Under Chancellor Angela Merkel, Germany's economy has gone from one of Europe's sickest to its economic superpower. Despite the one-two punch of the global financial crisis and the eurozone debt crisis, German output per capita has grown relative to its biggest European peers.
Continue Reading Below
Five million Germans were out of work when Ms. Merkel took office in September 2005, the most since the 1930s Depression. Since then, unemployment has fallen sharply.
Labor costs have risen more slowly in Germany than in many other advanced economies, boosting competitiveness. That has helped to propel German exports to 46% of gross domestic product, four times the share in the U.S. A weak euro has made German firms even more competitive.
Yet some economists say Germany's recent economic strength is a happy coincidence. Its main export products -- car parts, machinery, precision instruments -- have been sucked up by an industrializing Asia.
As Ms. Merkel heads toward what many expect will be an election victory, some economists say the German economy is vulnerable to changes sweeping the world economy. It depends heavily on small and midsize firms, known as the Mittelstand, which are financially conservative and invest relatively little in research and development.
Mittelstand firms have traditionally focused on hardware at the expense of software. In the future, hardware might account for only a quarter of the value of a car, for instance, with three-quarters going to software and technology. Breakthrough innovations in IT have typically been funded by venture-capital investors.
Continue Reading Below
German startup companies haven't been able to emulate the success of U.S. tech firms because of a lack of financing and a cultural aversion to risk-taking. Unlike startups elsewhere, German entrepreneurs are taught "to be useful from day one," says Christoph Raethke, a director at the German Tech Entrepreneurship Center in Berlin
German entrepreneurs face substantial bureaucratic hurdles, labor-market rules are relatively rigid, and the German tax code is biased against equity capital, economists say.
Germany depends heavily on its auto industry, which accounts for about one-fifth of its manufacturing output. That makes the economy vulnerable to industry upheaval from a shift to electric cars, which use far fewer moving parts than gasoline-powered vehicles. The could hurt the Germany's huge auto-parts industry.
Germany is increasing spending on research and development, and trying to prod firms to invest in digital technologies.
Nevertheless, economists say Germany invests too little, both privately and publicly, in digital and transport infrastructure and energy grids.
"German auto suppliers have built the perfect spark plug, they optimized the hell out of it," said Lin Sebastian Kayser, a digital entrepreneur in Munich. "But people in Silicon Valley and China are looking at how industries need to change, and acting on that. I can't think of a single Mittelstand company that is even thinking along these lines."
(END) Dow Jones Newswires
September 22, 2017 11:02 ET (15:02 GMT)