March 26 (Bloomberg) -- It’s a late winter morning at MAN AG’s truck manufacturing plant outside Munich, and 1,700 production line workers face a deadline just 6 minutes and 21 seconds away. As a countdown clock ticks above their heads, an eight-man team assembles a truck’s undercarriage. Farther along the conveyor belt, other colleagues have the same amount of time to attach wheels, install gearshifts and fit windshields to meet the day’s target of 132 vehicles.

All of them easily beat the clock, because they are used to working harder.

As global consumer demand melts away, slowing production lines across Germany, Chancellor Angela Merkel is injecting 82 billion euros ($110 billion) into the economy, the biggest stimulus package in Europe. The government has also made 100 billion euros available in credit and loan guarantees to German companies, including 25 billion euros in loans from Frankfurt- based KfW Group, the state-owned development bank. Merkel says the aid is necessary for the world’s No. 1 exporter to survive the economic crisis.

That program is designed to help export-driven companies such as MAN, Europe’s third-largest truckmaker, which sells about 60 percent of its vehicles outside Germany. In 2008, MAN made 168 trucks a day at its factory 500 yards (460 meters) from the site of the former Nazi concentration camp in the northwestern suburb of Dachau. In January, the company stretched the time to make each truck section by 39 seconds and halted production on Thursdays and Fridays. In February, the company shuttered the plant for two weeks.

Spending Spree

Germany’s spending spree came after Merkel exasperated European Union leaders, who wanted her to endorse a collective 200 billion-euro rescue package for the 27-nation trade bloc last November. Instead, she first criticized international stimulus efforts, and her coalition government abandoned three years of fiscal discipline only after domestic demands for action.

“Germany was getting a lot of flak from outside the country for not doing enough, but the real pressure came from the coalition parties and the business community,” says Jan Techau, director of European policy studies at the German Council of Foreign Relations in Berlin. “There was a growing sense within Germany that the government had to do more.”

As Germany fends off criticism for its approach, it also has to contend with pressure from the administration of U.S. President Barack Obama to spend even more this year.

“It’s time now for us to move together and to begin to act,” U.S. Treasury Secretary Timothy Geithner said in Washington on March 11. “Everything we do in the United States will be more effective if we have the world moving with us.”

Smaller Stimulus

Obama signed a bill authorizing $787 billion in spending, or about 2 percent of U.S. gross domestic product this year, on Feb. 17. Merkel’s package amounts to about 1.5 percent of GDP in 2009, according to the Washington-based International Monetary Fund, which says industrialized nations should spend at least the equivalent of 2 percent of GDP on stimulus packages this year.

In London on March 14, Merkel deflected American calls for further spending and said it was too soon to judge the effectiveness of initial efforts.

“If we want to actually strengthen the effect of such packages you simply have to implement them and not talk about the next one before the first has actually taken effect,” she said at a press conference with U.K. Prime Minister Gordon Brown.

‘Stumbling Block’

On March 25, the German government said it needed to sell 346 billion euros of government debt this year to counter the recession in the largest such issue since World War II. As part of this effort, Germany plans to sell 96 billion euros of government bonds and bills in the second quarter, the country’s Federal Finance Agency said in a statement.

“Germany is one of the stumbling blocks in the way of a greater international fiscal and economic stimulus,” says Nouriel Roubini, the New York University economist who predicted the global recession. “The problem in Europe right now is that those who can afford it the most, like Germany, don’t want a greater fiscal stimulus because they are concerned about sending the wrong signal to countries that have been less disciplined.”

Budget Balancer

Merkel, 54, entered the crisis with room to maneuver because of Germany’s balanced budget. As leader of the center- right Christian Democratic Union, Merkel fought Germany’s last election campaign in November 2005 with a promise to balance the books by 2011. She almost reached that goal in 2007, when the deficit was 0.2 percent, and did even better last year, when the shortfall was 0.1 percent of GDP.

She’s now broken that promise -- and the budget. The new spending combined with a decline in revenue will increase the deficit to 3 percent of GDP this year.

“Germany’s stimulus is probably the minimum of what’s really needed,” says Thomas Mayer, chief European economist at Deutsche Bank AG in London. “From a European perspective, Germany’s stimulus is really less than what is needed, because countries in the euro zone with a stronger fiscal position should do more than others.”

As a consequence of its use of the single European currency, Germany doesn’t have the monetary tools -- interest rates and money supply -- that central bankers have in the U.S. and the U.K. Fiscal policy is the one lever the Germans can pull, and even that has limitations. This year, the country will break the budget ceiling prescribed by the EU’s 1997 Stability and Growth Pact, which German officials helped write. Under the agreement, EU member states must limit their deficits to less than 3 percent of GDP. Germany’s deficit will widen to 4 percent in 2010, the country’s finance ministry said on Feb. 3.

ECB Influence

Roubini says Germany exercises too much influence on European Central Bank monetary policy as the euro area’s largest economy.

“Monetary policy is the job of the ECB, but the influence of Germany’s Bundesbank regarding concerns about inflation has helped keep euro zone interest rates at 1.5 percent when they should be closer to zero,” he says.

Germany also has avoided the unsustainable levels of personal debt that have plagued some of its neighbors. About 53 percent of German households live in rental properties and thus are unencumbered by mortgages. In 2008, Germans saved 11.5 percent of their disposable income, the highest ratio since 1993, according to research by the Bundesbank.

Global Fortunes

While all the pump priming may keep the economy afloat in 2009, Germany’s potential for growth remains a hostage to global fortunes. Last year, exports accounted for 47.2 percent of Germany’s GDP, more than double the proportion in Japan and almost four times as much as that in the U.S. In the 11 months ended on Nov. 30, Germany exported $1.376 trillion of goods, just ahead of China’s $1.317 trillion, according to the German Federal Statistical Office. The EU alone accounted for 63.6 percent of the country’s exports.

Customers around the world have stopped buying German products ranging from cars to precision electronics. Germany’s monthly foreign sales fell 20.7 percent in January from a year earlier, according to the government. The global economic meltdown triggered a 2.1 percent fall in GDP in the fourth quarter, the biggest three-month drop since 1987.

Deutsche Bank’s Mayer forecasts that Germany’s economy will shrink by 3.5 percent in 2009 and grow only 0.6 percent next year, even with the government spending.

“The stimulus program will help, but only to make the contraction a little less severe,” he says.

Agenda 2010

In November 2005, Merkel took charge of a country already undergoing an economic transformation. Her predecessor Gerhard Schroeder’s center-left government -- alarmed by zero percent growth in 2002 and a decline of 0.20 percent in 2003 -- introduced the Agenda 2010 program, which was designed to boost the economy by reducing taxes and regulations. His government cut the lowest rate of income tax in January 2004 to 16 percent from 19.9 percent and encouraged the unraveling of German company cross holdings by abolishing an asset sales tax that had been as high as 50 percent.

Following the rollout of the plan, GDP growth rose to 3 percent in 2006, the highest since 2000. Merkel, whose finance minister, Peer Steinbrueck, is a member of the rival Social Democratic Party, continued Schroeder’s policies.

Germany Hesitates

Last fall, as governments from China to the U.S. mapped out spending plans to fight the global crisis, Germany held back.

“Excessively cheap money in the U.S. was a driver of today’s crisis,” Merkel said in the Bundestag, the lower house of Germany’s parliament, on Nov. 27 as she defended the size of the initial aid package of 32 billion euros. “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the U.S. and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”

As recently as Dec. 1, Merkel held up Germany as a model of fiscal rectitude. “We won’t join a senseless competition to spend billions,” she said. The same day, Steinbrueck refused to endorse a proposal backed by French President Nicolas Sarkozy and Britain’s Brown for governments to spend up to 200 billion euros in economic aid across the EU.

Less than two months later, both German leaders came off the fiscal high ground when the coalition partners agreed to a second stimulus deal worth 50 billion euros, which included spending for building roads, modernizing schools and improving health-care facilities.

Rapid Reversal

“This decision to steer our country through this crisis will lead to significant new borrowing,” Merkel told German lawmakers on Jan. 14. “It was the hardest domestic decision I’ve had to take as chancellor.”

The fiscal U-turn is evidence of Merkel’s analytical mind and dispassionate political style. The daughter of a Protestant pastor and a schoolteacher, Merkel grew up in the former Communist-controlled German Democratic Republic. In 1978, she graduated with a master’s degree in physics from the University of Leipzig and in 1986 received a doctorate in quantum chemistry from the Central Institute of Physical Chemistry at the Academy of Sciences in East Berlin.

In 1989, she became a spokeswoman for Lothar de Maiziere, East Germany’s only democratically elected prime minister, and joined the CDU the following year. Merkel doesn’t have children, lives quietly with her second husband, Joachim Sauer, a research chemist, and is rarely seen outside of official functions.

Historical Memory

“She’s not an actor, unlike most politicians,” says Carl Graf von Hohenthal, former editor-in-chief of Germany’s Die Welt newspaper, who has known her since 1990.

Merkel shares her fellow citizens’ dread of excessive government debt and uncontrollable inflation, von Hohenthal says. Those memories stretch back to World War I, when the German government issued ultimately worthless war bonds, and to the hyperinflation that followed Germany’s defeat as the government printed money to pay for the reparations exacted by the victorious Allies. “That memory has been passed from one generation to the next,” he says.

Throughout the crisis, Merkel has maintained an edge over the SPD in the opinion polls. On March 25, her CDU had 34 percent support among voters, up 1 percentage point in the weekly poll that Berlin-based public opinion research company Forsa runs for Stern magazine. That compared with 24 percent for the SPD. The poll had a 2.5 percent margin of error. The center- right Free Democratic Party, which is not in the coalition, attracted 16 percent; the Left Party, 11 percent; and the Greens, 10 percent.

‘Shovel Ready’ Projects

Germany’s stimulus program, like the one in the U.S., includes funds for “shovel ready” local public works and technology projects such as wiring all of the country for high- speed Internet use by the end of next year. Income tax will be cut in 2009 and ‘10, especially for lower pay brackets, and all families will receive a one-off bonus of 100 euros per child, about enough to buy a toddler a pair of boots and a winter coat.

Consumers can also take advantage of an “environmental bonus” of 2,500 euros offered by the government to anyone who scraps a car that’s at least nine years old for a lower-emission model this year. The measure is aimed at pleasing both Germany’s battered auto industry and the country’s powerful environmental movement. Car sales in Germany rose 22 percent in February to 227,800 vehicles compared with a year earlier, according to the VDA, the German carmakers association.

‘Neurotic’ Savers

Even with the boost in car sales, Germans aren’t shopping enough to make a difference, with monthly retail sales falling 0.6 percent in February, the government estimates. In March, German business confidence fell to its lowest level in more than 26 years, according to a survey of 7,000 executives by the Ifo institute, a Munich-based economic research group.

“German households have reacted neurotically to the downturn, increasing their savings when faced with the threat of deflation,” says Juergen Pfister, chief economist at Munich- based lender Bayerische Landesbank.

As the government throws money at public works projects, beleaguered exporters are relying on two far older forms of state aid for German companies to see them through the crisis: payroll subsidies and state-backed loans.

On the last Friday in January, fewer than a dozen workers check machinery at Munich-based Hawe Hydraulik SE, a family- owned engineering company that makes hydraulic parts for cranes, oil drills and other industrial equipment. The government is helping to pay the rest of their 230 colleagues to stay at home. About half of Hawe’s 277 million euros in sales last year came from foreign customers, and orders dropped 40 percent in the last three months of 2008 compared with the year earlier. In January, the company introduced a Monday-Thursday workweek for its 1,200 production employees in Germany.

No Forecasts

The speed of the meltdown in demand shocks Hawe’s executives.

“This economic downturn just came at us like this,” says Michael Knobloch, Hawe’s marketing director, snapping his fingers for emphasis. Knobloch says the company won’t set any sales and profit targets for this year because immediate prospects are so bleak.

Hawe hasn’t fired any of its employees this year, mostly because of subsidies under Germany’s so-called short-work system, established in 1910. The government pays 60 percent of an employee’s salary and welfare contributions on the days that workers stand idle. The subsidy rises to 67 percent for employees with children.

Idle Workers

Across Munich, 18,375 people were on short-work deals in February, almost triple the number of a month earlier. Hawe negotiated its own slowdown deal with its workers, most of whom are members of IG Metall, Germany’s biggest union. IG Metall’s 2.3 million members are employed throughout German industry, producing goods ranging from automobiles and electrical systems to clothes and plastics. In December, when the government increased the period for short-work subsidy programs to 18 months from 6 months, IG Metall backed the plan.

“It was a wise decision by the government, because this crisis won’t be over by the summer,” says Michael Leppek, vice chairman of IG Metall’s Munich district.

In the past, the union has refused to negotiate individual deals with companies, preferring a nationwide work settlement that didn’t recognize the varying fates of industries.

Publicly traded companies such as MAN, with 51,000 employees, are also cutting deals with IG Metall. By slowing production at the Dachau plant, which MAN began operating in 1955, the company will cut 70 working days in the first half of this year, of which 42 days will be subsidized by the government. As at Hawe, the government pays 60-67 percent of salary, with the company supporting social welfare costs.

Low Expectations

MAN’s fourth-quarter profit in 2008 almost halved to 177 million euros compared with a year earlier, the company said in a Feb. 19 statement. From Jan. 2 to March 25, MAN’s share price slumped 19 percent to 33.09 euros.

“I hope the market will come back, but I cannot realistically say I believe it will come back this year,” says Hakan Samuelsson, MAN’s Swedish-born chief executive officer, at the company’s headquarters in Munich.

As Germany’s exporters suffer, the pain spreads down to their suppliers. Thomas Schnell, managing director of Dr. Schnell Chemie GmbH, is part of the 17th generation of his family to work for the privately held Munich company founded in 1642 as a soapmaker. Today, Dr. Schnell makes industrial cleaners and has annual sales of about 40 million euros and more than 400 products.

Ripple Effect

Schnell says the recent wave of production slowdowns by German manufacturers will harm his business. “Clearly, if a company such as German carmaker Opel -- one of our customers -- shuts production for eight weeks, they won’t need to clean their factories and their canteens,” he says.

The German government said on March 17 that it was in talks with General Motors Corp. on the future of its Adam Opel unit, which may receive 3.3 billion euros in state aid. Opel employs 26,000 workers at three German factories.

German lawmakers said they were ready to open state coffers again to keep Opel operating.

“We will do everything within our power to save the jobs,” Peter Struck, the SPD’s parliamentary leader, said on March 5. Short-work deals have only slowed the pace of unemployment, which reached 7.9 percent in February, the fourth consecutive monthly increase.

Local Lenders

Germany’s export-driven companies have one advantage over rivals in other EU countries: banks willing to loan them money. The country’s networks of cooperative and state-owned banks have continued lending at a time when publicly held financial institutions have struggled with losses from subprime mortgage investments. The combination of state-owned, cooperative and private lenders is known in Germany as the Drei-Saeulen-System, or the three-pillar banking system.

Hans Nerb, managing director of Nerb GmbH, a family-owned brewery equipment maker based near Munich, says he gave up dealing with private sector lenders such as HVB Group and Deutsche Bank years ago.

“These banks were only interested in lending to big companies or multimillionaires,” says Nerb. Instead he gets loans of up to 500,000 euros from local lenders for his company, whose 30 employees manufacture breweries for beer producers as far away as Mongolia.

Germany’s 438 savings banks owned by towns and counties and 1,232 customer-owned banks manage almost 80 percent of domestic savings accounts. None has required a taxpayer bailout.

Toxic Debt Woes

Some German state-owned banks have fallen into the same trap as private sector lenders. The so-called Landesbanken, seven banks mostly owned by Germany’s regional governments, have reported losses of more than 22 billion euros from toxic debt. Two of those seven banks have signed up for the government’s 500-billion euro rescue package.

“Every state finance minister must now understand what an expensive hobby it is to run a local bank and not supervise and manage it properly,” says Elga Bartsch, chief European economist at Morgan Stanley in London.

The travails of Germany’s eastern neighbors are also threatening the health of the German financial sector. In September 2008, the country’s lenders had $220 billion in loans outstanding to borrowers in eastern European countries, according to data from the Basel, Switzerland-based Bank for International Settlements. Munich-based Hypo Real Estate Holding AG, a commercial property lender, has also received a 102 billion-euro government rescue after credit markets froze.

State Aid

Germany’s coalition government has another route to channel liquidity to the country’s companies: KfW Group, the state-owned development bank founded in 1948 as part of the postwar rebuilding effort. Under the stimulus package, KfW will make available about 40 billion euros in corporate loans through 2010 to help maintain German companies’ cash flow.

A fraction of that money will filter down to Compact Dynamics GmbH, a privately held engineering firm based in the southwestern Munich suburb of Starnberg. At its factory, a team of 38 engineers makes electric drives for vehicles from Formula One racing cars to forklift trucks, with more than 30 percent of all orders coming from outside Germany.

Last year, Compact Dynamics increased sales by 7 percent from 2007 to about 6 million euros. That was before orders plummeted. Maximilian Eck, the company’s co-founder, says he signed only one new contract in January compared with three in the same month last year. This year he’s negotiated a 700,000- euro loan with KfW for 10 years at 3.8 percent interest, which the company has to start paying back after five years.

“KfW is a great help,” Eck says.

Chemical Reaction

As small German exporters such as Compact Dynamics battle through the recession, larger companies with bigger foreign order books will provide the first signs of economic recovery. One of them is Sued-Chemie AG, a specialty chemicals company that is the world’s largest supplier of catalysts to the petrochemical industry. Sued-Chemie sells about 80 percent of its products abroad.

The publicly traded company is 50.4 percent owned by One Equity Partners, a division of New York-based JPMorgan Chase & Co., and employs about 6,100 people worldwide. Sued-Chemie’s products, some of which help color the granules in detergents and boost the flavor in chocolate bars, had sales of 864 million euros and a profit of 80.7 million euros in the first nine months of 2008.

That was before the slump. Sued-Chemie’s share price dropped 4 percent to 74.50 euros from Jan. 2 to March 25. In the company’s wood-paneled, 19th-century head office in central Munich, CEO Guenter von Au acknowledges that growth may be impossible given current conditions. “Right now, the important task for me is to be cautious, giving guidance to our employees and keeping their motivation high,” von Au says.

Waiting Game

For now, the engine driving the Germany economy is stuck.

“Germany is reliant on the rest of the world,” says Dominic Bryant, European economist at BNP Paribas SA in London. “It’s not clear that when other countries get their balance sheets in order, they’ll want to start another consumer binge, so Germany could be waiting a very long time for that pickup.”

The prospect of an extended global recession may force Merkel to change her mind again and heed the call for more coordinated action, Roubini says.

“It’s clear that closer to the elections in September, if the unemployment rate starts to rise, Germany will do more,” he says.

Von Au and others like him in Germany’s executive boardrooms know that the key to recovery is outside of their control. Customers and purchasing managers around the world will play the largest role in deciding when Germany Inc. gets back on track.

Published in the May issue of Bloomberg Markets magazine.

To contact the reporters on this story: Richard Tomlinson in London at rtomlinson1@bloomberg.net; Oliver Suess in Munich at osuess@bloomberg.net

Last Updated: March 25, 2009 19:01 EDT