This Is the German Economic Miracle That Merkel Hopes Will Give Her a Fourth Term

By Andre TartarAndre Tartar and Sam Dodge

Angela Merkel has been consistently leading in opinion polls ahead of the vote that may give her a fourth term as German chancellor. Aiding her has been Germany’s economy, the strongest in Western Europe. The biggest reason for that: Germany’s success on the global economic stage. That has allowed Merkel to run on the view that globalization benefits everyone, even as President Donald Trump and others disagree.

Economy = Voters

Merkel’s political longevity is linked inextricably with her economic credentials: Unemployment is down by half since she first took office in 2005. Growth reached an average of 2 percent in her second term while the rest of Europe limped along at a fraction of that. Though slower since then, it’s stayed ahead of most of the rest of the continent.

Merkel’s Economic Bona Fides

Germany has outperformed the euro area and halved unemployment since 2005

GDP % change, year-over-year:

Germany

Euro area

12%

Germany unemployment

Start of

2nd term

Start of

3rd term

8

4

0

−4

−8

2006

2017

GDP % change, year-over-year:

Germany

Euro area

12%

Start of 2nd term

Start of 3rd term

8

Germany

unemployment

4

0

−4

−8

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

GDP % change, year-over-year:

Germany

Euro area

12%

Start of 2nd term

Start of 3rd term

8

Germany

unemployment

4

0

−4

−8

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Sources: Deutsche Bundesbank; Eurostat

Voters are responding. From 2005 to 2013, when Merkel carried her Christian Democratic Union party and its Christian Social Union partners to their best result since 1990, the CDU/CSU went from a 5-point deficit among hourly wage workers and a staggering 29-point gap with union members to an 8-point advantage and mere 2-point lag, respectively. All the while, the rival Social Democratic Party cratered among salaried workers.

How Germany’s Working Class Voted in Recent Elections

The CDU/CSU has made big gains among hourly-wage workers and union members

CDU/CSU

SPD

Hourly-wage workers

50%

40

30

20

2005

2009

2013

Salaried workers

50%

40

30

20

2005

2009

2013

Union members

50%

40

30

20

2005

2009

2013

CDU/CSU

SPD

Hourly-wage workers

Salaried workers

Union members

50%

40

30

20

2005

2009

2013

2005

2009

2013

2005

2009

2013

CDU/CSU

SPD

Hourly-wage workers

Salaried workers

Union members

50%

40

30

20

2005

2009

2013

2005

2009

2013

2005

2009

2013

Source: FG Wahlen analysis in Bundestag report

Many of those workers are enjoying the fruits of Germany’s export boom – up by more than $350 billion under Merkel. German voters are unlikely to forget the years of prosperity she’s helped deliver, despite a sluggish recovery since 2014 and a dip in exports.

A Free Trade Winner

Amid a global surge of economic and political nationalism, Merkel has become one of the principal cheerleaders for free trade. That’s because Germany punches far above its weight in that arena. Its $280 billion trade surplus in goods last year was surpassed only by $479 billion for much-larger China, according to United Nations data. Its exports in recent years represented around 46 percent of Germany’s gross domestic product, per the World Bank; the comparable figure for the U.S. is about 13 percent.

There’s a downside: Germany is vulnerable to anything that cuts into free trade, such as a British exit from the tariff-free European Union, higher U.S. tariffs under Trump or China’s transition from low-tech to high-tech manufacturing.

How Germany Compares to Other Trade Superpowers

Despite losing its spot as top exporter in 2009, Germany retains an enviable trade surplus

2016 merchandise trade balance

per capita

−$3,000

−1,500

0

1,500

3,000

Germany

$3,419

China*

$340

Japan

$298

−$2,472

U.S.

−$3,419

U.K.

2016 merchandise trade balance

China Risk

China’s trade in more advanced products (like vehicles, machinery, and pharmaceuticals) grew to 49 percent of goods exported last year, from 16 percent in 1992.

−$800B

−400

0

400

800

China*

$479B

Germany

$280B

Japan

$38B

−$225B

U.K.

−$797B

U.S.

U.S. Risk

In January, Trump threatened to slap a 35 percent tariff on German car imports ($23 billion in 2016.)

U.K. Risk

A hard Brexit or delayed U.K.-EU trade deal threatens Germany’s third-largest export market, worth $94 billion.

2016 merchandise trade balance per capita

−$3,000

−2,250

−1,500

−750

0

750

1,500

2,250

3,000

Germany

$3,419

China*

$340

Japan

$298

−$2,472

U.S.

−$3,419

U.K.

2016 merchandise trade balance

−$800B

−600

−400

−200

0

200

400

600

800

China*

$479B

Germany

$280B

Japan

$38B

−$225B

U.K.

−$797B

U.S.

U.S. Risk

In January, Trump threatened to slap a 35 percent tariff on German car imports ($23 billion in 2016.)

 

China Risk

China’s trade in more advanced products (like vehicles, machinery, and pharmaceuticals) grew to 49 percent of goods exported last year, from 16 percent in 1992.

U.K. Risk

A hard Brexit or delayed U.K.-EU trade deal threatens Germany’s third-largest export market, worth $94 billion.

2016 merchandise trade balance per capita

−$3,000

−2,250

−1,500

−750

0

750

1,500

2,250

3,000

Germany

$3,419

China*

$340

Japan

$298

−$2,472

U.S.

−$3,419

U.K.

2016 merchandise trade balance

U.K. Risk

A hard Brexit or delayed U.K.-EU trade deal threatens Germany’s third-largest export market, worth $94 billion.

 

U.S. Risk

In January, Trump threatened to slap a 35 percent tariff on German car imports ($23 billion in 2016.)

China Risk

China’s trade in more advanced products (like vehicles, machinery, and pharmaceuticals) grew to 49 percent of goods exported last year, from 16 percent in 1992.

−$800B

−600

−400

−200

0

200

400

600

800

China*

$479B

Germany

$280B

Japan

$38B

−$225B

U.K.

−$797B

U.S.

*includes Hong Kong
Note: Trade balance calculated as goods exports minus goods imports, not including re-imports and re-exports.
Sources: United Nations Department of Economic and Social Affairs, Population Division; UN Comtrade database; Bloomberg calculations

The Geography of a Global Germany

Merkel’s domestic power base generally mirrors Germany’s trade economy. Of the eight states where her CDU/CSU alliance won a roughly 40 percent-or-greater plurality of the vote in 2013, four are responsible for over half the country’s exports: Baden-Wuerttemberg; Bavaria; North Rhine-Westphalia, home of the country’s historic Ruhr industrial base; and Lower Saxony.

Between 27 percent and 35 percent of those states’ respective labor forces worked in manufacturing in 2015 and exports represented at least one-quarter of their regional GDP in 2016. They are also home to all 10 of Germany’s largest manufacturing companies, by revenue, from carmakers Daimler AG and BMW AG to chemicals company BASF SE and elevator expert ThyssenKrupp AG. In contrast, the six states that made up what was once East Germany, which include three of the CDU/CSU’s weakest showings, produced just 8.4 percent of the country’s exports.

The Sources and Destinations of Germany’s Exports

The industrial heartland–from Bavaria to the Ruhr valley–is home to many of Germany’s largest exporters and drives its global trade in goods, much going to the rest of Europe.

Percentage of 2016 exports

0

16%

Bremerhaven is Europe’s second-largest port for car sales, handling 2.1 million vehicles in 2016.

Hamburg is Germany’s largest port and western Europe’s third-largest in terms of 2015 outward trade (52.2 million tons)

Hamburg

Bremerhaven

Lower Saxony

Wolfsburg

Volkswagen

Hanover

Continental

Essen

ThyssenKrupp

North Rhine-

Westphalia

Leverkusen

Bayer

Ludwigshafen

BASF

Ingolstadt

Audi

Stuttgart

Daimler

Porsche

Bavaria

Baden-

Wuerttemberg

Munich

BMW

Siemens

CDU/CSU win margin in 2013

7.6%

21%

−0.2%

−6.4%

8%

3.9%

11.7%

23%

7.9%

28%

15.4%

10.4%

15.8%

6.8%

29.3%

25.1%

German exports by region, 2016

$129B

N. America

$878B

Rest of

Europe

$252B

Asia

$36B

S. America

$27B

Africa

$12B

Oceania

Percentage of 2016 exports

0

16%

Bremerhaven is Europe’s second-largest port for car sales, handling 2.1 million vehicles in 2016.

Hamburg is Germany’s largest port and western Europe’s third-largest in terms of 2015 outward trade (52.2 million tons)

CDU/CSU win margin in 2013

7.6%

SCHLESWIG-

HOLSTEIN

21%

−0.2%

MECKLENBURG-

VORPOMMERN

−6.4%

Hamburg

8%

3.9%

HAMBURG

Bremerhaven

11.7%

23%

BREMEN

7.9%

BERLIN

28%

Wolfsburg

Volkswagen

LOWER SAXONY

15.4%

10.4%

BRANDENBURG

15.8%

Hanover

Continental

6.8%

Essen

ThyssenKrupp

SAXONY-

ANHALT

29.3%

25.1%

NORTH RHINE-

WESTPHALIA

SAXONY

Leverkusen

Bayer

THURINGIA

HESSE

German exports by region, 2016

$129B

N. America

$878B

Rest of

Europe

$252B

Asia

RHINELAND-

PALATINATE

Ludwigshafen

BASF

BAVARIA

SAARLAND

Stuttgart

Daimler

Porsche

Ingolstadt

Audi

BADEN-

WUERTTEMBERG

Munich

BMW

Siemens

$36B

S. America

$27B

Africa

$12B

Oceania

Percentage of 2016 exports

0

16%

CDU/CSU win margin in 2013

Hamburg is Germany’s largest port and western Europe’s third-largest in terms of 2015 outward trade (52.2 million tons)

 

 

 

Bremerhaven is Europe’s second-largest port for car sales, handling 2.1 million vehicles in 2016.

7.6%

SCHLESWIG-

HOLSTEIN

21%

−0.2%

MECKLENBURG-

VORPOMMERN

−6.4%

Bremerhaven

8%

3.9%

HAMBURG

Hamburg

11.7%

23%

BREMEN

7.9%

BERLIN

28%

Wolfsburg

Volkswagen

LOWER SAXONY

15.4%

10.4%

BRANDENBURG

15.8%

Hanover

Continental

6.8%

Essen

ThyssenKrupp

SAXONY-

ANHALT

29.3%

25.1%

NORTH RHINE-

WESTPHALIA

SAXONY

Leverkusen

Bayer

THURINGIA

HESSE

German exports by region, 2016

$129B

N. America

$878B

Rest of

Europe

$252B

Asia

RHINELAND-

PALATINATE

Ludwigshafen

BASF

BAVARIA

SAARLAND

Stuttgart

Daimler

Porsche

Ingolstadt

Audi

BADEN-

WUERTTEMBERG

Munich

BMW

Siemens

$36B

S. America

$27B

Africa

$12B

Oceania

Note: The CDU/CSU win margin is the difference relative to the next-largest vote-earner in each state.
Sources: German Federal Statistical Office; UN Comtrade database; German Federal Returning Officer; Eurostat; Bremenports

While two-thirds of Germany’s exports currently go to the rest of Europe, it maintains its truly global trade footprint through a network of 130 international chambers of commerce in 90-odd countries, including some 35 in Asia and over 20 in Latin America.

A Manufacturing Powerhouse

Driving Germany’s trade juggernaut is its dominance in several competitive industries, including industrial and other machines (representing nearly 17 percent of exports), cars and their parts (more than 15 percent), and pharmaceuticals (6 percent). Most closely associated with this success story are Germany’s well-known global brands, such as Volkswagen AG, one of the world’s largest automobile manufacturers, industrial conglomerate Siemens AG and drugmaker Bayer AG. Equally important are lesser-known companies, mostly earning less than 1 billion euros, that provide the bulk of the country’s exports.

What Goods Drive Germany’s Trade Machine

High-end manufactured goods represented over half the country’s exports in 2016

Smaller exporter examples

 

Sensor manufacturer IFM Stiftung & Co., with a presence in 70 countries worldwide, develops and manufactures 70 percent of its products in Germany.

 

Hirschvogel Automotive Group, with 5,000 employees, is a major supplier of steel and aluminum car parts, with subsidiaries in China, the U.S. and India.

 

Niche bio-pharmaceutical company Dr. Willmar Schwabe Pharmaceuticals has more than 800 drug registrations worldwide, and earned 75 percent of its €900 million in revenue last year from international markets.

16.6%

11.3%

Machinery

Cars

4.9%

High-tech

instruments

5.8%

10.3%

Pharma.

Electrical

equipment

4.6%

4.2%

3.3%

Car parts

Plastics

Planes and

spacecraft

36.3%

2.7%

Other

Other vehicle

or train-related

Larger exporter examples

 

Active in businesses from power generation to medical imaging, Siemens AG derived 64 percent of its parent company’s €25.8 billion revenue last year from German exports.

 

About 600,000 workers produce over 40,000 vehicles a day globally at Volkswagen AG’s 120 factories, with the company exporting 4.4 million cars from Germany last year.

 

Founded in 1863, pharmaceutical giant Bayer AG now employees 115,200 people worldwide and earns nearly 90 percent of its revenue outside of Germany.

Smaller exporter examples

Niche bio-pharmaceutical company Dr. Willmar Schwabe Pharmaceuticals has more than 800 drug registrations worldwide, and earned 75 percent of its €900 million in revenue last year from international markets.

Hirschvogel Automotive Group, with 5,000 employees, is a major supplier of steel and aluminum car parts, with subsidiaries in China, the U.S. and India.

Sensor manufacturer IFM Stiftung & Co., with a presence in 70 countries worldwide, develops and manufactures 70 percent of its products in Germany.

16.6%

10.3%

36.3%

4.6%

Other

Plastics

Machinery

Electrical

equipment

4.2%

Car parts

5.8%

Pharmaceuticals

11.3%

3.3%

Planes and

Cars

spacecraft

4.9%

High-tech

2.7%

instruments

Other vehicle

or train-related

Larger exporter examples

About 600,000 workers produce over 40,000 vehicles a day globally at Volkswagen AG’s 120 factories, with the company exporting 4.4 million cars from Germany last year.

Active in businesses from power generation to medical imaging, Siemens AG derived 64 percent of its parent company’s €25.8 billion revenue last year from German exports.

Founded in 1863, pharmaceutical giant Bayer AG now employees 115,200 people worldwide and earns nearly 90 percent of its revenue outside of Germany.

Smaller exporter examples

 

Sensor manufacturer IFM Stiftung & Co., with a presence in 70 countries worldwide, develops and manufactures 70 percent of its products in Germany.

 

Hirschvogel Automotive Group, with 5,000 employees, is a major supplier of steel and aluminum car parts, with subsidiaries in China, the U.S. and India.

 

Niche bio-pharmaceutical company Dr. Willmar Schwabe Pharmaceuticals has more than 800 drug registrations worldwide, and earned 75 percent of its €900 million in revenue last year from international markets.

Larger exporter examples

 

Active in businesses from power generation to medical imaging, Siemens AG derived 64 percent of its parent company’s €25.8 billion revenue last year from German exports.

 

About 600,000 workers produce over 40,000 vehicles a day globally at Volkswagen AG’s 120 factories, with the company exporting 4.4 million cars from Germany last year.

 

Founded in 1863, pharmaceutical giant Bayer AG now employees 115,200 people worldwide and earns nearly 90 percent of its revenue outside of Germany.

16.6%

11.3%

Machinery

Cars

10.3%

5.8%

4.9%

Pharmaceuticals

High-tech

instruments

Electrical equipment

4.6%

3.3%

4.2%

2.7%

Plastics

Car parts

Planes and

Other vehicle

spacecraft

or train-related

36.3%

Other

Sources: UN Comtrade database; Company websites and financial reports; Bernd Venohr (Database of Deutsche Weltmarktführer); Bloomberg research

The Mythic Mittelstand

The backbone of Germany’s economy is the so-called Mittelstand, 3 million small-and medium-sized enterprises, most of them family-owned. They employ about 61 percent of workers, represent around half of GDP and exported 206 billion euros ($246 billion) worth of goods and services in 2015. Expand this definition to companies earning up to 1 billion euros and you get the kind of global exporters like the three examples provided on the left side of the graphic above.

This broader Mittelstand represents no fewer than 1,465 of the 1,650 German world market leaders identified by Bernd Venohr, a former professor turned management consultant. With a team of researchers, he’s spent 15 years creating and maintaining a database of companies that hold a top-3 position in their respective niche fields.

These world market leaders, heavily concentrated in Germany’s export hub in the south and along the Rhine River, brought in a combined 2.2 trillion euros in revenue last year and employed 8.6 million people worldwide.

World Market Leaders in Germany

The country has over 1,600 companies holding a top-3 position in their respective industries

By federal state

45

43

11

5

28

86

3

4

419

21

11

123

67

7

333

416

By industry sector

Mechanical Engineering

34.1%

Electrical Engineering

10.4%

Industrial Products

10.1%

Consumer Products

6.9%

Cars & Car Components

6.9%

Construction & Building Products

6.2%

Pharma & Medical Technology

4.8%

Chemical Products

4.1%

Others

16.5%

By company size

185

Over €1B

606

Under €50M

859

€50M-€1B

Global figures

Revenue

Employees

€2,178.4B

8.65M

By federal state

By industry sector

By company size

Mechanical Engineering

34.1%

185

Over €1B

45

43

Electrical Engineering

11

5

10.4%

28

Industrial Products

86

10.1%

606

Under €50M

859

€50M-€1B

Consumer Products

3

4

6.9%

419

Cars & Car Components

21

6.9%

11

123

Construction & Building Products

6.2%

67

Pharma & Medical Technology

7

4.8%

333

Chemical Products

Global figures

Revenue

Employees

416

4.1%

€2,178.4B

8.65M

Others

16.5%

Source: Bernd Venohr (Database of Deutsche Weltmarktführer)

A Labor Force Like No Other

For years, Germany’s factories have been kept humming by a steady stream of skilled labor produced, in part, by the country’s vaunted vocational training system. Most well-known is the national apprentice program run by the country’s 79 Chambers of Commerce and Industry. They place recent high school graduates at companies across the country, including BMW (1,200 new entrants in 2016), ThyssenKrupp (971), and BASF (837). There were 1.3 million trainees last year, 59 percent of whom were in industry and trade.

While fewer young Germans are opting for this particular path–a survey last year by the Association of German Chambers of Commerce and Industry found that 31 percent of businesses were unable to fill their available apprenticeships–many are instead enrolling in so-called Fachhochschule, or specialized universities of applied sciences, which serve a similar function.

Germany’s Apprenticeship Model

Well-known for its network of apprenticeships, younger Germans are instead flocking to semi-vocational colleges

Apprenticeships

Students in applied science colleges

Other higher education students

3M

2

1

0

2006

2015

Apprenticeships

Students in applied science colleges

Other higher education students

3M

2

1

0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Apprenticeships

Students in applied science colleges

Other higher education students

3M

2

1

0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: German Federal Statistical Office

Germany’s Demographic Nightmare

Unfortunately, to keep Germany’s economy revving at top speed, these universities and vocational programs need lots of new talent, and right now Germany doesn’t seem up to the task on its own. A 2015 projection from the German statistics agency says the population will decline from more than 80 million to 67.6 million in 2060 if net migration is low, with the number of working-age Germans falling by as many as 15 million over the same period. In recent years, net migration has surged, driven first by young jobseekers from southern Europe during the continent’s debt crisis, and more recently by Syrian refugees. That has the potential to stave off a difficult reckoning for the country in the short term. That is, during Merkel’s fourth term, should she win one.

What Demographics and Immigration Mean for Germany

After shrinking for much of the early 2000s, Germany’s population (and potential labor force) has been boosted by surging net migration

Combined births and deaths

Net migration

Population change

1.2M

0.8

Start of

3rd term

Start of

1st term

0.4

Start of

2nd term

0

−0.4

2000

2015

Combined births and deaths

Net migration

Population change

1.2M

0.8

Start of 1st term

Start of 2nd term

Start of 3rd term

0.4

0

−0.4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Combined births and deaths

Net migration

Population change

1.2M

Migrant inflows as a percentage of the population during Merkel’s first term:

Germany

U.K.

U.S.

0.8

Start of 1st term

Start of 2nd term

Start of 3rd term

Migrant inflows as a percentage of the population during Merkel’s second term:

Germany

U.K.

U.S.

0.4

0.7%

0.7%

0.4%

0

1.1%

0.7%

0.3%

−0.4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: The difference of births minus deaths is used for the combined figure; population change calculated by adding combined births and deaths with net migration.
Sources: German Federal Statistical Office; OECD