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Germany’s Economic Fate is Interlinked with Europe

BLOG - 5 June 2020

After months in the shadow, the European Union is finally back at the forefront. In order to allow the European economy to bounce back, the European Commission presented a recovery plan of 750 billion euros. An unprecedented proposal that could not have emerged without the support of the German Chancellor, Angela Merkel. What does this "European turn" for Germany imply and how to make this recovery plan coincide with the priority given by Germany to climate protection? Three questions to Roderick Kefferpütz, Director of the "Study and Strategy" unit of the Bade-Wurtemberg Minister-President. 

The proposal by the German Chancellor and the French President in favor of a European recovery plan signals a turning point in German European policy. Traditional ally of the "frugal'' states, Germany is standing out today to defend a truly European solidarity. Are we witnessing the assertion of a new political constellation in Europe?

The coronavirus has painfully laid bare two fundamental European features: Deep economic integration and geopolitical vulnerability. As production lines stood still in Italy and Spain, supply chains were disrupted, forcing German factories to shut down. Europe is now facing the biggest recession in its post-war history. Simultaneously, as the pandemic hit Europe, national governments engaged in political distancing. Hoarding, not helping, was their initial strategy; export bans on medical equipment were placed against EU neighbours and Italy’s activation of the European Civil Protection Mechanism was initially left unanswered. China and Russia were quick to exploit this situation. 

This historic moment revealed how quickly European supply chains can be interrupted and how quickly Europe can turn into a geopolitical chessboard upon which great powers, such as China, play their hegemonic moves. It is in this context – staring "into an abyss" as Commission President von der Leyen acknowledged – that Chancellor Merkel and Président Macron agreed on a European Recovery Plan. 

For Germany this seems to be a radical break away from its austerity fixation. But this break isn’t just about European solidarity; it’s also about German national interest. Germany has no interest in letting China profit geopolitically from this situation, as it did in the Great Recession 2007-2009 by, for example, letting it buy up strategic European infrastructure assets and deepening economic ties with EU Member States. Europe cannot become a blow-out sale for great powers.

Europe cannot become a blow-out sale for great powers.

Secondly, Germany’s economy won’t completely recover from the Coronavirus shock if European supply chains don’t restart. Germany’s economic fate is interlinked with Europe. Germany alone already accounts for more than 50 per cent of all public money that has been mobilized into economic rescue packages.

The European Recovery Plan is therefore also, to some degree, a European extension of Germany’s national rescue package. 

In this context, I would be careful with marking the European Recovery Plan as a fundamental German shift, or the beginning of a new political constellation in Europe. Germany has had its way with austerity against the South of Europe and has pushed its way on refugees against the East of Europe. Whether it will muster the necessary political will and capital to take on the North of Europe when it comes to the recovery package, remains to be seen. 

The European Commission President, Ursula von der Leyen, has promised a "massive" stimulus plan and announced on Wednesday, May 27 2020 that the Commission will spend 750 billion euros to get the continent out of this unprecedented recession. How was this announcement received by the different political forces in Germany? 

The biggest challenge for Angela Merkel lies within her own political family. The CDU/CSU seems divided on the issue. Several notable CDU/CSU spokespersons have already criticised the stimulus plan and supported Chancellor Kurz and the "frugal four". The liberal FDP, traditionally allies of the conservatives, have already expressed their extreme disagreement with the plan, as of course has the far-right Alternative für Deutschland. That leaves the Greens as one of the only opposition parties in the German Bundestag supporting the fundamental direction in which the European stimulus plan goes. In this context, it lends credence to an old quote from The Economist: "The remaining believers in a European vision are mostly Greens – along with the last bastion of the Europhile centre-right, Germany’s CDU."

The European recovery plan requires that Member states present an investment and reform plan compatible with the political priorities of the Commission: the "Green Deal", the green transition and a greater European sovereignty. Which concrete projects could bring a greener, stronger Europe for tomorrow?

Without a doubt the investment and reform plan must future-proof Europe’s economy by making it more climate-friendly, digitalized and competitive in the long-term. However, the stimulus plan also needs to have an economic effect right now, while the going is tough. While building more wind farms, for example, might have an effect a couple of years down the line, it might not do much to ease the economic situation at this moment. For now, three general policy proposals come to mind. 

First, retrofitting. Europe’s public building stock should be systematically upgraded. Making public buildings more energy efficient would boost the construction and efficiency industry as well as their supply chains, in addition to helping the climate and saving taxpayers money on energy bills. The same holds true for the public car fleet. Upgrading the public car fleet to electric and hybrid cars could support Europe’s car industry as would an ecologically-oriented cash-for-clunkers scheme. 

Europe should consider putting into place a massive reshoring programme, providing companies with financial support if they wish to relocate to the EU.

Second, a scrappage programme for old, non-digital and polluting machinery could be considered. Many European factories still work with old, non-industry 4.0 machines.Providing financial support for their replacement with high-tech industry 4.0 machines that have a better CO2 balance, would help to digitalise European industry and make it more climate-friendly. Simultaneously, it would support the high-tech machinery sector. 
 
Last but not least, Europe should consider putting into place a massive reshoring programme, providing companies with financial support if they wish to relocate to the EU. The Coronavirus pandemic is redrawing global supply chains and a competition over the global economy is taking place. Japan has already earmarked $2.2 billion of its stimulus package to support Japanese manufacturers shifting production out of China. The EU could do the same offering financial incentives to win European manufacturers back to the old continent or helping EU manufacturers to diversify their supply chains and increase resilience. 
 

 

Copyright: Odd ANDERSEN / AFP / POOL

 

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