German shares took another slamming yesterday, almost doubling their loss since Sunday's hung election.

The spectacle of Hurricane Rita heading for the Texas oil coast as the Fed cranked up US interest rates another notch cannot have helped - it didn't help our stock market either.

But politics, the shock of Angela Merkel's supposedly reforming CDU's failure to live up to the opinion polls, and now the confused uncertainty about how the next German Government is to be formed and by whom, is enough to unsettle any market.

The question of whether it will stay unsettled is another matter. So is that of whether Germany's real economy is anything like the mess it is cracked up to be.

First, you would have done far better this year in German shares than in British or American. You would be looking at a return of about 15 per cent.

Nor was this the perverse action of a stock market thriving in a crumbling economy, or investors jumping the gun, rashly anticipating an era of Thatcher-style reforms from Ms Merkel.

Ms Merkel was never going to be a Thatcher. She proposed to raise VAT by two per cent to fund tax cuts elsewhere. Lady Thatcher let Sir Geoffrey Howe double it. In any case the only reason there was an election this year was that Chancellor Schroder's own labour market reforms stuck in the craw of his party's traditional voters.

To a great extent, German share prices have been reflecting the revival of German industry and its remarkable success in coping with globalisation. Germany regained its position as the world's biggest exporter last year - beating China, that is. That was not done by fighting bra wars Italian-style, or by confronting the unions headon like Lady Thatcher.

Professor Andrew Clare, Legal & General's consultant financial economist, points to German companies who have got on with their own reforms without waiting for the politicians. Mostly, their unions struck the best deal they could without coming out on strike.

They started with the most productive workers in the world - per hour. The trick was, and is, to persuade them to work more hours. Last year Siemens got 4,000 of its people to work 40 hours a week instead of 35 without extra pay, rather than have their output shifted to Hungary. Daimler/Chrysler actually combined longer hours with a pay cut by promising no redundancies until 2012.

When a private equity owner of Grohe, a maker of high-grade bathroom fittings, threatened to sack 3,200 workers and make the stuff in China, the IG Metall union hired consultants and came up with its own plan whereby productivity in Germany would be raised by 30 per cent.

That still cost 1,000 jobs, but the deal ensured the victims 80 per cent of their pay for a year and re-training.

None of this makes people happy, let alone secure, confident consumers. It generates more profits than jobs - so did Lady Thatcher's free labour market for more than a decade.

But it does make the Germans competitors to reckon with.