Germany has the economic strengths America once boasted

Germany with its manufacturing base and export prowess is the U.S. of yesteryear, an economic power unlike any of its European neighbors. It has thrived on principles America seems to have lost.

By Don Lee, Los Angeles Times January 21, 2012, 7:33 p.m.

Reporting from Elz, Germany— Every summer, Volkmar and Vera Kruger spend three weeks vacationing in the south of France or at a cool getaway in Denmark. For the other three weeks of their annual vacation, they garden or travel a few hours away to root for their favorite team in Germany's biggest soccer stadium.

The couple, in their early 50s, aren't retired, nor are they considered particularly well off. They live in a small Tudor-style house in this middle-class town about 30 miles northwest of Frankfurt. He's a foreman at a glass factory; she works part time for a company that tracks inventories for retailers. Their combined take-home income (after taxes) is a modest $40,000.

Yet the Krugers have a higher standard of living than many Americans who earn twice that income.

Vera and Volkmar Kruger, seen here in the town of Limburg, Germany, not far from their home in Elz
Their secret: little debt, frugal habits and a government that is intensely focused on high production, low inflation and extensive social services.

That has given them job security and good medical care as well as well-maintained roads, trains and bike paths. Both of their adult children are out on their own, thanks in part to Germany's job-training system and heavy subsidies for university education.

For instance, Volkmar's out-of-pocket costs for stomach surgery and 10 days in a hospital totaled just $13 a day. College tuition for their son runs about $260 a semester.

Germany, with its manufacturing base and export prowess, is the America of yesteryear, an economic power unlike any of its European neighbors. As the world's fourth-largest economy, it has thrived on principles that the US seems to have gradually lost.

It has tightly managed its budget and adopted reforms — such as raising the retirement age — that some other Eurozone nations are just now being forced to undertake. And few countries can match Germany's capabilities for producing and exporting machinery and other equipment, or its infrastructure for research, apprenticeships and financing that support manufacturing.

"German industry is strong," said Volkmar, speaking in halting English as he occasionally looks up translations on a laptop. "People work hard. That's why the German economy is best in Europe."

Indeed, Germany was the only major Eurozone nation to escape the credit downgrades that have hit its neighbors. And the country continues to anchor the continent's economy.

Still, Germany has its share of challenges.

Income inequality, while less pronounced than in the U.S., is rising. Most workers, including the Krugers, have seen little or no real wage gains in recent years. And the nation's population is declining.

And now, with Europe on the ropes, Germany faces both a declining market for its exports and the prospect of having to cough up tens of billions of dollars more to help bail out profligate Eurozone neighbors.

Even so, German business and consumer confidence has held up well. The nation's jobless rate fell last month to a two-decade low of 6.8%, considerably lower than in much of Europe and the U.S.

And though its industrial production is starting to soften, Germany so far has maintained an impressive trade surplus with the rest of the world, including China.

Germany's economy looks like that of the U.S. a generation ago.

In 1975, manufacturing accounted for about 20% of the United States' economic output, or gross domestic product, about the same as in Germany today. Since then, U.S. manufacturing's share of GDP has slid to about 12%.

In 1975, the U.S. budget deficit was a manageable 1% of the economy, about the same as Germany's now. Last year, the U.S. deficit was about 10%.

American families in the 1970s and early '80s typically saved about 10% of their take-home pay, about the same as in Germany today. The U.S. savings rate these days is in the low single digits.

Germany, like China, fiercely promotes its exports and has been reluctant to ramp up domestic spending, frustrating Washington, which wants to sell more American goods abroad.

That may be good for Germany, but many critics say the country's lack of consumption causes unhealthy imbalances for the regional and global economies, much the way America's overconsumption and borrowing does.

But Germany's economic practices and lifestyle are deeply ingrained in a culture that fears debt and inflation. In many ways, for instance, the nation discourages consumerism. Its streets aren't plastered with the billboards that dot the U.S.. Taxes on goods and services are high. Many shops and restaurants in Germany are closed Sundays.

Many smaller stores don't even take credit cards. Volkmar laughed about how consumers in other countries pull out plastic for the smallest of purchases.

"In France you pay for your croissant with your credit card. In Germany, they don't like it," he said, referring to both merchants and consumers.

Since paying off their home loan recently, the Krugers have almost no debt. They sock away money for old age and summer trips, and they rarely eat out.

Household liabilities in Germany have been rising, but remain lower than those in other developed countries. By one common measure, Germany's household debts were 97.5% of total after-tax income in 2010, compared with 125% for the U.S.

Still, the Krugers and other Germans are seeing a rise in freewheeling spending, especially among the young. Volkmar said he gets a lot of credit card offers. More marketing, however, doesn't mean that a lot of consumers are getting credit.

"In truth, it's not easy credit," said Fasun Batmaz, a manager at a TeamBank consumer unit whose name, Easy Credit, belies the rigorous process and strict requirements. "Only a handful come in and may get it."

Easy doesn't describe the Krugers' lives either. On weekdays and every few Saturdays, Volkmar is out the door by 5 a.m., driving 45 minutes to his factory. Vera also works some Saturdays. But neither gets paid more when they work additional hours, nor do they get paid less when they work fewer hours. Over time, the hours balance out.

A similar idea is behind a work-sharing system that many experts said helped Germany avoid the mass layoffs that swept the U.S. during the Great Recession. A company might reduce the hours of all workers to avert laying off an employee.

Germany's lower unemployment rate also reflects its orientation toward formal vocational training.

The Krugers' older child, Thorsten, was interested in books from an early age, and prepared for a university education. Their daughter, Nadine, got a vocational diploma in social work that included three years of schooling after high school, with the final year being on-the-job training at half pay.

About one-fourth of all German businesses take part in this apprenticeship program; six of 10 apprentices end up getting hired permanently, said Dirk Werner of the Cologne Institute for Economic Research.

The practice, he said, is a key reason why Germany has one of the lowest unemployment rates for 15- to 24-year-olds, about 9.7%, according to the Organization for Economic Cooperation and Development in Paris. In the U.S., the comparable rate is about twice that.

Volkmar and others attribute part of the lower unemployment rate to the German work ethic. Yet Germans, on average, work far fewer hours a year than Americans, thanks partly to five or six weeks of vacation.

The amount of the Krugers' vacation time is typical for most Germans.

When they go to France, the Krugers take an old Volkswagen camper, but still expect to spend about $3,000 over three weeks.

Over the recent winter holiday, they took the 45-minute train ride into Frankfurt to buy Christmas presents. They picked up practical gifts: a breakfast tray, cutting board and sleeping gown for Nadine. For Thorsten, the couple bought a tool kit made in Germany.

Volkmar laughed when asked why he bought tools for his son. Thorsten asked for them, he said, adding a bit sheepishly, "The Volkswagen camper needs repair."