Germany’s choice

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Europe is at a hinge moment, but so is Germany. And it is hard for the EU to go anywhere without its largest economy consenting to go in the same direction. Hard though not impossible, as shown by last week’s imposition of tariffs on Chinese electric vehicle imports, in the face of Berlin’s opposition.

Still, so long as Germany does not know what it wants, the EU will struggle to make any big steps forward. (That’s why my hope lies in smaller coalitions of the willing — see Other readables below.) And Germany’s disorientation is striking. The country’s inability to decide what it would like its future to be is one reason why a government that promised so much renewal when elected three years ago is now widely panned as dysfunctional. The sense of drift must surely also be one reason behind the country’s protracted recession.

Today I report on two events last week that, together, perfectly illustrate the rift in German public and elite opinion about where the country (and Europe) needs to turn, economically but also by extension geopolitically.

As I mentioned last week, I spent a few days at the Berlin Global Dialogue, an impressive gathering of German, European and global business and political leaders. French President Emmanuel Macron attended. So did ministers from the German government and many other countries.

Among the many people I chatted with was UniCredit economist Erik Nielsen, whose latest Sunday note gives a nice — and upbeat — impression of the event. The theme of the conference was to “(re-)establish common ground”, “focus on areas where co-operation is possible — rather than not co-operating at all”, and “bridge [varying local] perspectives”. Nielsen took away a hint of convergence of Franco-German differences. My much less optimistic take is that “bridging differences” is code for a yearning to return to a less geopolitical world — or at least a world where geopolitics does not get in the way of business.

Geopolitics or anything else, really. In addition to worries about losing the Chinese market, my conversations on the sidelines were rife with rebelliousness against the burdens businesses feel are placed on them in the name of decarbonisation and other good causes. Deregulation, simplification, and generally for government authorities (at both national and EU level) to get out of the way, were the leitmotifs. And Berlin practises what it preaches: the government is passing a “growth initiative” package of structural reforms it hopes will raise the long-term growth rate by 0.5 percentage points (though independent economists are less optimistic).

I heard many calls for “technological neutrality”. That is to say: decarbonisation, yes, but don’t favour any particular technology. It is hard not to see this in the context of Germany’s struggle with the shift to electric cars and rearguard action to carve out a future for its internal combustion engine (ICE) manufacturing. I found telling German finance minister Christian Lindner’s suggestion to his Saudi counterpart Mohammed al-Jadaan (available on video here) that cheap Saudi energy could be used to produce synthetic fuels “which could make the transformation [of Germany’s] mobility sector much easier”.

So I left Berlin with the strong impression that much of Germany’s elite has taken fright from the future and is now hunkering down in defence of how the country has always done things. But I heard quite different tones from the other end of Germany, where on the same day as the Berlin Global Dialogue, the European Central Bank’s Isabel Schnabel gave the Walter Eucken lecture at the Eucken Institut in Freiburg, the high temple of German ordoliberalism.

Schnabel’s very good speech was billed as about escaping stagnation in the Eurozone. But read it closely, and the strongest messages seem to me to be directed at Germany, warning the country against the resistance to change I detected in Berlin. (Schnabel has form on knocking down German shibboleths in symbolic locations: she once gave a spirited defence of the ECB in Karlsruhe, the seat of the German Constitutional Court, whose dislike for the central bank is well known.) Below I reproduce some of her charts.

First, from being the EU’s economic locomotive Germany has become a drag on European growth. One of Schnabel’s charts displays the post-pandemic recovery in the Eurozone as a whole next to the performance of the Eurozone excluding Germany. The result is uncomfortable for the bloc’s biggest economy: it is now clearly part of the problem, not the solution.

This is not just because Germany is specialised in industry, which understandably is facing the double headwinds of high interest rates and high energy prices. Even looking only at industrial production, Germany’s post-2021 performance is among the worst in the Eurozone.

In capital goods specifically, Germany produces less today than at the end of 2021, unlike France, Italy, Spain and the Netherlands, Schnabel also shows. (She suggests this heterogeneity means that her and her colleagues’ tight monetary policy cannot be faulted for industrial weakness. I’m unpersuaded: high central bank interest rates may not explain that large variation in industrial performance across euro countries — but they have surely contributed to the aggregate industrial contraction in the Eurozone, which is significant if not as severe as that in Germany.)

Instead, it turns out that the German export-driven industrial boom in the first two decades of this century was always more contingent than its promoters admit. We all know that as China has gained global market share, rich countries have seen theirs shrink. But Schnabel points out that Europe’s exports (dominated by Germany) would have performed much worse had it not been particularly exposed to the strongest-growing globally traded markets and sectors:

In other words, the export boom reflected a fortunate reliance on a propitious composition of exporting sectors and trading partners. Had Europe’s industrial base and trading relationships been the same as the US’s, things would have looked much worse — as indeed they have done since 2019:

If there is another way to politely say “your growth model is dead, please move on rather than try to revive a corpse”, I cannot think of one. Schnabel’s coup de grâce is to draw attention to Chinese investment in car shipment capacity — which is “projected to raise the number of electric vehicles available for exports by 1.7 million annually by 2026 . . . To put this in perspective, the total number of electric vehicles sold across the EU in 2023 was 2.5 million.”

Time is running out, then, to complete the massive shift to EVs in Europe’s own capacity. As it turns out, there are some innovations the EU is world-beating at — those in green tech. Here is the last Schnabel chart I want to share:

In terms of global export market value share, Schnabel’s speech documents that the Eurozone is actually still well ahead of China in electric and hybrid vehicles (30 against 16 per cent), and has gained ground (from 18 per cent in 2017) even as it has fallen back in ICE cars (from 30 to 24 per cent).

Two visions of where to go, then. One, willing to make a clean break with the past — and risk a break with some traditional partners; the other, hoping to salvage and restore a long-struggling economic model including by isolating business from geopolitics. I personally have little faith in the realism of the second strategy. But either way, much is going to depend on how Germany makes up its mind.

Other readables