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Germany – The End of Innocence

Analyses - 15 October 2019

The current recession that is threatening Germany points towards a major structural crisis. For Roderick Kefferpütz, Germany is lagging behind with new technologies, depends heavily on exports and takes a naive stance on the international scene. The German model appears to be "out of date".

These days Germany feels like it is experiencing the final moments of its golden age. The country has never done so well: order books are full, the unemployment rate is at one of its lowest ever levels, and Germany, which is now in its tenth consecutive year of growth, is experiencing its longest economic expansion period since Chancellor Ludwig Erhard. And yet, the economic miracle is coming to an end: economic storm clouds are gathering over the German sky.

This summer, industrial production fell by 5% and exports by 8% compared to last year. The business climate is worsening. More and more companies are using part-time work. Calls for stimulus measures are finding increasing echoes and everyone is talking about the upcoming recession. The term "recession" now appears in the Google search engine with the same frequency as during the 2008 crisis.

But this debate is falling short. Germany is far from being on the threshold of an economic crisis of unknown magnitude and duration. My concern is: Germany is entering a structural crisis. The country is living through a present that will soon become a thing of the past. The economic order from which it has benefited is disappearing. A new economic order is emerging and Germany has yet to find its place in it.

The heart of our industry dates back to the imperial era

First of all, the German economy seems increasingly outdated. The large German companies of the 20th century are weakened. The automotive industry, caught up in the diesel scandal, is failing to produce electric cars on a large scale. ThyssenKrupp, an industrial icon, has just been removed from the DAX, the index that lists the 30 largest German companies, and Deutsche Bank is just a shadow of its former self. Bayer has been in a state of crisis since the takeover of Monsanto has yet again proven to be a case of "stupid German money".

Germany is far from being on the threshold of an economic crisis of unknown magnitude and duration. My concern is: Germany is entering a structural crisis.

The consulting firm EY has published a list of the most dynamic companies on the stock exchange and compared their growth. Conclusion: The German companies are at the bottom of the list. Germany’s core industrial sectors - automobiles, machine tools - are industries from the Kaiser era. Do they have what it takes to compete with the hungry young digital companies from Silicon Valley or Shenzhen?

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

This is the new normal. And it destroys Germany’s understanding of economics. In Germany, economic policy is only considered from a commercial point of view, and not as a means to pursue strategic objectives. Germans think in a mercantilist way and not in a strategic way. They reject mixing economic policy and foreign affairs. When President Horst Köhler said in 2010 that a country the size of Germany, oriented towards foreign trade and largely dependent on it, must be ready to defend its economic interests also via military means, he was forced to resign.

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.

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)



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