas, Treier said.

Now, emerging countries like China are laying their own foundations by buying things like precision machine tools for their factories — precisely the goods in which Germany specializes.