Germany: 25 years later and no looking back

Editor’s Note: To mark the 25th anniversary of the fall of the Berlin Wall, CNN’s week-long special Made in Germany will look at how the country’s economy has developed since the momentous event.

Story highlights

Today, Germany is the world's fourth largest economy with a low unemployment rate

The 25th anniversary of the fall of the Berlin Wall highlights economic success

Collapse of East and West has meant massive growth for Germany in various industries

CNN  — 

Not so long ago, Germany was vilified for its slow economic growth, high unemployment rates, and record budget deficits. As late as 2004, The Economist called it the “sick man of Europe.”

Today, Germany is the world’s fourth largest economy, and the most important market in the European Union. Its 5.3% unemployment rate is the second lowest in the EU. Germany exports more merchandise than any other country aside from China, and its share of total world trade is larger than that of the U.S. Not bad for a nation of 81 million citizens that’s not even among the world’s 15 most populated worldwide.

The roots of Germany’s 21st century economic success date back to the Industrial Revolution, when Germans were early adopters of rail transportation and coal production. But the country’s current rise to status of economic superstar began on a cold autumn day, exactly 25 years ago.

Fall of the wall

On November 9, 1989, a group of excited Berliners used mauls, chisels, hammers and fists to smash down the wall that divided the West and East part of the city. The fall of the Berlin Wall was a landmark moment, which intensified a process that fully materialized two years later with the collapse of the Soviet Union.

What West Germans found when they entered East Germany was a society marked by high unemployment rate, low productivity and a lot of poverty. They also found a highly skilled workforce that was comparatively cheap, and new markets with an appetite for products. They found opportunities – not only in the eastern part of their reunified nation, but also in many other former Soviet-bloc countries, like the Czech Republic, Romania and Slovakia.

“Part of the success story of the German multinationals was their capacity to use the opportunities that arose – first with reunification, and secondly with the expansion of the EU,” said Fredrik Erixon, director of the European Centre for International Political Economy, a Brussels-based think tank.

“German companies became increasingly skilled at understanding foreign markets and leaning towards foreign markets. Germany has done that in a way which I’d say is more efficient than what you see in the United Kingdom or France, which are the other two big economies that traditionally have had an outward-oriented vision.”

Ahead of the times

By the end of the 1990s, businesses from Germany played key roles in countries transitioning to a market economy, according to Erixon. German manufacturers were outsourcing parts of their supply chain to Eastern Europe, and German financial firms provided services to millions of people who were just discovering capitalism.

It didn’t end on the eastern edge of Europe. Germany turned into one of the world’s largest exporters by going even further east to the emerging Asian markets, especially China and India, according to Irwin Collier, professor of economics at Free University Berlin.

“You have these two huge blocks, huge economies that were starving for investment goods and it just so happens that is where Germany had its comparative advantage – in the production of investment goods,” Collier said. “The high Chinese growth rates meant there was enormous demand for German goods.”

The goods Collier referred to are mainly vehicles, machinery, pharmaceuticals and electronics. German car manufacturers like BMW, Mercedes and Volkswagen established a particularly strong presence in the Chinese market. Companies like Siemens, BASF (chemicals), Deutsche Bank (one Europe’s largest banks), and Allianz (insurance) also became leading global corporations.

Promoting skills

In addition, thousands of medium-sized companies, often family owned, have been successful internationally and particularly in Asia, according to Anke Hassel, professor of public policy at the Hertie School of Governance in Berlin. Hassel said one of the keys to Germany’s manufacturing success is the country’s unique apprenticeship scheme, in which school leavers spend two to three years training with companies.

“The apprenticeship scheme is very important in particular for manufacturing companies because they train people at mid-level skills in a very specific way,” said Hassel. “They give them industry and firm-specific skills.”

Hassel explained that having relatively highly-skilled workers allows companies to be more flexible with their production process, and continuously improve. But it’s not all rosy. According to Hassel, Germany’s dependence on exports make it very vulnerable.

During the 2008-09 financial crisis, the loss of Gross Domestic Product (GDP) Germany experienced was large compare to other countries, and even today fluctuations in the world economy are immediately felt in the German economy. And fluctuations will always happen.

Currently, as market demand in China and other emerging markets is slowing down, Germany’s challenge is to rebalance its economy away from an enormously heavy dependence on exports. It needs to increase domestic consumption, which has been relatively weak for decades, otherwise the economic growth it has experienced will not be sustained.

In the quarter of a century that has passed since the Berliners tore down that wall, Germany has, no doubt, become an economic superpower. But as Germans know better than anyone, economic realities can change very quickly.