Stay informed with free updates
Simply sign up to the German economy myFT Digest — delivered directly to your inbox.
The writer is a member of the executive board of Bertelsmann Stiftung
Mario Draghi’s recent report on European competitiveness has sounded alarm bells across the continent, particularly in Germany. The former European Central Bank president tells it as it is: stagnating productivity, lagging digital innovation, an ageing population, a shrinking workforce and the double load of digital and green transitions put the European model at risk.
Gone are the days when Germans could consider bad economic news from Europe as other people’s problems. The continent’s once unchallenged industrial leader is in deep trouble — so much so that some neighbours now, only half-jokingly, talk about it as a “failed state” where the trains don’t run and 10-year-olds can’t read. Not only does Germany’s image abroad need improving, the country also needs to rethink its growth model and is best advised to do so in co-operation with fellow Europeans. This is why the first and loudest political reactions from German policymakers on Draghi’s magnum opus miss the point.
The report offers a compelling case for a coherent industrial policy. Yet few in Berlin have engaged with the question of how to cure the EU’s weaknesses, particularly those of its largest economy. Rather than starting to think about what a new economic strategy for the country and the continent would look like, most have stayed in their comfort zones: liberal finance minister Christian Lindner or Friedrich Merz, the Christian-Democrat opposition leader, rejected the report because it devotes a few paragraphs to the raising of new EU debt.
Germany’s economy is deeply integrated with the European single market, with more than half of its exports destined for other EU countries. The country’s key sectors — including automobiles, machinery and chemicals — rely on the single market’s harmonised regulations. The customs union simplifies trade and the EU’s regulatory power is also a competitive advantage. German companies have benefited from the euro’s stability, which allows long-term planning without the risk of currency fluctuations.
For decades, German prosperity was built on export-driven growth, with a skilled workforce, strong innovation system and efficient infrastructure underpinning its success as a world leader in manufacturing. Today, however, the reliance on traditional industries leaves Germany vulnerable. In other countries digital innovation drives growth, but German companies failed to grasp the potential of new technologies, including EVs, when they still had a head-start.
The Federation of German Industries (BDI) estimates that Germany needs to invest €1.4tn by 2030 to strengthen its industrial base and stay competitive in the global market. The BDI warns that 20 per cent of Germany’s industrial value creation is at risk — particularly in industries such as automotive, chemicals and energy-intensive sectors including coking plants and mineral oil processing — unless high energy costs, labour shortages, excessive bureaucracy and under-investment in critical infrastructure (notably transport and digital networks) are addressed. Indeed, without reform and investment, Germany risks further deindustrialisation and the decline of the small and medium-sized enterprises that form the backbone of its economy.
It needs major investment in 5G networks, broadband and digital platforms to remain competitive. The country also falls short on security, both in terms of conventional defence spending and the ability to fend off hybrid threats. Housing, transport, education and the health system are equally pressing issues that undermine the credibility of mainstream politicians at both the national and regional levels, playing into the hands of populists.
Many in Germany and other northern European countries still assume that an EU industrial strategy would amount to them having to support the rest of the bloc. But that gets things the wrong way round: Europe has the opportunity to reassert itself in the digital sphere, master its green transition and innovate more. Looked at in that light, Germany or the Netherlands, say, would gain as much they give from a new industrial strategy.
But this also requires both the European Commission and other member states not to treat industrial policy as a vehicle for redistribution by stealth. Instead they should be serious about building on strengths and enhancing flexibility for the benefit of the continent as a whole. Draghi’s report offers a blueprint — it’s up to everyone, including Germany, to seize the opportunity.
Read the full article here