Germans have long been considered one of the world’s most educated people. Frederick the Great of Prussia launched the first general public education system in the world back in the 18th century. In the 19th century, the U.S. modeled much of its educational system on what American educators admired about the German plan, including compulsory attendance, kindergarten and vocational education. Yet, despite that proud legacy, German policymakers have become frustrated in recent years with a system that seems stuck in a number of ways.

At the grade school and middle school levels, some studies suggest that tracking intended to divide academically inclined students from those with a more vocational bent appears to favor upper-income children over poor and immigrant children, irrespective of ability. In the universities, a number of factors encourage students to delay graduation or to drop out altogether. And in advanced research institutions, the goal of creating a more egalitarian university system has led to lower international rankings and less cutting-edge research.

Knowledge at Wharton asked faculty members at Wharton and leading German universities, as well as German business experts, to explain what’s changing at the post-secondary level and the consequences those reforms are likely to have on German businesses and the economy. “In general, it’s been a good system,” says Saikat Chaudhuri, a professor of management at the Wharton School who grew up in Germany. “The problem is that when something works well for a long period of time, people are reluctant to change it.”

“Don’t get me wrong,” he adds. “Some of the work is good, especially in the natural sciences. That’s why [German academics] win Nobel prizes still. But there are some other areas where you see weakness.”

Anglo-Saxon Model

Triggered by a Europe-wide initiative to adapt higher-education systems to the Anglo-Saxon model, an ambitious effort to revitalize German education is underway. Policymakers hope that several changes in the system will lead to some fundamental improvements to German education and research.

In primary education, government support is increasing for early education along the lines of Headstart in the U.S., an early childhood education program geared toward helping underprivileged preschoolers become better prepared for the demands of grade school. Some states are shrinking the time it takes to complete the Gymnasium (academic secondary school) program from 13 to 12 years, partly by extending the school day throughout the whole day rather than ending at lunchtime, which was long the standard schedule.

At the university level, even more dramatic changes are on the way. The traditional five-year degrees are being dropped in favor of the Anglo-American style bachelor/master configuration, a three-year/two-year sequence that will align Germany with the rest of Europe. At the same time, the government is giving a few of the country’s highest-performing public universities extra financial support, in the hopes that the investment will help the country’s universities regain their once-high reputation for cutting-edge research.

From Diplomas to Doctorates

As influential as Germany’s system was in many respects, its leadership did not extend to the structure of higher education. In higher education, the British bachelor’s/master’s/PhD system has become the dominant design of global education, perhaps because it offers more flexibility than the five-year German diploma degree, the DiplomKauffrau or the Diplom-Kauffmann, or perhaps because of the greater prestige American universities enjoyed as research institutions in the postwar era.

Germany is making the switch to the BA/MA/PhD system as part of its obligation as a signatory of the Bologna Process. Signed by 26 European countries, the 1999 accord set a goal of creating a single European higher-education authority. As of today, 46 countries have joined the process, the goals of which include making it easier to facilitate the mobility of students and faculty between countries and to increase access to high-quality higher education.

Before the birth of the European Union, the alignment of degrees mattered less. After all, a foreign customer probably didn’t much care whether the engineer who designed an engine held a Diplom or an MS. Today, however, with labor inside Europe more flexible than ever and international competition more intense, many German policymakers have become convinced that the current conversion of German colleges and universities to a BA/MA/PhD system is a necessary step to keep the country economically and scientifically competitive.

The old five-year degree has several marks against it, critics say. Perhaps the most serious is the length. Because of the public service required of young men and the fact that students frequently stretch out the five-year program for a few more years beyond that minimum, graduates often don’t settle down to their first job until they are 27 and sometimes as late as 30.

University education in Germany has followed a monolithic system, says Christian Homburg, president of Mannheim Business School, one that “does not meet the requirements of business practice anymore.” This is assuming, of course, that students graduate. Drop-out rates from the traditional programs were as high as 50% at some universities, the result being that much of the investment made by society and individuals in higher education was lost. Shorter degree programs create more flexibility for students to join the workforce earlier, scholars and executives say, enabling them to change career paths midstream in ways that allow them to keep up with changing interests and respond to shifting demands of the marketplace.

“I am convinced that this new structure of university education will open more diverse options so that each student can individually design his or her way of studying,” says Homburg.

One investment company president says the shorter study periods should be helpful to many people. “It’s a waste of resources, forcing people into such a long study without any experience in any job,” says Jan Friske, president/CEO of WestLB Trust GmbH. “I think the bachelor system increases the chances of not wasting so many resources.”

Finally, simply being out of step with other countries has its own costs. The diploma system made it difficult for graduates to work outside the country to get the right amount of credit for their level of education, which foreign recruiters tended to misinterpret as the equivalent of the three-year English bachelor’s degree. At the same time, scholars say, the diploma system also made it more difficult to make comparisons with schools outside Germany.

A Positive Change

For all of these reasons, the scholars interviewed seemed pleased with the change. “I think it’s one of the most significant changes in the German educational system in decades,” says Martin Fassnacht, associate dean and holder of the Otto Beisheim endowed chair of marketing and commerce at the WHU Otto Beisheim School of Management.

The transition to the BA/MA system began several years ago. The Organization of Economic Co-operation and Development (OEDC) estimates that 60% of the country’s universities now offer BA/MA style degrees rather than the older diploma, and the transition is expected to be complete by fall 2009.

For employers, the new degrees seem to be largely positive. At Mannstaedt, a maker of specialty steel objects, the loss of two years of education is not crucial, since the company gives new recruits three years of advanced training after they are hired. “We need to educate people anyway because there are no lessons at the university that teach the specifics of our industry,” saysJoerm Grossman, CEO of Mannstaedt.

At Goldman Sachs’ Frankfurt office, too, the switch from five-year to three-year degree holders also does not seem to have made much difference. The only area where managing director Bernard Herdes finds new recruits now know much less than they used to is in accounting, but he says this is generally not a serious problem.

The other big difference for employers is that they are getting first-year recruits three or four years younger than they once did. That is helpful, according to Mannstaedt’s Grossman because it is easier to integrate younger people in the corporate community. When they are older, he adds, they often begin to feel money pressure as they start to raise families, and they are more susceptible to poaching by competitors.

However, Friske thinks the older candidates may actually have been better able to focus on work because they are more mature. “These people are a little bit more adult. They know that they need to make money now and pretty quickly. That’s a difference from people who are 22 or 23 who come out of the university” with a bachelor’s degeree.

That said, however, Friske and other executives interviewed note that their companies have not really had problems with the new bachelor’s degree recruits. One reason offered by Friske: A good portion of the fourth and fifth years in some of the old diploma programs focused more on theory than practical applications.

The reforms may be having other consequences as well. Herdes believes that fewer students are spending two years in an apprenticeship program at a bank, as he did before going to university. Those kinds of programs have become rare now with the new degree structure in place. He has mixed emotions about that change. “I think it was beneficial for most people I know who did that. The big question is, is it worth it to work two years, to get that first-hand customer experience?”

Whatever the experiential tradeoffs, adding workers to the job market earlier rather than later is likely to be beneficial from a macroeconomic view. Although prolonging education well into the 20s reduced unemployment, bringing 20-somethings in at a younger age makes it easier to fill the gaps left by the growing number of retirees, which demographers expect to see in the coming decades. The elimination of a 13th year of Gymnasium in some states and the move toward a three-year degree is likely to compensate somewhat for the country’s extremely low birth rate and high rate of childlessness, which are both quite extreme compared to other European countries: Germany’s birth rate was 1.3 in 2003, down from 2.1 in the early 1970s, and the childlessness rate is 25% overall and 30% among highly educated women. Thus, the average age is expected to rise dramatically over the next three decades. By 2050, one in three Germans is expected to be over 80, according to German news service Deutsche Welle.

But age by itself is less an issue than the ratio of retired to working, which stands now at one-to-three and is expected to rise to one-to-one by 2040. Starting to work earlier could help alleviate that pressure. “Workers who enter the labor force earlier reduce the training and education costs while beginning earlier payments into the pension and health care insurance schemes,” wrote Ursula Lehr, a former minister of youth, family, women and health in Germany.

Pursuit of Excellence

Another line of reforms now being pursued by the government is the designation of certain universities as centers of excellence for particular fields. Over the years, as the government tried to push state universities to provide more egalitarian educational opportunities, German universities lost their spots in global education rankings. Their reputation for cutting-edge research declined. At the same time, many students went abroad.

The result was weaker research and a broad-based system in which the key question is not, as in the U.S. or the UK, where you went to school but what degree you had and maybe the name of your thesis advisor, according to Chaudhuri. For average students, this system has worked out well, he says, but ironically, may have hurt the country as a whole.

“What’s perverse about this whole thing nowadays is that they created this system to have equality. But actually what happens is that those who can avail themselves of other opportunities — a lot of the German elite — come to study [in the U.S.] at top universities instead of sticking around in Germany. So in the end, it’s not helping the system,” he argues.

To try to restore some of the universities’ lost luster, the federal government began moving a few years ago to select several universities for additional support to improve their research capabilities and reputation in global research. To American ears, such additional funding might sound innocuous, but the program actually sparked some controversy — not just between schools and cities that won the competition versus the many that didn’t, but because many Germans see elite schools as anti-democratic, a move that undermines the German republic’s long-term commitment to educate all its citizens well.

“The dream of being equal is over for German universities,” says Hans-Wolfgang Arndt, rector of the University of Mannheim, which has schools of business administration, economics and social sciences closely intertwined with the humanities, law, mathematics and computer science. Mannheim’s success proves Arndt right: Numerous rankings, awards and evaluations express the quality of research and teaching at the university. “Applicant … numbers continue to soar,” says Homburg of the Mannheim Business School.

At a fundamental level, experts say, Germany is unlikely to ever want to emulate the kind of pyramid-shaped educational systems found in the United Kingdom, France and the United States.

Chaudhuri notes, for instance, that when private business schools began opening, there were actually protests. Some doubt Germany will ever develop a truly elitist system. “A real elitist system, like in the United States or in other countries, is probably nothing that you would find many people striving for, although we understand the point that we need some top performers in all areas,” says Felix Gress, managing director of the Metropolregion Rhein-Neckar, a business development organization focused on the metropolitan region around the Rhine and Neckar, a southwestern region that includes Heidelberg, Mannheim and Ludwigshafen.

The reason, Gress says, is that Germany is deeply egalitarian and does not have the same kind of tradition of centralization as many other countries. “My personal reading is that we have had that for a long time because we are not a centralistic nation like, for example, France. If you look back into French history, the revolution in France was basically against the privileges of others, not against privileges.”

Germans, in his view, are deeply suspicious of hero-worship and superstars of almost all kinds. Obviously, World War II exacerbated those fears, but even before that, Germans have always been afraid to follow a single leader. It’s an idea deeply embedded in the German psyche, he says, going all the way back to the Middle Ages. Think of the Pied Piper of Hamlin, the legend about children who were led away from that city by a man playing an enchanted flute.

“We don’t trust each other here, for historic reasons. That is why the individual, the hero, the superstar, and all of that — we just allow that in sports and let’s say in culture, in singing also,” he notes. For Germans, he adds, victories are mostly the story of team players, not individuals. “Even the Nobel Prize winners would say this is the result of a team play. It’s a little bit different than in other countries.”