Don't accuse me of schadenfreude, but Germany has real problems

'Being brilliant at making things is not enough to run a successful economy. You need to be good at services'

The mighty German industrial trade union, IG Metall, is firing a series of shot-across-the-bows strikes in support of its claim for a 6.5 per cent pay increase. Yet German industrial workers are the best-paid in the world – and the country has just dipped into recession and has 4 million people unemployed and rising.

Are they unreasonable, out-of-touch or, maybe, just greedy?

Actually none of the above. The labour unrest in Germany reflects two profound pressures in European society: the cost of social security and the shift from manufacturing to services. These happen to be particularly evident in Germany, but they are relevant to all of us.

The German workers might appear to be acting greedily, and the scale of the claim is far above inflation, but their discontent has a solid economic background. For the past three years they have been accepting very low pay settlements of around 1.5 per cent a year, while workers in service industries have been doing rather better. Now that the mood of German manufacturers has improved – they are more confident than they have been for a year – they want to claw some of this lost ground back.

But surely German workers are already stupendously well paid? Well, no – that is the case if you look only at pre-tax pay. In fact, they take home less than their British counterparts. The latest comparable figures looking at what workers were actually paid are for 1998, but the relationships will not have changed much. These show that the cost to a German employer of a single worker on average earnings in manufacturing, converted in equal purchasing power dollars, was $35,863 (£25,133)a year. The cost to a British employer was $29,277. But knock off tax and employer and employee social security and the German worker received only $17,147 while the British one got $19,906. German income tax for this worker is similar to ours – 17 per cent against 15 per cent. The big difference is much higher social security costs in Germany.

Now it is true that the German worker may have better pension provision, though these are being cut, and he or she probably has better health care. But school performance is worse according to the latest OECD study, and, of course, unemployment is vastly higher. Furthermore, in the last year German wages in international terms have been depressed by the poor performance of the euro, so that if a German family is holidaying anywhere other than the eurozone, it will feel quite poor. Germans are not used to that.

So the union demand, while tough, is completely understandable. It is a natural reaction against a decade when living standards have increased by very little. In round numbers, German living standards have been rising by about 1 per cent a year over the past 10 years, whereas ours have been rising by about 3 per cent. If you hold down one group's living standards for several years and they have a monopoly bargaining unit, as do the 3.6 million IG Metall workers, you will have pressure to strike. We are seeing this with several of our public-sector worker groups here.

However the pressure from IG Metall, insofar as it is effective, is likely to speed up the hollowing out of Germany's industry. We are such avid consumers of German technology, particularly cars, that we tend to overlook the fact that being brilliant at making things is not enough to run a successful economy. You need to be good at services too.

The shift from manufacturing to services is a universal feature of the developed world. However, Germany has particular problems, partly because of its traditional dependence on manufacturing and its central wage bargaining system. But perhaps its greatest problem is that it is relatively easy for its companies to shift production across to Eastern Europe, which offers a combination of lower wages and skilled workers; an overwhelming case for shifting production east. The genius of German design and engineering is as great as ever; but it can be applied to products made anywhere in the world.

I'm sure that genius will continue to support German companies. But it won't support German jobs. German industry is shedding labour, but so, too, is US and Japanese industry. Compare Japan and the US, the least successful and the most successful big economies over the past decade. Japan's manufacturing employment is down 11 per cent since 1990. But the US is down 12 per cent. In Japan, service-sector employment is up 20 per cent. But in the US it is up 28 per cent. The key to maintaining employment is not how slowly you run down manufacturing; it is how quickly you build services. Germany, like Japan, but unlike the US and UK, happens to be rather slow at the latter.

All this is hard to explain to German voters. Even here, where we have been remarkably successful in European terms at increasing both employment and living standards, people find it hard to accept that running down jobs in manufacturing is a necessary and inevitable side-effect of speeding the switch into services. In Germany, given the way people have been taught to regard engineering as the driver of the economy, it is harder still.

Perhaps the hardest thing of all is to explain to the 4 million unemployed Germans that the country needs to accept more immigrants to take the skilled posts that companies cannot at present fill. Last week the government forced through a bill relaxing immigration, but it seems certain that this will become a key issue, maybe the key issue, in the September elections.

There is a certain seductive pleasure in feeling sorry for the Germans. It certainly makes a change that German GDP per head should be lower than British, with the gap widening, and that the most powerful German labour union should now be striking for more pay. However, we should try to resist the temptation, for two reasons.

One is that Germany is our second largest export market and Europe's biggest economy. It is easier to prosper if your neighbours are prospering too. The other is that the difficulties Germany faces – in particular adapting its society to an ageing population and a decline in manufacturing employment – apply to the rest of us, albeit in less stark form. And those problems will become worse, not better, in the years ahead.