Partying Like It’s 2008

Germany is one of the worst-hit economies in the developed world. So why is everybody so calm?

By Stefan Theil

The economic crisis has taken its toll in Europe. Governments in the Czech Republic, Hungary and Latvia have collapsed. Violent street protests have erupted in France and Britain. Yet Germany remains unfazed. While its economy is forecast to contract by 5.3 percent this year—compared with 4 percent in the U.S., 3.7 in Britain and 3.3 in France—Germans are remarkably angst-free about their prospects.

When spring temperatures finally arrived in late March, Berlin's sidewalk restaurants were packed. Its roads were choked with shiny convertibles tanked up on newly cheap gasoline. Consumer spending has held up; March auto sales were up 40 percent over last year, thanks to the €2,500 government trade-in incentive that came with Germany's fiscal-stimulus plan. Only 13 percent of Germans tell pollsters their personal finances might be affected by the crisis. A long-planned protest in Berlin in late March managed to attract only a few thousand antiglobalization activists and left-wing fringe types. "Why Is It Still So Quiet?" the Frankfurter Allgemeine newspaper asked in a recent headline, intrigued by the idea that the country's citizens might be sitting out the grimmest recession in 60 years.

The main reason that most Germans have yet to feel affected by the crisis is, to put it simply, that they haven't been affected. Unemployment, at 8.6 percent in March, only began to creep up in December when it was at 7.4 percent, and is still near lows last seen in the early 1980s. German banks were among the biggest speculators in toxic U.S. assets, but that has had few repercussions for ordinary Germans. They saw neither a bubble in real-estate prices (in fact, they're a nation of renters) nor a boom in credit-fueled consumer spending, the implosion of which is now hurting the United States, Britain, Ireland and Spain. Though German stocks are down 41 percent from their 52-week highs (versus 39 percent for the Dow Jones), it affects few private households, as few Germans own stocks directly. For their retirement they depend on state pensions and life-insurance policies, whose returns (and risks) don't show up on monthly statements.

What's more, most Germans seem to be enjoying a sweet spot they haven't seen in decades. Even with the recent jump, joblessness is still far below its 2005 peak of 12.6 percent. After years of cost-cutting and wage restraint, unions finally negotiated some raises; the latest round of pay hikes was the highest in 13 years. Plummeting energy prices and a stimulus tax cut have brightened the mood as well.

The good times may last a little while yet. Even as the recession begins to bite—mainly via a sudden collapse in Germany's exports, which account for some 40 percent of GDP—its impact will be muffled. Germans trust their welfare state to cushion the blows in a way unimaginable in the United States. Most workers are eligible for benefits, and few of them have to worry about losing their health insurance.

Jobs are slow to disappear, in part due to worker protections. Layoffs in Germany's hard-hit export industry—orders in such key sectors as cars or machinery are down by about 50 percent—have been kept artificially low, thanks to a newly expanded government subsidy that is paying 50,000 companies to keep more than 1 million workers on the payroll even though they no longer have work to do.

Moreover, with a national election coming up in September, Chancellor Angela Mer-kel's coalition government is desperate to tide over the job market, as are big German companies, which fear that massive layoffs might lead to a big win for a left-wing coalition. "Every German company will try not to lay off workers before the election," says Daimler public-affairs executive Martin Jäger.

Also helping Germans keep their cool: the attitude that whatever happens, they've probably been there before. Germans have endured worse than the 11.6 percent unemployment predicted for 2010 by the OECD, and have been through long phases of economic stagnation as recently as the 1990s and early 2000s. Paradoxically, many Germans may now sleep even easier, especially among the nearly 50 percent who receive government benefits, pensions or civil-service salaries. With the reversal of the political winds, welfare-state reform no longer seems on anyone's agenda. On the contrary, some benefits were expanded as part of the country's stimulus program.

The rosy mood will be tested in the coming months as insolvencies and layoffs start to hit harder, and could turn truly sour should the German exports fail to bounce back next year as expected. But until then, Europe's biggest economy won't let a little downturn spoil the day.