I was in Germany recently, and it caused me to ponder why Germany’s economy continues to do so well, despite the huge costs of absorbing the former Communist East.

What makes some countries grow, while others stagnate?

Obviously the age profile of a country is important.

If more of the population is elderly or retired, one will have slower growth. In 10 years time Germany may not be so dynamic for that reason.

But, at the moment, Germany is doing well.

For example, German and British car factories are running profitably at 80% of capacity production, while Italian car factories are only using 46% of their capacity, and French car factories only 62%. Running at less than 75% of capacity means running at a loss.

Rigid labour laws may explain why French and Italian factories have not been able to reduce capacity in response to reduced demand for new cars.

In Germany, youth unemployment is only 5%, while in southern Europe it is 25%.
Meanwhile, France is beginning to worry about the performance of its schools. There are suggestions that it has dropped 14 places in Mathematics between 2003 and 2009 in the OECD Pisa tests conducted in 65 countries.

China, Korea, and Finland regularly come near the top in these tests. Education for the elite in France is excellent, whereas German education is more broad based, and its apprenticeship system imparts vital skills to a larger proportion of the population.
The German Minister for Science told me that German Scientists produce 10% of all the scientific papers in the world with only 0.1% of the world’s population. China spends four times as much on research as Germany, but China produces fewer scientific papers. Specialist scientific institutes, like the Max Planck Institute, which are separated from universities (and from university politics) play an important role.
But perhaps the reason for Germany’s success can be put in a single word…..frugality
Writing of the Germans in the early 16th century the Florentine diplomat, Niccolo Machiavelli said

“The reason why private citizens are rich is that they live as if they were poor……Nobody cares for what he has not, but only for what is necessary to him”

This is as true today, as it was 500 years ago.