Germany powers ahead for now but economy may face a hefty bill

While Britain is starting to feel the pain of austerity measures and Portugal is on the brink of calling for a bailout, the German economy remains on course for a second year of strong growth.

That is despite oil price rises in the wake of the Libya crisis and global production delays, particularly of car and machine parts, caused by the Japanese earthquake.

Recent business confidence and purchasing managers' surveys confirm the picture of an export-led upturn that has made Germany the envy of Europe. The country's budget deficit is set to fall below the EU's budget ceiling of 3 per cent of GDP this year. Britain's, by comparison, will be 9.9 per cent.

The German government is forecasting a slowdown in growth to 2.3 per cent this year from 3.6 per cent last year, but some economists are predicting a figure closer to 3 per cent - still respectable given the size and maturity of the economy. The British government last week cut its growth forecast to 1.7 per cent.

How does Germany do it? The question has been asked by policymakers around Europe over the past year as the continent's largest economy has outpaced growth in the rest of the 17-nation euro zone. The answer is a strong focus on high-quality manufacturing, a product range that suits the requirements of the top emerging economies for machinery and luxury cars, a long-term approach to management that weathers short-term setbacks, and years of budget discipline.

But it isn't just that. For more than a century, Germany has been proud of its engineering prowess and its industrial innovations, often born of close links between universities and companies. It's a matter of survival, because the country has no major natural resources and relies on the skills of its workforce for its prosperity.

It has placed a heavy emphasis on research and technological advances in industries such as the steel mills and metalworking factories of the north-western Ruhr region as well as small, specialised machine-making factories in the south.

Know-how is regarded as such a valuable resource governments and businesses fight to protect it. Industries aren't simply allowed to die overnight when they're no longer viable. The wholesale closure of the steel and mining industries Margaret Thatcher, then British prime minister, enforced in the 1980s would have been unthinkable here.

Governments try to take the sting out of painful transformation, such as the phasing out of coal mining over the past half century, by providing development grants aimed at spawning new enterprises.

Key industries such as car manufacturing can rely on state help in bad times. During the global slump in 2009, top companies such as Daimler and VW got subsidies that allowed them to put tens of thousands of workers on short time rather than fire them. They were able to keep their workforces intact and quickly fired-up production when the world economy began to recover last year.

The focus in Germany is on fine-tuning rather than the sledgehammer approach of British governments including that of David Cameron, the current prime minister, who has embarked on a high-risk venture to eliminate the budget deficit in just four years by reducing spending by £81 billion (Dh479.38bn) and cutting more than 300,000 public sector jobs.

Given the Teutonic tradition of caution, the drastic U-turn on nuclear policy by Angela Merkel, the German chancellor, is all the more surprising, and poses a homemade risk to German economic growth in the coming years.

Within days of the Fukushima accident in Japan, she closed the seven oldest of Germany's 17 nuclear power stations pending a three-month review of reactor safety. She has suspended her plan to prolong the lifetimes of the plants by an average of 12 years beyond their original phase-out date in 2021, and even pledged last week to speed up the exit from nuclear power.

Mrs Merkel's about-face was an election campaign ploy designed to avert defeat for her party colleagues in a key election in the southern state of Baden-Wurttemberg on March 27.

It didn't work. Her Christian Democrats were ousted and replaced by Germany's first regional government led by the anti-nuclear Greens party. Driven by public fears of atomic energy, Mrs Merkel has abandoned the most important policy of her second term. The move will end up depriving the government of billions in future tax revenues from power companies.

More importantly, the country is about to put itself at a competitive disadvantage to rival economies sticking to cheap nuclear power. Germany faces major energy price rises in the coming years because it will have to accelerate its shift into renewables - an exorbitant project because it involves vast investments in new infrastructure.