John FitzGerald: Germany’s economic engine is definitely stuttering

Since the 1960s, Germany has excelled in engineering industries, with manufacturing the engine of growth. Firms such as Volkswagen and Siemens became dominant in their sectors in Europe. Over much of the last 60 years, a vigorous German economy powered economic prosperity across the EU.

In the 1980s, competition from Japan began to cut into Germany’s car markets. Cheap Japanese car imports were seen as a threat, rather like today’s fear of losing out to Chinese carmakers.

However, when the Berlin Wall fell in 1989, Germany was quick to exploit the new opportunities opening up to the east. While German car manufacturing was suffering from rising domestic costs, firms shifted labour-intensive processes to Hungary, Slovakia and Poland, keeping the highly skilled work at home. This helped German carmakers to prosper for another 30 years.

Central to the German economic model has been an educational system with a very strong vocational sector straddling second level and further education. This has prided itself on producing highly skilled technicians, such as toolmakers and machinists, to drive manufacturing excellence.

However, today the German economy faces challenges and opportunities that are very different from those 60 years ago, requiring different skills. As the car industry undergoes revolutionary change, traditional, more narrowly focused engineering skills are no longer as valuable as in the past.

Instead, modern businesses require a wider range of expertise and skills that more typically come from a graduate qualification than from strictly vocational training programmes.

For example, graduate mechanical engineers are able to work in a range of industries, whereas those with industry-specific skills are less able to adapt to new fields and challenges.

While Germany has increased its share of graduates of working age over the past 25 years, it has been a laggard in relative terms, and is below the EU average.

While Germany’s graduate share has risen from 20 per cent to 34 per cent, it has been outstripped by France and Spain, at 40 per cent, and an even higher share in Ireland. In former East German länder – federal states – the share of the population with third-level qualifications is the same as in 2000.

The Republic of Ireland has come from the bottom of the class to the top. Free second-level education only began in autumn 1967, when I left school, and a steady increase in school and then college participation followed over 50 years.

This change has been central to the State’s economic success. Today, the Republic has the highest share of its working-age population with third-level education – and almost 60 per cent of those in their 30s now have a degree – followed by Luxembourg, Sweden, Lithuania and the UK. The State has the highest share of Stem graduates in the EU, 60 per cent higher than in Germany.

Countries with a higher graduate workforce are more likely to feature high-paying sectors such as IT, pharmaceuticals or fintech. The Republic’s share of graduates in manufacturing was 63 per cent last year, compared to Germany’s 36 per cent.

In the information technology (IT) sector, the Republic, France and Lithuania top the graduate share, at over 85 per cent, while Germany is on 60 per cent. It is not surprising that Revolut comes from Lithuania, and that a substantial share of the EU’s pharmaceuticals are made in Ireland.

[ German car industry seeks fightback amid slumping market shareOpens in new window ]

The nature of the Republic’s human capital, nurtured over decades, has allowed the State to specialise into profitable rapidly growing sectors. Germany, which still relies on skills, which were very valuable in the past when car making was king, has found it difficult to adapt its economy to the changing demands of the global marketplace.

The OECD measure of net national income per person, adjusted for price differences, offers a more valid measure of comparative living standards than gross domestic product .

These data show that Germany’s standard of living has not changed much over the past 15 years relative to the US and the UK. However, the investment in third level by the Republic, Denmark and the Netherlands has enabled them to outpace Germany.

Lithuania, with a high share of graduates, is also catching up rapidly, from 45 per cent of German living standards 20 years ago, to reach over 70 per cent today.

For Germany, and other countries that rely on the skills of yesterday’s economy, it is vital they refocus their education systems to produce qualifications that enable a more flexible and adaptable workforce. As we know, such change takes a long time to mature, as an older generation is gradually replaced by workers with new skills and qualifications.

In Ireland we can’t be complacent either. In uncertain times, the State’s education system must foster the openness and ability of students to learn and evolve their skills over their lifetime, to thrive in a changing world.