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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.

Treier was in China’s dynamic industrial city Shenzhen last week and visited a cargo plant.

“I saw a lot of freight coming and going,” he said. “Eighty percent was exports going out of China and 20 percent was imported machines from Germany. There were no flights either to or from the U.S.A.”

Treier describes the mittelstand as the “first column” of the German economy and says many are “hidden champions of the market.”

Because they are often based in small towns and regional centers, they tend to have more local, permanent workforces. This keeps wages down and means firms tend to avoid layoffs during tough times.

During the financial crisis, they were helped by Germany’s subsidized “Kurzarbeit” (short work) scheme, under which struggling companies could put their employees on shorter working hours rather than sacking them. The government then made up part of the workers’ lost wages.

This safety net worked brilliantly. Mass layoffs never happened and companies recovered more quickly once the climate improved because they still had a fully-trained workforce.

“I know a lot of companies that were helped by it,” Jerusalem said. “Imagine what a distaster it would have been if they’d laid off the people who they now need again today.”

Germany’s challenge for the future — and Merkel’s at the G20 in Seoul — is the issue of stimulating domestic demand so that the economy is not quite so lopsided in favor of exports.

The United States proposed a 4 percent limit on either trade surpluses or deficits, beyond which a country would have to find ways to boost its imports or exports to correct the imbalance.

No way, said Germany. Such a “political” approach was “neither economically justified nor politically appropriate,” Merkel said on Thursday morning. The resulting vague communique in Seoul reflected Germany's determination — and that of other big exporters such as China — to protect its export-dependent mittelstand.

In fact, Germany has already begun correcting its imbalance, economists here say. After years of wage restraint, workers are demanding a share of the spoils — and bigger pay packets will mean more consumption. In this cause, workers are even backed by pro-business conservative politicians.

“It’s interesting that even the conservative politicians in Germany are saying that wages should increase,” said Michael Holstein, head of macroeconomic research at DZ Bank. “We think wages will grow more strongly and the economy will go more in the direction of stronger domestic demand.”

By lessening its reliance on exports, Germany will have a broader, more resilient economy, he said. Like most economists, Holstein believes that, while there are plenty of challenges on the horizon such as the ageing of the population, the need for skilled migrants and necessary improvements to the education system, Germany is looking pretty good.

“There are still problems to be solved,” he said. “But over the next few years, we are quite optimistic about the German economy.”