Every time things get bad in Germany, someone suggests an agenda. Federal Economy Minister Katherina Reiche has now endorsed a “2030 Agenda” intended to make the location fit for international competition in the 21st century. This refers to the 2010 Agenda Gerhard Schröderwhich responded to the economic collapse after the turn of the millennium with reforms in social services and the labor market. But Schröder’s reforms may have been the right answer to the challenges of his time: Today the country has other problems.
Gerhard Schröder’s agenda was, at its core, a cost-cutting program. In the 1990s, Germany lost its international competitiveness due to the reunification boom and rising wages. Schröder relaxed protections against dismissals, reduced taxes and cut unemployment benefits. The world market does the rest, whose demand for German machinery and vehicles is almost insatiable, driven by China’s rapid industrialization.
The share of exports to the Chinese market in total exports increased from 3.3 percent in 2007 to 7.5 percent in 2018. German industry produces products that are in international demand. There was progress that lasted for ten years and made Germany an international role model.
The current situation is completely different: German industrial sales markets are closed (as in the US case), cross-subsidised (as in China) or affected by rapid structural changes. According to a study by the German Economic Institute in conjunction with employers, industrial companies stated that Chinese competitors were offering their goods at prices that were “more than 30 percent lower than their own.” Such cost advantages are difficult to explain by more efficient production methods. But what is important is that no amount of ambitious reform policies can offset these cost advantages. Therefore, exports to China fell sharply in the first half of the year.
Growth solves many problems
In other words, the question is whether the German business model can still work when it is no longer possible to make enough money selling vehicles and engines on the global market. The appropriate comparison may not be Germany at the turn of the millennium with its mass unemployment and high wage costs, but the situation in Finland after the end of the Nokia boom. At that time, the company was the world’s largest mobile phone manufacturer and contributed about four percent of the country’s gross domestic product. With the rise of smartphones, Nokia quickly lost market share and the Finnish economy plunged into crisis. The German car industry today is probably in the same situation as Nokia was at that time.
This does not mean that reform is not needed, on the contrary: better infrastructure would help the economy, as would less bureaucracy and more skilled workers. But you can’t just save yourself from a structural crisis. Rather, it will be a matter of state support in the search for new markets and products – through support programs for companies, but also through appropriate social guarantees for employees. Innovation cannot be forced by the state, but it also cannot be forced with a chainsaw.
Because that is also the lesson of the Schröder years: growth does not solve all problems, but many problems do. Deficits in pension funds, unemployment insurance or health insurance can also be caused by the fact that income decreases and expenses increase due to a weak economy. If the economy improves, at least some of the situation will improve itself.
Under the leadership of Gerhard Schröder, Germany transformed itself into an export power, and it was quite difficult. Under Friedrich Merz The country must transform itself into an innovation powerhouse. This – there is so much honesty to do – is much more difficult. And most likely it won’t take months, but years. What’s more important is that we don’t get distracted by false comparisons.
