Many small businesses in Germany thrive during downturn

While the global economic cascade hit Germany with full force this past winter, it brought Manfred Steberl another job. A young couple had just lost €20,000 ($26,580) in the stock market. They pulled what savings they had left out of the bank to put in another asset – their home. They hired Mr. Steberl, a contractor, to install solar panels, parquet flooring, and a plush bathroom.

"People would rather hire somebody they trust and invest their money in their own projects than give it to a bank they don't trust anymore," says the affable Steberl. "The Germans attach great importance to their interior, to where they live."

In Europe, the crisis has devastated countries dependent on foreign investments, such as Iceland, and those thriving on the car industry, like Hungary. Germany, too, is struggling. But the country's legendary small businesses and entrepreneurs, like Steberl, are helping to at least moderate the recession.

Tailors and bicycle mechanics, roofers and bakers, they are the Mittelstand (small- and mid-sized enterprises) that helped Germany rise from the ruins of World War II. Now they are acting as a shock absorber against the economic tumult.

"The Mittelstand is going to withstand the crisis," says Frank Wallau, head of the Bonn-based Research Institute on Small and Middle-sized Enterprises.

Firms with up to nine employees are the backbone of the German economy, making up 93 percent of the country's 1.6 million enterprises. Small and middle-sized firms hire two-thirds of the people – even more than in the US and Britain, experts here say. While demand for German products has shrunk to historic lows – with the big automakers' woes rippling through the economy – the Mittelstand has avoided large-scale layoffs so far.

One reason is where the firms get their money. In the mid-19th century, Germany set up local savings and cooperative banks to help small businesses cope with industrialization. Today, the country's 450 public savings banks and 1,200 credit cooperatives finance three-quarters of all small- and medium-sized firms. In most cases, the smaller banks remain far more robust than the nation's Big Three – Commerzbank, Deutsche Bank, and Dresdner Bank – because of their caution.

"In hardly any country is the cooperation of local banks with small businesses as important as in Germany," says Sigurt Vitols of the Center for Social Science Research Center in Berlin.

Like most small businesses, Steberl's plays out locally. The painters and granite cutters he works with all live near him, in a village outside Frankfurt in the verdant hills. He gets clients by word of mouth.

"When you're alone, and when you're good, you will seldom fail because you'll always find people who want your services and are ready to pay for it," he says. "The key is trust."

Still, Germany is hardly waltzing through the recession. The government predicts the export-dependent nation could contract by 2.25 percent in 2009 – the worst showing since just after World War II.

The government has adopted a modest $66.9 billion stimulus package, which includes funding for roads, bridges, and schools, as well as a subsidy to spur the use of "green" cars.

Many small businesses don't want a big-ticket government response. "The danger people see is that we're going to leave huge debts to the next generation," says Mr. Wallau.