Germany Finds the Net; As the Internet swept the globe, Germany was on the outside looking in. Now, a belated move to deploy it.

Byline: Stephen Roach; Roach is the chief economist at Morgan Stanley

Four years ago, there were whispers of revival in Japan. They came mainly from the business sector, where a massive restructuring was gathering momentum. They turned out to be an accurate portent of the stunning turnaround to come in the world's second largest economy.

Today, there are similar whispers in Germany. In my recent rounds of meetings with a wide range of German business managers, the verdict was nearly unanimous--a powerful restructuring is now bearing fruit. Like the case in Japan a few years earlier, this could well be the start of a reawakening in the world's third largest economy.

Productivity growth is the ultimate arbiter of the success or failure of corporate restructuring. And German productivity is now on the mend, rising at a 1.7 percent average annual rate over the five quarters ending in mid-2006. By U.S. standards, where the productivity rebound peaked at about 4 percent, Germany's accomplishments look modest. By German standards, however, the recent improvement represents more than a doubling from the anemic 0.7 percent trend from 1998 to 2004. Such an acceleration is a big deal for any economy.

Three major forces appear to be driving this Wirtschaftswunder --or "economic miracle"--improved labor efficiency, breakthroughs in capital efficiency and new organizational efficiencies in corporate Germany. While each of these developments is impressive, it is the combination that makes the real difference.

The high-cost German labor market is still rigid--but less and less so. This reflects a shift to part-time and temporary labor, which now make up more than 40 percent of total employment. Meanwhile, German unions have become more compliant and retreated from misguided efforts to shorten the workweek.

Germany's capital stock has always been a model of efficiency, but it has long been lacking in new information technologies--the elixir of the Anglo-Saxon productivity revival of the late 1990s. That is now changing. Germany's IT share of business capital-spending budgets is on the rise and, according to OECD statistics, now exceeds that in France, the United Kingdom and even Japan.