By David Bach, Professor at IE Business School, published on IE Focus

Germany has scored more economic goals than Spain because it applied the structural reforms needed before the crisis took hold, and because Merkel, has controlled spending from the start.Spain may have beaten Germany in both the European Football Championship and the World Cup, but where economy is concerned there is no doubt that Germany has the upper hand. Last Thursday´s news that the largest economy on the continent had grown by 3.6% in 2010 (the highest level since the unification in 1990) has surprised even the experts. The Spanish economy, however, closed 2010 with an average reduction of 0.2%. What does Angela Merkel know about economics that the Spanish president doesn’t? One analysis of the German success shows that the causes behind the differences go beyond the current Chancellor´s policies and also clearly point the path Spain should take.

Germany´s economic strength (and Spain´s weakness) is based fundamentally on four pillars:First of all, Germany applied structural reforms to its labour market and social systems before the crisis, more specifically between 2003 and 2005 under the government of the Chancellor Gerhard Schröder. Under the name of “Agenda 2010”, the reforms were highly controversial and cost Schröder his job when voters abandoned his social democrat party. In Spain, President Zapatero has still not been brave enough to take that step; the opposition is also failing to offer a coherent alternative for essential reforms. 

Secondly, thanks to these reforms and other factors, such as heavy investment in R&D by German companies, a commitment to innovation, and moderation in salary demands by the trade unions, the productivity of German workers and the competitiveness of the economy have increased significantly in recent years. In Spain, however, a combination of low productivity and investments in R&D that are well below the European average continues to hinder sustained growth.
Thirdly, the main driving force behind Germany´s growth is its exports. This is the result of the high-level competitiveness of German firms, especially its SMEs, which lead the world in many sectors. However, most of Spain´s businesses still fail to look beyond the country´s borders and the multinational successes of Telefónica, Santander and Iberdrola are unable to compensate because their contribution to Spain´s GDP is relatively low.

Finally, despite the extraordinary 4.7% reduction of the German economy in 2009, the encouragement given by the government was relatively small because Merkel insisted (correctly, in spite of her critics at the time) on controlling the deficit and being careful with public finance. Spain, however, spent money like water and, unfortunately, much of it went on public consumerism rather than investments that produce returns. Madrid is probably the city with the best pavements in Europe, but that does not increase worker productivity or business competitiveness. 

La Roja has earned its fame with creative, innovative football. If Spain wants to win on the economic playing field, it needs politicians, entrepreneurs and union leaders who are prepared to make a commitment to the future.