Germany – The End of Innocence

Our technological leadership is gradually disappearing. This threatens our competitiveness. According to Adam Posen, Head of the Peterson Institute in Washington, Germany is moving down the value chain, not up. As far as the digitization of industry or artificial intelligence is concerned, Germany is already behind. It feels like we are witnessing the end of a technological era that we profoundly shaped, and are entering a new one in which we no longer have a role to play.

When China sneezes, we get chills

Second, the international trading order is breaking down. We are the main beneficiaries of today’s trading system. Our companies are present on all continents and consider the global market as their natural playground. The 30 largest German companies generate 80% of their revenues abroad. We are the world's export champions and we are proud of it. But this propensity to export makes us disproportionately dependent on the international situation. Millions of industrial jobs in Germany depend on the vitality of international trade. When the Chinese economy sneezes, we get chills.

Rising protectionism and the trade war strike at the heart of the German business model. Value chains are under pressure and are starting to decouple. Trade flows are changing and the WTO is in crisis. Ray Dalio, founder of the Bridgewater Associates fund, talks about a global paradigm shift. "We are probably witnessing the end of globalization", writes Neil Shearing, Chief Economist of Capital Economics, in a note to his clients. The world is being divided into rival economic blocs. The international trade order is gradually dissolving like sugar in water, putting the German export-led growth model into crisis.

The spirit of the open market is dead

Last but not least, the economy is becoming political. The liberal spirit of open, global markets, which so strongly marked the turn of the 2000s, is dead today. The global economy has entered a geopolitical phase. The spheres of security and the economy are increasingly linked; it’s no longer about economics, but geo-economics. That’s the field where the US and China are competing over hegemony.

We are witnessing "the logic of conflict, translated in the grammar of commerce" (Luttwak). Other rules and means apply there. It’s no longer about troops, artillery and military manoeuvres, but about commercial influence, technological domination, hostile corporate takeovers, currency wars and raw material control. US export controls on high-tech goods to China, the Chinese One Belt One Road initiative, possible US sanctions against the Nord Stream 2 project, all these measures pursue obvious geostrategic interests.

The new normality

Even today, we still have difficulty recognizing that it is in our interest to secure maritime routes, starting with the Strait of Hormuz. We need a shift in strategic culture, integrating economic policy into a more global geopolitical rationale. It is time for Germany to lose its innocence.

Germany is at the centre of major political and economic upheavals. It is a country whose companies remain traditional and mechanical in the digital age. It is a country dependent on exports at a time of contraction in international trade, and a country that believes in the teachings of pure economic theory, while it finds itself in the middle of a new geo-economic Cold War. A country that, by clinging to its principles of budgetary discipline, is heading for ruin, as Annalena Baerbock, Co-President of the Greens, put it.

The upcoming recession is signaling a more serious structural crisis. It reminds us of the dialogue in Hemingway’s novel Fiesta: "How did you go bankrupt? - Two ways. Gradually, then suddenly". Simple fiscal stimulus measures won’t solve this problem. We need long-term investments and an economic policy that not only combats the negative symptoms of our model, but lays the economic foundations for tomorrow's wealth.

By courtesy of the Zentrum Liberale Modern (published on 18/09/2019)

Copyright : Andrew CABALLERO-REYNOLDS / AFP