A new era for Europe’s most powerful economy. Sixteen years of a government helmed by Angela
Merkel is out - making way for a new, as of yet unknown administration. While her tenure was
defined by a steady hand amidst various crises, many agree a bolder economic transformation is
overdue. And that’s why the outcome of the election matters for the world.
When Germany says goodbye to the outgoing government, the challenges to its economy
will be carried over into the next one. There’s a lot the incoming government has to deal with
in order for Germany to hold on to its place among the world’s leading economies.
You know, I can I could list fifty five different things that would have to be done
There is still the recovery from the pandemic…. Population aging, digitalization,
the environmental crisis, ...future relations with China...
We’re not going to get to all of them. But here are some of the biggest.
In many ways some of these challenges are the kind
facing all of us. Like the one where we will continue hurtling towards a catastrophic end
if we don’t immediately cut back on our greenhouse gas emissions.
The effects of the climate crisis hit Germany particularly hard just a few months ago,
when unseasonably heavy rains and flooding killed more than 180 people, destroyed entire towns and
wrought tens of billions of euros in damage. The catastrophe further fueled concerns that,
in the last years, too little had been done for the climate...too slowly
Germany certainly was not a climate leader for the last decade under Merkel,
but in a sense, also we may be about to see a restart, mean, the the news notably of the
decision by the German Constitutional Court that demands action by the German government,
the introduction of a national carbon tax regime that is comprehensive and covers all areas
of German society last year, is very big news. And it is the backdrop to the EU's decisions to
attempt the same thing at the European level. So Germany is acting as a conceptual leader.
They're a pacesetter. But is it enough to address, you know, the reality of the climate crisis?
Good question. Especially given a trend that should worry Germany’s next government.
This year, Germany is expected to record its biggest rise in greenhouse
gas emission since 1990. Last year, the pandemic brought
public life to a standstill... the upshot of which is that Germany met its emission
reduction targets in 2020 compared to the baseline year of 1990. As the economy reopened THIS year,
the 2021 goal will be missed...making it harder to achieve an even bigger cutback in 2030.
The goal is for the country to become climate neutral by 2045.
While it’s generally trying to head into the right direction, it needs to speed up...as
well as integrate climate change adaptation into the economy…and that requires investing
in resilient infrastructure, housing, transport and industry. Analysts warn that not doing so
will cost Germany much more in the end. The question is to what degree we can manage
changes and successfully transform the economy or whether we'll be very unhappy
with a situation where economic prosperity is at stake or where climate change is having
very negative consequences for the economy because it's an unmanaged transformation.
Now in transforming the economy of a manufacturing superpower - an
INDUSTRY makeover will be key. When it comes to the challenge of
modernizing industry, there’s one German sector where that’s particularly urgent.
The automotive industry - the German economy’s crown jewel - is largely considered to have
been slow to adapt to low-emissions technology like electric vehicles….but
in the last years, the outgoing government has pushed billions in incentives and subsidies to
help kick electromobility into high gear. Still, years of dithering mean others have gotten
there first. In terms of market cap, American electric carmaker Tesla has overtaken the big
automotive players...including Germany’s big three - Volkswagen, Daimler and BMW.
While Germany’s big automakers might be in the position to swing the transition into
an electric future, there’s an entire network of suppliers designed around
gas and diesel engine powered- models that have to transform too.
But transformation comes at a price. One-worst case scenario says that
the shift to electromobility can cost the automotive sector half of its jobs by 2030.
Now remember that goal to become climate neutral by 2045? The transport sector will have to
sink emissions especially dramatically in order for that to happen - about
forty percent within the next decade. So the next government will still have to
grapple with the question of whether to stop the sale of conventional combustion engines
in order to achieve that goal - something that divides political parties and the population.
Now we can’t talk about Germany’s most exported product without zooming out onto
trade itself. To say Germany has done well from globalization is an understatement.
In terms of share of global exports, only the world’s number one and two economies are ahead.
But the new German government will be taking over at a particularly special time for global trade.
Following the protectionism in vogue during the Trump years, the COVID-19 pandemic also
did its part in creating supply bottlenecks and disrupting supply chains - resulting in
shortages in building materials, vital tech parts like semiconductors, plastics, rubber and metals.
Even as trade recovers, a discussion on how to make supply chains more resilient is likely to
continue onto the next administration. What they should not do is really to call for
production reshoring and to call for firms to to bring back production to Germany. Now,
what policymakers could do, for instance, is to sign further trade agreements or to ratify
already-negotiated trade agreements, such as the trade agreement with Canada, the CETA,
or the trade agreement with South American countries. With such trade agreements,
these will lead to decreasing trade costs and diversify their supply chain. This could be a way
to lead to more competitiveness of German firms. But in the post-Merkel era,
eyes will be on arguably the most significant trading relationship this export-heavyweight
has. CHINA is Germany's most important trading partner, with goods traded between the two
countries reaching almost 213 billion euros in 2020. But Germany has been criticised for using
trade as an engagement strategy in the face of Chinese authoritarianism and expansionism.
Germany can offer a vision, but it depends critically on whether other key players are
actually willing to go along with that, because it is not the kind of power that can impose itself.
I mean, how could Germany impose itself on China? I mean, it's an absurd idea,
but it can offer a prospect. It can offer an attractive partnership. And the Chinese have
been only too ready to recognize the potential benefits of that. You cannot in the end, if you
are an export-orientated manufacturing player like Germany, ignore the sheer scale of that market.
At the same time, China is THE key competitor to watch out for
when it comes to digital technologies. For its part, Europe has struggled to keep up.
One other thing that the pandemic laid bare was just how painfully behind Germany is,
when it comes to digitalization. Not what you would expect from a country famed for invention
and innovation. But internet speeds, the digitization of public services,
and the development of digital business models haven’t been fastest here.
According to the Speedtest Global Ranking, Germany isn’t even among the top twenty of countries with
the fastest mobile and broadband speeds.
We will need to invest more in digital infrastructure, but money is not going
to solve all problems here. Again, it's like putting money on the system as it is currently
set up, is not going to necessarily help with the complex decision making. It's not going to
help with the delay in finding consensus and then maybe even going for a suboptimal, uncoordinated
measure. Instead, it's really about changing the system, how we manage this transformation.
It’s not just because of slow internet speeds that things take time in Germany.
It’s the bureaucracy itself. There’s a certain love for rules and processes that
often translates into piles of paperwork to be filled out and transmitted via fax machines.
According to the World Bank, Germany ranks 125th among 190 countries when it comes to the ease of
starting a business. But experts warn that more ambitious targets - say when it comes,
to again, climate change regulations - mean more rules are coming, not fewer.
I expect that there will be more regulations to be put into place. The
government needs to make sure that these regulations don’t disadvantage Mittelstand
businesses, small businesses, new businesses, and at the same time,
they don't create new regulations and on the other hand, create new support programs to
make sure that small businesses are more disciplined. I think it's a huge task.
And finally, the economy isn’t just about industry and the policies that govern them. It’s about
the people too. This country of 83 million is experiencing a pretty key demographic change.
Among all the age-groups here, it’s the 40-59-year-old category that is by
far the largest, at 23.6 million people. The next-largest age group is made up of those 65
years and older, at more than 18 million. This year alone, there will be roughly 150,000
fewer working age residents - that’s according to the country’s federal labor agency.
And to be able to address that shortfall, the government has to do more to expand the pool.
In terms of labor market, Germany must strengthen the immigration of skilled
workers and improve equal opportunities, for instance, through education policy reforms.
And as people age out of the workforce, they have to be supported by public
finances - meaning higher spending on health care and social security.
Now these are just some of the challenges facing Europe’s biggest economy.
But here’s the question. Is Germany’s next government equipped to handle them?
In the end, any kind of transformation will have to be done within the context
of Germany’s consensus-seeking structure - with the new government certain to be a
broad coalition of parties representing very different interests, the issue
is whether it will be able to make bold decisions on the big questions.
I think the biggest single weakness, which is an inability or unwillingness to take risks
in the economy and beyond. The issue for Germany is to
combine the necessary and attractive checks and balances in the German system that has led
this country to be seen as a bulwark for liberal democracy, for stability in a world of horrific
lurches and unpredictability. How do you combine that with
a system that not just allows for but positively encourages and facilitates greater risk taking?
Creating conditions that encourage change for the people is Germany's biggest challenge,
as it faces the big questions to come, both locally and globally.
In any case, change should be unavoidable. But to what degree, and to what effect - will
depend very much on who assumes power, in what’s still Europe’s economic powerhouse. For now.
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