A decade of labour and welfare reform laid the ground for Berlin's latest success story, writes DEREK SCALLYin Berlin

THERE’S NO news like bad news in the media business. By that standard, German newspapers have been failing their readers badly in 2011. Day in, day out it’s the same old story: boom, upswing, economic miracle.

Considering the chill elsewhere, it makes for disconcerting reading that the German economy grew 3.6 per cent last year, the strongest performance since unification.

A word of advice for anyone trying to get their heads around the indecent haste with which Germany has recovered from recession: forget the Berlin economists and the Frankfurt bankers. Head south to the Black Forest.

Walter Dreizler, a family-run manufacturer of high-tech gas burners for boilers, is a classic example of the Germany’s Mittelstand and all that’s right with the German economy. Now in its third generation, the 46-year-old company is one of the thousands of the small- and medium-sized businesses that form the backbone of the German economy.

Dreizler puts its success down to long-term thinking and consistent investment of 5 per cent of turnover in research and development of high-tech patents and products that are in demand from Berlin to Beijing.

“We aren’t the ones who can offer a standard product cheaper; we will never manage that,” said Daniel Dreizler, grandson of the founder, and a partner and procurist with the firm. “We can offer a quality product that is more efficient and offers technical advantages, and argue for the price premium on that basis.”

After a tough 2009, Dreizler cut costs and managed to post turnover of €6 million last year with double-digit growth likely in 2011.

Dreizler’s return to health reflects the wider economic picture in Germany, with the jobless rate at or below the psychologically crucial three million mark.

Business confidence is at record levels, manufacturing is at an annual high and the final piece of the puzzle fell into place this week. German consumers – the economic equivalent of the canary in the coal mine – are spending again after years with their hands in their pockets. Retail sales were up 1.6 per cent, the biggest gain in six years, and imports are rising.

Germany may have ceded to China its crown as world’s largest exporter, but its high-tech manufacturing and engineering know-how has its companies struggling to keep up with demand for their machines.

This overnight success was a decade in the making. In 2002, faced with a vicious circle of low growth and high unemployment, chancellor Gerhard Schröder bullied and cajoled powerful trade unions to set aside their wage agreements in exchange for job security guarantees.

The second stage, the radical “Agenda 2010” reform programme, was a high-stakes gamble that slashed welfare benefits and loosened up the labour laws. It eventually cost Schröder his job as German leader in 2005 just as the reforms began to bear fruit.

“There are many people here who criticise the low-wage jobs that were created with new labour market flexibility,” says Dr Jörg Rocholl, an economist at the ESMT university in Berlin. “But it’s important to remember how . . . the labour market was so rigid that even in an upturn no jobs were created.”

Germany’s recovery took a hit when the economic crisis rumbled across the world in 2009. Big companies like Volkswagen and Siemens appealed to chancellor Angela Merkel’s government to act before they were forced to make mass redundancies.

Berlin simplified short-time legislation, providing companies with easy access to subsidies to bridge the pay shortfall resulting from shorter working weeks.

That was crucial in allowing even smaller companies like Dreizler hold on to their 52 employees, many highly-skilled engineers, and activate them immediately when the orders came rolling in again in last year.

“Things came back so quickly that no company could have hired and trained new workers fast enough,” said Mr Dreizler, partner and procurist in the firm.

By mid-2010, with the precision of a German machine and the punctuality of a German train, Agenda 2010 rolled into the station, reform goal achieved.

News that Germany is growing at twice the rate of the rest of the euro zone has prompted some economists to dampen the party mood, asking whether the boom is coming at the expense of Germany’s euro zone partners – and that it might eventually come back to bite Berlin.

“Fundamentally, it was wage restraint over the last 10 years that’s responsible for Germany’s success,” said Stefan Bielmeier, chief economist at DZ Bank, to Bloomberg. It’s questionable, he added, whether that model is sustainable in the future.

Analysts are already predicting an end to Germany’s run of wage freezes this year.

“The impetus for wage rises will increase in Germany in 2011,” said Antje Praefcke, senior FX analyst with Commerzbank in Frankfurt.

Europe’s largest economy ran up a €96 billion trade surplus in the euro zone for the first three quarters of 2010, up €15 billion in a year. As it stands, some 60 per cent of German exports go no further than its 26 EU partners.

But imports are finally rising again, up a staggering 33 per cent in November, something from which its European neighbours hope their own companies are feeling the benefit.

A delegation from the German-Irish Chamber of Commerce has already taken in the German economic miracle for themselves, visiting Dreizler and other Mittelstand companies in southern Germany.

“There are great opportunities for Irish companies in German industry but we have to configure ourselves to deliver,” said Micheal Galvin of Enviroeye Engineering, one of the visitors.

Ireland’s next economic upswing, he says, depends on how well we can benefit from Germany’s current good fortune.

“We’re not going to produce companies like Dreizler.

“But there’s no reason why we can’t be systems integrators and assemblers, and write software to make these German machines achieve high yields.”

The German economic miracle is real, just as the backbone of the economy is real: small- and medium-sized companies run with a long-term view by owners and selling products the world wants.

“Made in Germany” is back.