Recovery revealsunderlying strengths

This has been the year ofGermany’s comeback. As2010 draws to a close,Europe’s largest economy ison course to grow at anannual rate of significantlymore than 3 per cent – andpossibly the fastest inalmost two decades. Busi-ness confidence is at a 20-year high, according to theIfo economic institute.

The impressive pace ofexpansion shows how sig-nificantly the country’s eco-nomic fortunes haveturned. Last year, in thewake of the collapse of Leh-man Brothers investmentbank in September 2008,gross domestic product fellby almost 5 per cent. Thecountry’s exposure to globaltrade cycles was exposed.

But the global economiccrises also revealed Ger-many’s underlying eco-nomic strengths. When thedownturn struck, compa-

nies in the US laid off work-ers. In Germany the reac-tion was different. Helpedby government subsidiesfor “short-time” workingschemes, businesses held onto their workforces; manywere scared of losing skillspermanently.

Once the world economystabilised, German compa-nies could leverage thepick-up in global demanddriven by fast-growingeconomies such as China’s.

Unemployment quicklyturned and has fallen stead-ily over the past year – inOctober falling below 3mfor the first time in 18years. In turn, that hasencouraged hopes that Ger-man consumers – who man-aged to avoid the property-price bubbles that have hitcountries such as the US,Spain and Ireland – willfinally start to increasetheir expenditure.

Thomas Mayer, chiefeconomist at DeutscheBank, says: “We are stilldependent on the positiveimpulses that come espe-cially from emerging mar-kets, but Germany is begin-ning to find some footingon the domestic demandside.”

Factors explaining the

rebound were in placebefore the crisis. Reformsto the labour market andprivate-sector restructuringdating back to the firstyears of this century hadincreased competitiveness.

At the time, the changesbrought social unrest. Butbefore the global economiccrises that first erupted in2007, growth was alreadyrebounding on the back ofexports – and domesticdemand would almost cer-tainly have followed.

“What should have hap-pened in 2008, but didn’thappen because of LehmanBrothers, can now unfold,”says Holger Schmieding,chief economist at Beren-berg, the Hamburg-basedbank.

Now the recovery appearswell entrenched, boostingconfidence that it will besustained into next yeareven if US growth remainssluggish.

The Organisation for Eco-nomic Co-operation andDevelopment forecasts 2.5per cent growth next yearand 2.2 per cent in 2012,after 3.5 per cent in 2010.

Given Germany’s rapidlyageing population, that is

EconomyThe financialpicture looksvery differentfrom last year,says Ralph Atkins

Continued on Page 2

GERMANYFINANCIAL TIMES SPECIAL REPORT | Monday November 29 2010 Page 4

MilitarySpending cutsmay force aradical socialchange

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Stronger Berlin balks at global role

Twenty years afterthe joyful reunifica-tion of its commu-nist and capitalist

halves, and more than 60since the foundation of thefederal republic from theruins of the second worldwar, Germany remains acountry uncertain of itsown success.

Its mighty economy, thelargest in the EuropeanUnion, has emerged fromthe recession more rapidlythan most. Just 10 yearsafter being written off asthe sick man of the conti-nent, Germany has re-discovered its vocation as aworld champion exporterand the locomotive of Euro-pean growth.

In the past five years, andin spite of the global reces-sion, it has seen unemploy-ment drop from 5m to 3m,the lowest since the imme-diate aftermath of reunifica-tion in 1990.

As smaller and weakereurozone economies, suchas Ireland and Greece, areforced to implement grimausterity programmes todeal with their soaring debtand deficits, the Germanmodel of wage restraint,budget discipline and pru-dent saving has boosted atrade surplus that is theobject both of internationalenvy and open criticism.

Yet at home, the centre-right coalition governmentof Angela Merkel, the chan-cellor, has seen its popular-ity plunge.

Protest politics are backin vogue, as thousands ofdemonstrators take to thestreets of Stuttgart, one ofEurope’s most prosperouscities, seeking to stop thebuilding of a high-speed railtunnel under the centralstation. In north Germany,anti-nuclear campaignersconfront ranks of policemento stop the transportation ofradioactive waste.

The two great “people’sparties” of the postwar Ger-man economic miracle – MsMerkel’s Christian Demo-cratic Union, and the oppo-sition Social Democraticparty – are losing powerand influence in the centre,as voters switch to the envi-ronmentalist Greens andthe far-left Linke party.

A five-party contest forpower in national andregional elections has leftpolitics paralysed, as thecomplex electoral arithme-tic forces traditional rivalsinto uncomfortable coali-tion governments.

In spite of the Germaneconomic revival, withgross domestic product

growth this year forecast atclose to 4 per cent, thefinancial crisis in the euro-zone has shaken the confi-dence of the political estab-lishment.

“If the euro fails, thenEurope will fail,” Ms Merkelintones repeatedly in herefforts to persuade reluc-tant voters and her ownparty’s politicians that theymust show more solidaritywith their weaker Europeanpartners and lead the res-cue efforts for Athens andDublin.

Germany is anxious, too,about its own internal cohe-sion. The publishing sensa-tion of the year was a bookcalled Germany does awaywith itself, a diatribeagainst Islamic immigrationand the failure of integra-tion. It was written by ThiloSarrazin, a former topfinance ministry officialand Social Democrat politi-cian. He was forced to quitas a board member of theBundesbank, the central

bank, for his sensational-ism, but that did nothing todiscourage sales.

Yet the need to boost thenumbers of skilled migrantworkers coming to filllabour shortages in theeconomy is a constanttheme of employers and ofMs Merkel’s ministers. Alack of skilled workers iscosting the economyaround €20bn a year,according to a recent gov-ernment study.

The latest migration fig-ures show net emigration,in particular to Turkey, thesource of the largest immi-grant group.

On foreign policy, too,Germany’s reluctance toplay a bigger global rolebecause of the country’s20th century history ofNazi-led aggression stillstirs a divisive nationaldebate. When Horst Köhler,the president, dared to sug-gest that a world tradingnation must also takegreater responsibility forglobal security, he wasangrily attacked by SocialDemocrats and Greens, andpromptly shocked thenation by resigning.

Guido Westerwelle, vice-chancellor and foreign min-ister, insists that Ger-many’s reluctant involve-ment in foreign wars suchas Afghanistan is healthy.

“I am happy we have ahealthy scepticism towardsmilitary interventions ofthe Bundeswehr. There isnothing wrong with that,”he said in a recent inter-view with the FT. “Someforeign politicians may seeit as a lack of firmness, butonly if they have not reallystudied the darkest chapterin our history.”

Yet attitudes are chang-ing. Karl-Theodor zu Gut-tenberg, the rising star ofthe CSU, who is defenceminister and the country’smost popular politician, hasrevived Mr Köhler’s argu-ment in order to defend hisplans to turn the Bun-

deswehr into a professional,volunteer army.

The “Berlin republic” hasa different style and focusfrom the “Bonn republic”that characterised Germanyuntil unification in 1990.

By moving the capitalfrom the west to the east,Germany’s political estab-lishment underlined thereality that a united Ger-many is a central European,not a west European, state.

Yet in spite of accusa-tions in Brussels that Ger-many is now driven more

by its narrow nationalinterests, and less by its tra-ditional commitment to theEU, a strong pro-Europeanpolicy survives in all themain political parties.

Ms Merkel was lauded inthe popular press as the“Iron Lady” for her determi-nation to enforce stricterausterity policies on the“budgetary sinners” of theeurozone. But she defendsher insistence on the stabil-ity of the euro as essentialto the future of the Euro-pean Union, and not just an

attempt to appeal to Ger-man voters.

“In this existential crisis,we assumed our responsibil-ity for the future of Europe– and in so doing for thefuture of our own country,”she declared at the recentCDU party conference inKarlsruhe. “We stood up topressure at home and inEurope. We made it clearthat a good European is notalways someone who actsfast but, rather, someonewho acts wisely.”

If anything, she is criti-

cised by rivals such as theGreens for not being Euro-pean enough. “Merkelalways focuses on domesticpolicy,” says Cem Ozdemir,co-leader of the Greens andthe most prominent Ger-man politician of Turkishparentage.

He dares to suggest thatthe eurozone must contem-plate a “joint fiscal policy”and even a common socialpolicy. It smacks of a“transfer union” in whichGermany would be effectivepaymaster for weaker econ-

omies – anathema to mostGerman politicians. “Weneed to have a discussionabout that,” Mr Ozdemirsaid in an FT interview.

Domestic politics willloom large in Germany inthe coming year, with nofewer than five elections infederal states.

Ms Merkel’s CDU couldeven lose its majority inBaden-Württemberg, thewealthy south-western stateit has ruled since 1953, to a“red-green” coalition of theSPD and Greens. Accordingto recent polls, the Greenscould be the principal partyin such a government, rid-ing on support won fromthe Stuttgart protests.

Ms Merkel, the Protestantpastor’s daughter who wasbrought up in East Ger-many, insists she does notpay attention to the polls.“Whoever bases policy onlyon short-term polling trendsis in the wrong job,” shetold the FT recently.

She flatly rules out anyalliance with the Greenparty in Berlin. But MsMerkel is a pragmatist anda consummate consensus-builder. She is much morepopular than her party.There are no rivals in sightto replace her. She is justthe sort of politician thatGermany’s uncertain citi-zens seem to like.

In spite of a strongeconomic revival,the eurozone crisishas left the nation’spolitical leadersshaken, writesQuentin Peel

InsideBanks An increasingburden of regulation israising concerns, reportsJames Wilson Page 2

Consumers Bread is thebattleground in a cut­pricewar (pictured), writesDaniel Schäfer Page 3

Mittelstand Threescientists in an EastGerman canteen cookedup a recipe for success,says Quentin Peel Page 4

Energy A solar­poweredcity sees a bright futurein renewables, writesGerrit Wiesmann Page 4

Angela Merkel: ‘If the eurofails, then Europe will fail’

AFP Photo

2 ★ FINANCIAL TIMES MONDAY NOVEMBER 29 2010

Germany

ContributorsQuentin PeelChief Correspondent

Ralph AtkinsFrankfurt Bureau Chief

James WilsonFrankfurt Correspondent

Daniel SchäferFrankfurt Correspondent

Gerrit WiesmannBerlin Correspondent

Rohit JaggiCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

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Recoveryrevealsunderlyingstrengths

about as fast a growth rate as itcould reasonably expect overthe longer term.

Germany’s revival will helpthe rest of Europe, providing anexpanding market for goods pro-duced elsewhere and strength-ening the government’sfinances.

That domestic demand is pick-ing up and the current accountsurplus has fallen as a share ofgross domestic product is help-ing answer critics who arguethat the country’s focus onindustrial competitivenessamounts to a “beggar-thy-neigh-bour” strategy that underminesother economies.

But could Germany do moreto rebalance its economy andin the process provide more ofa helping hand to weakereurozone economies, especiallycrisis-hit countries such as Ire-land, Portugal and Greece?

Within Germany at least,there is a strong consensus thatthe country is already close tothe limits of the possible. Run-ning a current-account surplus,the argument goes, is naturalgiven the country’s demograph-ics – in effect, it is saving for itsold age.

The experience of countriessuch as the US and Spain showsthe long-term dangers of boost-ing demand by expanding creditand runs counter to traditional“stability orientated” Germaneconomic thinking.

There are also practical objec-tions, however. Germany’scouncil of economic advisersargued in its latest report that amore expansionary fiscal policywould bring scarcely any bene-fit for countries such as Spain,Ireland or Greece, because ofthe relative unimportance oftheir exports to Germany.

In contrast, the beneficialeffects would be felt in countrieswith stronger trade links, suchas the Netherlands and Ger-many’s eastern European neigh-bours.

The report added: “BecauseGermany cannot by itself stimu-late total demand in the euro-zone noticeably, it is also truethat a moderate [fiscal] consoli-dation in Germany will alsoentail no significant danger forthe European upswing.”

Attempting to help otherEuropean countries by increas-ing German wage levels couldeven backfire by creating moreunemployment at home, thecouncil of advisers warned.

Instead, the economic crises ofthe past few years have encour-aged Germans to think thatother economies should becomemore like theirs and not theother way around.

For now, at least, Germany’sfocus on competitiveness andliving within its means hasbrought stability and solidlybased growth.

Jürgen Stark, a member of theEuropean Central Bank’s execu-tive board and a former Bundes-bank vice-president, told aFrankfurt conference this monththat for uncompetitive econo-mies there was no alternative topainful adjustment processes.

“Germany could be a rolemodel for other countries in theeurozone,” he said.

Continued from Page 1

Weakened banks must bear burden of new rules

Germany’s banking system isout of acute danger, but consid-erable concern remains overwhether it can adapt quicklyenough to the changes that arecoming in response to the finan-cial crisis.

Too many banks still cannotclearly explain how they willoperate once deprived of theabundant central bank liquidityand state support that hashelped them through the pasttwo years.

A number of banks still relypartly on government guaran-tees to obtain funding. Com-merzbank, the country’s second-largest bank by assets, will only

slowly be able to repay the€18.2bn of government capitalthat propped up its acquisitionof Dresdner Bank. And banksincluding several public-sectorLandesbanken are also hostagesto the judgments of EU competi-tion authorities, which wantwide-ranging restructuring ofthe banks to compensate for themarket distortions caused bythe state aid they were given.

Even while the banks grapplewith such issues, they must pre-pare for the stricter Basel IIIcapital requirements that globalregulators agreed this year. Ger-man banks could need €50bn tomeet regulations that will comeinto force by 2018, according tothe Bundesbank, Germany’scentral bank, although most ofthat should come from retainedearnings over the period.

Banks must also find a way topay for costs arising from a slewof regulatory measures beingprepared by the German govern-ment. And while a strongdomestic economic recovery hasmeant banks have faced a bur-

den of loan losses that is at thelow end of expectations, manystill have high exposure tostruggling economies elsewhere.

It adds up to a bleak outlookfor many banks, which areincreasingly vocal in objectingto the burden of regulationbeing heaped on them. AndreasSchmitz, president of the BDB,the association representing thecountry’s commercial banks,said bluntly last month that thebanks had “reached the limit” ofwhat they could tolerate.

“The outlook for the Germanbanking system remains nega-tive. This reflects the severeimpact of the financial crisisand also captures long-standingstructural weaknesses,” saysMoody’s, the rating agency, not-ing that German banks lost anaggregate €28bn over the pasttwo years.

The Bundesbank says thebanks’ situation has “markedlyimproved” since last year butsays “vulnerabilities and struc-tural weaknesses” remain.

The government is on the

verge of introducing a restruc-turing law for banks that willmake it easier to intervene inthe case of troubled institutions.The banks are broadly support-ive of the measures, which arelikely to be a precursor for anEU-wide plan. But banks resentaspects of Berlin’s “go it alone”approach, such as an annuallevy on banks from next year

that will build up a fund to beused for bank restructuring.

The expected €1.2bn to beraised annually will be paidmostly by the biggest bankssuch as Deutsche Bank, Com-merzbank and the Landes-banken. Josef Ackermann, chiefexecutive of Deutsche Bank, isamong those who have criti-

cised this and other potentialburdens on banks. Germany isnot the only country planning abank levy but the BDB says thisand other German plans, suchas a proposed financial transac-tions tax and a reformed EU-wide deposit protection scheme,could cut banks’ potential post-tax profits by 40 per cent.

Can German banks meet suchchallenges? Mr Ackermann isamong those who are concernedby the relative weakness of Ger-man banks – Deutsche is theonly institution of global stature– and believe this reflects abanking market that is bettersuited to creating jobs and blan-ket coverage in Germany thancreating powerful players.

“Germany has only one bankamong the biggest 30 [by marketcapitalisation] – are we payingthe price?” was a question heposed at a recent conference.

But the existing system –where a lot of domestic lendingis in the hands of savings banksand co-operatives, whose goal isnot profit maximisation – has

many supporters. WolfgangSchäuble, finance minister, saysit helped the German economyrebound strongly after the cri-sis, with companies of all sizeshaving reliable local bankingpartners. A feared credit crunchdid not materialise.

Nevertheless, there is wide-spread agreement that theLandesbank sector must bereformed. These public-sector,regionally owned banks providecentral functions for the savingsbanks but are seen as lacking aviable business model. The Bun-desbank says there is still“excess capacity” in Germanbanking.

WestLB, perhaps the best-known Landesbank, has beenthrough repeated crises. A freshrestructuring plan for the bankis due to be presented to EUauthorities in February and thenext months may see a franticeffort to engineer a merger withother German counterparts. Onesuch plan – a potential mergerwith Munich-based BayernLB –was called off in October.

Financial sectorThe country’s lendersare expressingconcern at Berlin’sgo­it­alone approach,says James Wilson

Exports pullspecialists outof recession

In the summer of 2009, the chiefexecutive of car parts supplierWebasto gave his competitors alesson in counter-cyclical behav-iour.

At a time when Webasto’s rev-enues were plunging 25 percent, Franz-Josef Kortümbought the convertible roof unitof an insolvent rival – a dealthat doubled the group’s yearlyinvestment budget to 8 per centof sales.

One and a half years on, andwhat seemed daring amid Ger-many’s sharpest economicdownturn in decades now lookslike a smart move.

Demand for high-tech goodsfrom Webasto and other Ger-man companies has risen at abreathtaking pace in 2010. TheGerman exporters’ associationexpects the volume of goodssold abroad to rise 16 per cent to€937bn this year – the biggestincrease in a decade.

Germany’s export-driven com-panies in key sectors such asmachinery, cars and chemicalgoods have emerged from thecrisis stronger than before.

Significant parts of the coun-try’s plants are running at fullspeed again, driven by a rapidrise in demand from China andthe US for the country’s broadspectrum of industrial goods,ranging from premium cars tolaser-cutting machinery. Somecompanies are already expand-ing capacity and many arerehiring engineers and workers.

The reason why manufactur-ers in Europe’s largest exportingnation have emerged from theashes of the crisis faster thanothers boils down to a willing-ness to think long-term.

While companies in the USand other parts of Europe oftenslashed their workforces, Ger-many’s engineering and carcompanies opted for a strategyof hibernation.

Most companies held on totheir permanent workforce.Instead, they let go of tempo-rary workers and used a scheme– dubbed Kurzarbeit – in whichthe state makes up a largepart of the wage billwhen working hoursare reduced.

This approach hasspared the highlyskilled permanentworkforce, but itsent untrained con-tract workers intoat least temporaryu n e m p l o y m e n t .Unions complainthat companies areseizing on the recov-ery to expand theproportion of con-tract labour evenfurther.

This approach wasmade possiblethanks to a mixtureof political reformsand wage restraintthat has boosted pro-ductivity in the pastdecade.

Peter Smeets,Frankfurt head of PaulHastings, a law firm, says:“The German labour marketreforms helped the industrybecome more efficient. This hasgiven Germany a 10 to 15 per

cent productivity surplusagainst countries such asFrance and Italy. This is thecard we are playing now.”

Another factor that helpedGermany’s industrial base with-stand the crisis is that manycompanies are family owned.

At Webasto, the two familyowners took their share of thepain by waiving rent paymentsdue from the group for its head-quarters on the outskirts ofMunich. The owners of the pro-ducer of air-heating systems,sunroofs and roofs for converti-ble cars also allocated morefunding to research and develop-ment than the industry average.

“For our owners, sustainablesuccess based on product inno-vation is much more importantthan peak returns,” saysWebasto’s Mr Kortüm.

This engineer-driven approachis deeply embedded in Ger-many’s corporate culture andeducation system. “It’s part ofthe German DNA to be an engi-neer and a tinkerer, to craftsomething and to be very pre-cise,” Mr Kortüm says.

This spirit has spurred an eco-nomic structure with swathes ofsmall and medium-sized com-panies – the country’s famedMittelstand – which specialise insmall but advanced marketniches. Such a strategy forcedthese companies to expand rap-idly beyond their relativelysmall domestic markets.

Heidelberger Druckmaschinenis one example. A global marketleader in printing machinery, ithas the same brand prestige inits industry as Mercedes has inthe premium car sector.

The group went into a deepstructural and cyclical crisis inthe past few years, duringwhich it was even forced to askfor state help in 2009.

But now it is starting to bene-fit from an increasing focus onquality printing in China, whichhas become the group’s biggestmarket.

Bernhard Schreier, Heidel-berger’s chief executive, saysthe group is even winning mar-ket share from Chinese rivals ontheir home turf.

He says these competitors willnot be able or willing to catchup with Heidelberger at themoment.

“This is a niche market withlow volume and high entrybarriers,” he says, adding that aforay into this speciality

machinery market byChinese companieswould neither payoff nor bring thesame prestige asChina’s move intocars or high-speedtrains.

This focus onniche marketsmight guaranteethat many partsof Germany’s Mit-telstand will con-tinue to beat theirfledgling competi-tors from the east.

But ThomasLindner, presidentof VDMA, the Ger-man engineeringassociation, saysin other sectorsChinese competi-tion will soon bepalpable.

“In higher-vol-ume markets such

as machine tools, thesituation will become a lot morecritical for us than in the nichemarkets,” he says.

ManufacturingState help in retainingskilled workers and afocus on the long termhave paid dividends,says Daniel Schäfer

Ray of sunshine: a counter­cyclical gamble by Webasto,maker of sunroofs such as theone on this Maybach car, paid off

Demographic timebomb’sticking muted by reforms

Germans who turn 65next year can be grate-ful for a birthdaypresent that younger

citizens will not receive – theright to their full state pensionas soon as they reach that age.

From 2012 the country’s pen-sions screw will gradually betightened, requiring an extrafew weeks of working life fromeach year’s retirees. By 2029, thestatutory retirement age willhave risen to 67.

It is one of Germany’sresponses to a question thatmost of Europe is grapplingwith: how fewer people of work-ing age can provide for morepensioners who are also livinglonger. Those aged 65 today areexpected to live for 18 years, onaverage.

Germany’s population isshrinking by about 100,000 eachyear, while the dependencyratio – those aged 65 or over asa percentage of the working-agepopulation – will double toalmost 60 per cent in 2060, worsethan the EU average.

The debate over public pen-sions is particularly importantin Germany because the stateprovides about three-quarters of

the average citizen’s retirementincome – much higher than incountries with more developednon-state pension schemes.

Nevertheless, over the pastdecade Germany has institutedwidespread reforms to encour-age private saving. Axel Börsch-Supan, director of the Mann-heim Research Institute for theEconomics of Ageing, says:“Germany is well positioned toweather the demographic cri-sis.”

Prof Börsch-Supan says whatGermans get from the first pil-lar of the pension system – stateprovision – will be about 15 percent lower in 30 years’ time. Butthat will still be more generousthan countries such as the USand UK. “In fact pensions in 25years’ time in Germany will stillbe better than they are in thosecountries today,” he says.

Most Germans are aware ofthe need to raise their privatesavings – whether through occu-pational or “second pillar” pen-sions or so-called “third pillar”private saving – to compensatefor a relatively lower state pen-sion. More than 14m have takenout “Riester” private savingproducts, named after a formerlabour minister, since theirintroduction in 2001.

Experts and the financialindustry would like to see agreater take-up. Prof Börsch-Supan says the wealthiest thirdof the population almost allhave some provision, comparedwith only about 30 per cent ofthe worst-off third of the popula-tion. Providers of Riester pen-sion plans want the system

made more flexible, less com-plex and open to higher contri-butions from a wider range ofcontributors. At the moment,the self-employed, for example,are ineligible for the products.

Brigitte Miksa, head of inter-national pensions at AllianzGlobal Investors, says: “Take-uphas been less than it might havebeen. Also people in the lowestincome brackets are the mostlikely to have an irregularemployment career, interruptedby unemployment or by low-paid jobs. So it is the group thatlacks the means to save.”

As for occupational pensions,

these have been “something of aluxury” historically in Ger-many, according to Prof Börsch-Supan, with big companiesoffering vastly better schemesthan smaller companies.

Occupational schemes havebeen in flux over the past dec-ade, with a widespread move bycompanies away from definedbenefit schemes and towardsdefined contribution schemes.

Ms Miksa says: “People arestill not being mobilised enoughto take part in schemes, espe-cially those who work for smalland mid-sized companies. Thereis an argument for some kind

of semi-automatic enrolmentmechanism.”

The BVI, the association rep-resenting investment funds andasset managers, says rules gov-erning occupational pensionsdiscriminate against investmentfunds.

The GDV association, whichrepresents the insurance indus-try, counters that investmentfund-based products are unsuit-able. “Germany doesn’t need anAmericanisation of occupationalpensions,” it says.

Almost three-quarters ofRiester pension plans are alsoinsurance-type products and MsMiksa says German pension sav-ing is still driven strongly byinsurance-type thinking and byan interest in protection.

“People like guarantees butthat comes at a cost, and part ofthat cost is forgone returns,”she says. “In Germany – wherethe large state pillar is protectedagainst volatility – it would besensible to have greater risk tol-erance in occupational and pri-vate pension saving. However,this is not what we see.”

Nevertheless, that preferencefor security paid off in the finan-cial crisis. The Organisation forEconomic Co-operation andDevelopment says the Germanpension system was far lessaffected than others, where farmore of people’s retirement potwas invested in riskier assets.

Rolf-Peter Hoenen, presidentof the GDV, says: “The Germansystem has proved itself in thecrisis, especially in an interna-tional perspective. Other coun-tries are envious.”

PensionsThere are still gaps butmost people knowthey need to raisetheir private savings,says James Wilson

Age concern: union members protest at moves to raise the retirement age from 65 Getty Images

‘In Germany in25 years, statepensions will still bebetter than in the USand the UK today’

‘Germany has onlyone bank among thebiggest 30 – are wepaying the price?’

Within Germany atleast, there is a strongconsensus that thecountry is alreadyclose to the limits ofthe possible

FINANCIAL TIMES MONDAY NOVEMBER 29 2010 ★ 3

Germany

Loaf is the battleground in cut­price war

Germans might be well-known for their pen-chant for bread. But arecent incident shown

that their love of Brot and Sem-meln (rolls) is not as uncompro-mising as one would think.

The revelation that ChristianWulff, Germany’s president,savours breakfast rolls at theBellevue presidential castle inBerlin that are transported286km, from a famed bakeryshop in Hanover, triggered amedia outcry this summer.

The episode revealed that,unlike Mr Wulff, most Germansput price far above quality. Andthis has triggered a price war inthe country’s bakery sector thatis set to become even fiercer inthe coming years.

Traditional bakers, who viewthe production of rolls andstrong-tasting rye-based loafs asa craft, are on the retreat, assupermarkets and discountshops that sell industrially pre-baked products at bargainprices have gone on the offen-sive.

“Many traditional bakeriesare dying a slow death,” saysDirk Schneider, a former con-sultant who nine years agofounded Backwerk, Germany’sfirst discount bakery chain.

Hans-Georg Häusel, a psychol-ogist who uses the scienceof brain function to explainconsumer behaviour, saysthis lack of concern about oneof their most favoured food-stuffs reflects the German char-acter.

He explains: “Discount shop-ping is popular because the ‘dis-ciplined’ personality type, whois dutiful but dislikes pleasure,is more common in Germanythan in other countries.”

In the six years to 2009, the

number of traditional bakersdropped by about 2,200 to lessthan 15,000, figures from Zen-tralverband des DeutschenBäckerhandwerks, the Germanbakers’ association, shows.

At the same time, the numberof bakery shops remainedsteady at 45,000.

The figures underscore howtraditional bakers are rapidlyconsolidating and how largesupermarket chains and dis-count groups are pushing into

the market for bread products.Peter Sterling, head of the

bakery department at NGG, theGerman retail trade union, says:“While the typical Germanbaker will not cease to exist, Ido not dare to predict how manyof them will survive.”

Peter Becker, head of the Zen-tralverband, says that each yearanother 3 per cent of bakersvanish as they either give up orfail to find a successor whenthey retire.

German food retailers such asEdeka or Rewe have in the pastfew years expanded bread androlls offerings by adding in-storebakery shops to the industriallymade and frozen bread found onthe supermarket shelves. Theseshop-in-shop outlets mostly sellcheap, pre-baked bread and rollsthat are merely warmed up atthe in-store bakery.

While estimates about thescale of the supermarkets’ suc-cess vary wildly, most experts

agree that they have been rap-idly winning market share inthe past decade. Mr Sterlingfrom the NGG trade union saystraditional bakers sell fewerthan a quarter of the loaves soldtoday in Germany.

This competition is set tointensify as the country’s fooddiscount behemoths enter thefray. Aldi, the leading Germandiscount chain, this year startedto install bread and rollmachines in its shops.

At the same time, a number ofbakery discount chains such asmarket leader Backwerk haveemerged in the past decade.These self-service bakeries lurecustomers with cheap prices athigh-traffic city-centre locations.

“We are more efficient thantraditional bakers, but we needtwice as many customers, as weare offering our products muchcheaper,” says Mr Schneider.

His discount chain’s productshave even been found to bemore authentic than those ofsome traditional bakers, asBackwerk makes its rolls 100per cent out of sourdough, theclassical mixture of rye flourand water used in Germany forbread. By contrast, small bakersnow often use dough with chem-ical additives to make the rollsdurable.

But the market for such dis-count bakeries is limited. Afterrapid growth in the past fewyears, there are now 1,200discount bakery shops nation-wide. “The growth rates areslowing each year – 2,000 loca-tions will be the maximum,”says Mr Schneider.

But while the fierce competi-tion is a threat to many bakers,some see it as a chance toreturn to their breadmakingroots.

Fore example Mr Wulff’sfavourite baker in Hanover,Broterbe Gaues, uses century-old baking techniques to pro-duce a very limited variety ofrelatively high-priced bread.

While the bakery appears tobe thriving, such success maybe difficult to repeat amid a Ger-man food discount culturewhere price determines almosteverything.

Mr Becker from the Germanbakery association does not har-bour any illusions.

“I don’t know many bakerswho drive a Ferrari,” he says.“If you want to become rich,you have to choose anotherjob.”

ConsumersA celebrated love ofbread is not matchedby a desire to pay forit, says Daniel Schäfer

Rising competition: supermarketsare slicing into bakers’ traditionalmarket Bloomberg

‘We are more efficientthan traditional bakersbut we need twice asmany customers’

4 ★ FINANCIAL TIMES MONDAY NOVEMBER 29 2010

Germany

Bundeswehr faces up to the shelving of conscriptionNineteen-year-old Thomas Kokotwas woken at about 4am andhas spent much of a rainy Berlinmorning parading and learning tohold and handle a rifle. He appearsdelighted.

Since the start of October, therecent school-leaver has been one ofabout 60,000 young men doing com-pulsory six-month national service,introduced in 1956 as a one-yearstretch to help protect what was then

West Germany from its Communistenemies to the east.

“It’s part of life,” says Mr Kokot.“School’s compulsory in Germany andI think conscription is part of thatsame social duty. You become moreself-sufficient, you learn discipline –and you learn to iron.”

But if the government of AngelaMerkel has its way, Mr Kokot couldbe among the last so-called “citizensin uniform”, who were meant to serve

as a permanent link between civilsociety and the military.

After early qualms, Ms Merkel’sdefence minister, Karl-Theodor zuGuttenberg, is pushing for nationalservice to be shelved – not abolished,in case it is ever needed again – aspart of a reform of the German armedforces, the Bundeswehr.

The idea has been discussed for adecade. With the end of the Cold War,the Bundeswehr’s focus changedquickly from being defensive to join-ing Nato-led foreign operations withprofessional troops only, first in theBalkans and latterly in Afghanistan.

As a result, the Bundeswehr is onlyrecruiting 15 per cent of eligible maleschool-leavers, while some 20 per centchoose conscientious objection and doa year’s social work instead, and 65per cent are let off serving altogether.

For years, the Social Democrats, inpower from 1998 to 2009, and Ms Mer-kel’s Christian Democrats, who haveled two coalition governments since2005, considered that an end to con-scription was taboo. Few in eitherparty dared dismiss one of the Bun-deswehr’s founding justifications:the civilising influence of asteady stream of recruits as abulwark against renewed mili-tarism.

As so often, money – or alack of it – eroded those prin-ciples. Following the eco-nomic crisis and expensivenational bank bail-outs, MsMerkel this summer assem-bled her cabinet for atwo-day brainstormingin order to come upwith a rigorous pro-gramme of spendingcuts.

A 10th of thefour-year, €80bnprogramme fellon the shouldersof the defenceminister. Sensingthe moment, Mr zuGuttenberg said theBundeswehr’s strength of250,000 men and 100,000 civiliansupport staff had to be cut radi-

cally – and that this could only beachieved by ending conscription.

Since then, Ms Merkel’s conserva-tive Christian Democrats have joinedthe anti-conscription line of their FreeDemocrat junior coalition partner,and it now looks almost certain thatthe parties’ parliamentary majoritywill vote to shelve conscription fromJuly.

Mr zu Guttenberg has distancedhimself from his initial proposal toshrink the Bundeswehr from 250,000men to an all-professional force of asfew as 165,000. But an independentreport commissioned by him recentlyrecommended a troop strength of180,000. The defence ministry is topublish its final proposal in the newyear.

Ceyhan Ormanli, 22, a Kamerad ofMr Kokot, sports their Berlin-based

Guard Battalion’smotto, Semper talis,

“Always the same”,o n

his dark-green sleeve. He thinks thatthe end of national service would be ashame.

“We don’t just need soldiers abroad,in Kosovo or Afghanistan, we needsome at home, too,” says the son of aGerman mother and Turkish father.“I’m proud of my uniform. When yousee all the flags and all the colours atour ceremonies, you do feel a closerrelationship to Germany.”

The government, conscious of theimportant social role of conscriptionand the social work done by theyoung men who do not want to serve,is planning to introduce voluntaryforms of participation for men – andwomen – who want to take a gap yearbetween school and university oremployment.

Mr zu Guttenberg reckons the Bun-deswehr will in future be able to luresome 15,000 school-leavers to servevoluntarily for a year.

Christina Schröder, the family min-i s t e r ,r e c e n t l ypresented aplan to get

35,000 young men andwomen to do a year’s

social work. They wouldreplace the 90,000 conscientious objec-tors who would no longer be there toperform menial but vital functions inold people’s homes or hospitals.

These institutions have in pastmonths voiced worries about thestructural changes that await Ger-many from around the middle of nextyear.

But the institution that will be hitmost, the German army, has so farkept quiet, as officers and soldiersawait Mr zu Guttenberg’s final plan –and the detailed effects on battalionsand barracks that will follow.

The changes and challenges facingthe Bundeswehr are enormous. TheGuard Battalion – the Wachbataillon –in which Mr Kokot and Mr Ormanli

serve has 2,000 men, of whom 80per cent are conscripts.

How the battalion – the hon-our guard for visiting states-

men, among other things – willdeal with 1,600 vacant posts is, for thenext months at least, Ms Merkel’s andMr zu Guttenberg’s well-guardedsecret.

MilitarySpending cuts may forcea radical social change,writes Gerrit Wiesmann

Awaiting orders:details of cutsand reforms arestill to beunveiled Getty

Improbable dreamin canteen cookedup eastern success

In the spring of 1990, a fewmonths after the fall of theBerlin Wall, three frus-trated East German physi-cists met for coffee in thecanteen of the technicaluniversity in Karl-Marx-Stadt, a former textile townnamed after the father ofCommunism.

Their country was inpolitical turmoil after thecollapse of Communistparty rule, and most of thestudents at the universitywere consumed with onethought: how to go westand find jobs in the prosper-ous capitalist world.

The three scientists wereall turning 40, just thewrong age to benefit fromthe imminent upheaval ofGerman unification. Theywere too old to be retrained,and too young to draw awestern-style state pension.But they did have an excel-lent training in the field ofplasma technology.

For Dietmar Roth, hiswife Silvia, and their col-league Bernd Rau, the endof state control in the eastmeant an extraordinaryopportunity to set up theirown private enterprise.That was their improbabledream in the canteen.

It was scarcely an idealtime. A few weeks later, fol-lowing currency union onJuly 1, the east Germaneconomy collapsed, throw-ing tens of thousands out ofwork. Most of the largestate enterprises were sold,downsized, or simply shut.

The Roth and Rau fami-lies, however, had ploughedtheir modest savings into amakeshift laboratory. Theyset up a fledgling businessin June to exploit the pat-ents developed by their uni-versity. They wanted to useplasma technology to createextra-thin coatings on any-thing from industrial toolsto silicon chips.

“We actually started inour garage,” says SilviaRoth. “We were all used toimprovising. For know-howand technical expertise innatural sciences, the uni-versity was very good, but

the equipment was not.”From those humble begin-

nings, the three physicistsestablished a company thattoday employs nearly 1,200people in a new factoryoverlooking the Sachsen-ring circuit, known for host-ing motorcycle grand prixraces, outside Chemnitz –the original name of Karl-Marx-Stadt and its currentone again.

Gleaming solar panelsline the front of the build-ings, as a symbol of its suc-cess. For the company hasdeveloped a series of tech-nologies for coating solarcells, especially photo-voltaic cells, that has givenit world leadership in one ofthe fastest growing newindustries – sustainableenergy.

Roth und Rau is an excep-tion to the depressing rulethat very few successfulhome-grown small enter-prises have succeeded inthe former East Germany.The lack of a Mittelstand –the classic small and medi-um-sized west German fam-ily firms – is a key toexplaining sluggish eco-nomic growth in the formercommunist state.

In the early years, thefounders were lucky to finda few contracts for theircoating machines, mainlyfrom other universities andresearch institutes. Theykept themselves busy byproviding precision coat-ings for machine tools.

They hoped to break intothe semiconductor market,but the competition wasalready too stiff.

The breakthrough camein the mid-1990s, when theydeveloped a pilot machine

for silicon-nitride coating ofwhole panels of solar cells.They had hit on a productthat was ahead of its timein a fledgling industry.They suddenly needed toexpand very fast to meetdemand from German andUS, and then Asian, solarcell manufacturers.

“We went to the local sav-ings bank and said wewanted to do projects cost-ing €30m,” says Prof Roth.“They said we were mad.”

They got the same reac-tion from private equityinvestors. So they decidedto launch the company onthe Frankfurt stockexchange.

Since 2004, when itemployed just 65 workers,with a turnover of €9.5m,Roth und Rau has seen itsbusiness expand 20-fold.Forecast turnover in 2010 is€285m.

Like all good Mittelstandcompanies, it moved intothe export market at a veryearly stage. It was alreadyselling to India and Taiwanin the late 1990s. In 2009, 76per cent of new orders camefrom Asia, with China inthe lead.

The challenge now is tokeep pace with rapidlyincreasing competition. Thecompany has invested heav-ily in research and develop-ment, hiring 75 staff todevelop new techniques toproduce ever more sophisti-cated coatings for the newgeneration of solar cells.

With a west German part-ner, Rohwedder, taking 60per cent of the shares, theIPO in 2006 raised €27m,which helped finance thenew factory outside Chem-nitz.

Then Rohwedder sold out,and today 86.6 per cent ofthe shares are freely traded,with the balance held bythe founding partners.

In 2009, the company wasnamed Ernst and Young’sentrepreneur of the year forthe whole of Germany.

It has come a long wayfrom that university can-teen.

MittelstandPlasma technologyexpertise gave threescientists a bigchance, saysQuentin Peel

‘We went to thesavings bank andsaid we wanted todo projects costing€30m. They saidwe were mad’

Keeping focused: the company is investing heavily in R&D

Solar­powered city sees abright future in renewables

The rooftop terraceof the Hotel Vic-toria in Freiburg, inthe south-west of

Germany, offers gloriousviews of the mountains thatare one source of fame forthis pretty city in the BlackForest.

The city’s other claim tofame lies closer to hand:The Victoria’s roof itself ispacked with row upon rowof solar panels, and a quickglance across the flat, slop-ing, and crooked rooftops ofthis old city shows similararrays. Even the distantfootball stadium boasts itsown solar-energy plant.

“Freiburg is famous forits pioneering role in envi-ronmental protection,” saysDieter Salomon, the city’smayor since 2002 and alsothe first leader of a big cityto come from to the envi-ronmentalist Green Party.

“Solar energy plays a bigpart, and people often focuson it. But don’t forget theimpact of good town plan-

ning and traffic manage-ment.”

The city’s example helpedinspire chancellor AngelaMerkel’s administrationthis year to publish a com-prehensive governmentenergy plan, the first for 30years, in which the govern-ment pledged to raise theamount of electricity gener-ated from renewable energyfrom 16 per cent today to 50per cent in 2030.

But, contentiously, Berlinalso extended the lifetime ofGermany’s 17 remainingnuclear power stations,arguing that Germanyneeded this energy “bridge”while renewable sourceswere built up.

One reason for Freiburg’ssuccess – it was named “Cli-mate Capital” of Germanyby a panel of environmentalgroups this year – is itslocation, not far fromFrance and Switzerland, inone of the sunniest spots inthe country.

The other is the legacy ofGermany’s foray intonuclear energy. In 1973, thepopulation in and aroundFreiburg rose up to protestagainst plans to build anuclear power station innearby Wyhl, a fight theywere able to decide in theirfavour by 1977.

“It was after Wyhl that aconsciousness about all

things environmental reallytook hold around here,”says Mr Salomon. “The areaquickly moved from anti-nuclear to broader environ-mental issues, not leastthrough the mixture of aca-demics working at FreiburgUniversity and farmersround here making a livingoff the land.”

By 1986, the city councilcalled for an end to nuclearpower and declared solarpower the energy of thefuture. The municipal util-

ity, Badenova, now suppliesall homes with electricityfrom renewable energysources, some producedlocally, some bought in.

The city has alsoimproved the insulation ofmunicipal-owned apart-ments, hoping that privatelandlords will follow suit.

Over the ensuing years, itcomplemented this visionwith concrete plans toreduce energy consumption,mainly by cutting distancesbetween home and work to

a minimum, and encourag-ing people not to use cars.

“We want a compact cityin which people have totravel only short distances,”says Mr Salomon.

The Vauban quarter is anexample. Once a Frenchbarracks near the centre oftown, it was redeveloped bythe council from 1992 forinner-city living – ratherthan as an office or anindustrial park, which wasthe fate of many other mili-tary sites that closed afterthe end of the Cold War.

Its central location madeit easier to persuade resi-dents to use trams or bicy-cles, or to walk, instead ofgoing by car. “Around 70per cent of all journeys inthe town are made usingpublic transport or bikes oron foot,” says Mr Salomon.“We’re building three newtram lines in the next fewyears. We want to keep asmany cars out of our citycentre as is reasonable –although we don’t want toban cars, by any means.”

The core of Freiburg’senchanting medieval centreis largely closed to car traf-fic, with trams snakingtheir way through crowdsof pedestrians and scores ofcyclists. The town todayboasts parking for 9,000bikes and 500km of bikepaths – and with 423 cars

per 1,000 people, it has thelowest vehicle density ofany big German city.

The city still producessome 1.8m tonnes of carbondioxide every year, but thisis already 14 per cent lessthan in 1992. So confidentare Mr Salomon and hiscity council that they havepledged to cut emissions by40 per cent by 2030 – a real-istic goal, the mayor insists,despite the fact that thetown failed to live up to its1996 promise to cut emis-sions by 25 per cent by 2010.

But Mr Salomon’s tale isnot all good news. He wouldlike to build two new windturbines on the hills aboveFreiburg, but has so far notsecured the assent of thestate government of Baden-Württemberg.

He also fears that thenational government’s pro-nuclear policy will makelife harder for the myriadrenewable-energy producersto stay profitable. “Thenuclear lifetime extensionwill make life more difficultfor those that supportrenewable energy,” he says.

But for now he might beable to draw cheer fromFreiburg status as Ger-many’s “Climate Capital”.One of the prizes is a solar-energy plant – which willbe installed on yet anotherroof in the city.

EnergyFreiburg has ledthe way inenvironmentaltown planning, saysGerrit Wiesmann

Light harvest: Freiburg’s main conference centre is crowned by solar panels, as are many other buildings in the city Bloomberg

‘Around 70 percent of all journeysare made usingpublic transport orbikes or on foot’