Christian Democratic Union (CDU) leader and likely future chancellor Friedrich Merz is sidling cautiously up to the debt brake issue that just demolished the traffic light coalition. At an event last week, Merz signalled his willingness to consider modifying the brake to permit spending on infrastructure. Germany is certainly in dire need of infrastructure spending. Half of Intercity trains run late as Deutsche Bahn works through decades of deferred maintenance. Public offices have not yet entered the digital age, with online services common in other EU states absent in the Bundesrepublik. Fiber optic connections and high-speed cell service are a distant dream for most Germans. What perky online start-up would choose Germany, where an outdated internet hook-up can be stalled for weeks or months by protracted bureaucratic snafus? With his studied ignorance of an obscure figure known to historians as “Frau Merkel,” Merz evades any responsibility for the previous CDU governments that left Germany in such a parlous state.
Unfortunately for Germany, even a comprehensive upgrade to its physical and digital infrastructure will not unlock future prosperity for an economy still far too dependent on the export of machine tools and automobiles. Merz may improve the transport and communications hardware available to German businesses but he shows no sign of addressing the obsolete software at the heart of Germany Inc. As detailed by Wolfgang Münchau in his dispiriting new book Kaput: The End of the German Miracle, a tight constellation of captive banks, large corporations and German politicians remains committed to huge export surpluses and a corporatist control of investment. There is no German venture capital sector able to fund innovative start-ups in emerging sectors. Corporate investment remains devoted to improving the products of prior industrial revolutions. Rather than invest in hybrids or EVs, Volkswagen updated its diesels with illicit programming ensuring they were clean only on the emissions test stand. The multi-billion dollar alliance with EV maker Rivian is an implicit confession that the largest car maker in Europe doesn’t have a clue how to produce the coming generation of computers on wheels.
Is there any hope of upgrading the software running Germany Inc.? The unholy symbiosis between German car makers, banks and their political partners suggests a preference for easy protection over risky innovation. The surge in cheap Chinese EV imports prompted a new EU tariff designed to give European car makers room to catch up, but will do little to preserve the precious export markets at the core of Germany’s economic success. Neither protection nor corporatism will change an underlying faith that Germany’s strength still lies in incremental improvements to legacy engineering. The near-death experience that shook American car makers out of their torpor came after a massive invasion of their home market by advanced Japanese and Korean models. If the EV tariffs are any indication, the EU will police the walls of the Single Market to forestall a similar reckoning from reforming German business.
Other than blunt protectionism, what could the EU do to save its largest economy from slow decline? A unified capital market across the Eurozone might offer German entrepreneurs the support German banks do not. A reinvigorated competition policy could compel automakers to make the painful transition to the hybrid/EV world by limiting state subsidies and tariff protections. Yet an integrated capital market is still beyond the grasp of EU leaders, and a prior commitment to competition has been eclipsed by emerging neo-mercantilism between trade blocs. Protection might preserve the internal EU market for German firms, but at the expense of their world markets. It is difficult to imagine any robust growth in car exports to China and the US amid a trade war. While Peugeot can nestle comfortably inside the Single Market with its limited sales to China and the US, German car makers will be crippled financially by the loss of these markets. The EU’s core competencies remain regulation and subsidy. It simply does not have the tools to revamp its largest economy and biggest budget contributor.
The new sectors that will fuel future prosperity require both the infrastructural hardware and entrepreneurial software that Germany lacks. Reforming the debt brake may unlock the funds needed to upgrade infrastructure, but money alone will not change a corporate culture allergic to disruptive innovation. The US Air Force poured money into microelectronics so it could put guidance computers atop ICBMs. Innovators repurposed microprocessors so that teenagers could one day update their Instagram pages, and cars could update their control systems wirelessly. The serendipitous economic developments that follow from government investment require a corporate culture that embraces novelty and tolerates risk. Germany will not thrive if it cannot both digitise its economy and offer its technically-minded youth a chance to launch enterprises its bankers and politicians have never dreamed of.
The world’s economic blocs ready to choke the flood of German exports