The German Industry Strategy 2030: Inconsistent and Dangerous!
Andreas Freytag is a Professor of Economics at the Friedrich-Schiller-University Jena and Honorary Professor at the University of Stellenbosch.
Prof. Dr. Freytag obtained his diploma from the University of Kiel, his doctorate as well his Habilitation from the University of Cologne. Prior to his appointment in Jena, he worked at the Kiel Institute for World Economics, the University of Cologne, Cambridge University (as Visiting Scholar), and the Eesti Pank, Tallinn, Estonia. He has been consultant for the EU-Commission, the OECD, the IMF and various public and private clients.
In March, the German Federal Minister for Economic Affairs and Energy, Peter Altmaier, presented the so-called National Industry Strategy 2030: Strategic guidelines for a German and European industrial policy (henceforth called Strategy 2030) as a rational response to the eminently important question of how to maintain prosperity in a dynamically changing globalized world.
The Strategy 2030 is an attempt to identify priorities for Germany and for Europe. It has the following distinctive objectives:
- The share of manufacturing in GDP should increase to 25 percent in Germany and 20 percent in the European Union. The Ministry announced it will fight for every industry job in Germany whether “old” or “new,” whether “dirty” or “clean.” The question remains how this objective should be achieved; the Ministry excludes tariffs as a tool. The second question is: why 25 percent? Why not 27 percent?
- Value added chains should be entirely within the European Union, which in turn implies that European companies should start a huge process of in-sourcing and on-shoring. The costs of such a policy for European producers, foreign owners of factories of production, as well as consumers all over the world can only be estimated—but they would be substantial.
- The government is determined to create national and European champions. For this purpose, European competition law should be changed so that mergers can be much easier. The assumption that only huge companies survive in global competition is proven wrong by hundreds of thousands of Mittelstand companies in Germany and Europe on a daily basis.
- The state should prevent take-overs of European firms by foreign investors if these are state-owned or heavily subsidized. This suggestion is directed at Chinese investors who are often accused of wanting to get hold of technologies in order to gain a competitive edge over European or other Western companies. Although this claim seems credible, such investment restrictions require much care and oversight. In particular, the suggestion to nationalize firms in such cases must be viewed very critically.
- Finally, the Ministry advocates a targeted R&D policy. There is already a quite well-funded set of domestic and European R&D policies, so this seems to be the most realistic, but also redundant, objective.
Many observers have taken a very critical stance, among them former government official Jeromin Zettelmeyer from the Peterson Institute or authors from the Kiel Institute of World Economics. Their critique is persuasive and balanced. Others are much more outspoken—there has even been the claim that the suggested policy is closer to the economic policy model of the former East Germany than to the West German model of “Social Market Economy.”
Although this claim is exaggerated, the Strategy 2030 is a novelty in German economic policy. Never in the Federal Republic’s history has the German Federal Minister for Economic Affairs so openly expressed a desire to restrict competition and to nationalize private companies. Against this background and despite the reference to Ludwig Erhard (the Federal Republic’s founding economics minister) in the foreword, the Strategy 2030 marks quite a substantial step away from policy concepts of the past, at least in theory. It places a significant weight on the state as the main actor responsible for industries’ success and failure.
Both economic reasoning and political economy arguments show that the government’s capacity to successfully steer the economy is overestimated by the Strategy 2030. There is an assumption in the report that the government can know the right size for each industrial sector, the best-qualified participants in value added chains, the optimal size of companies, or important technologies of the future. The Hayekian argument that central government agencies are regularly unable to process the enormous amount of market-generated information (“pretense of knowledge”) must not be forgotten. In addition to the economic perspective, it has to be kept in kind that initiatives such as the Strategy 2030 immediately invite rent-seeking actors. For instance, any deviation from the competition principle will invite new firms and sectors demanding the same treatment. The well-organized German rent-seeking society may already be preparing for the looming feast.
Although the Chinese challenge must not be underestimated—not only with respect to intellectual property—there are much more promising policies to react to this and other challenges of the world economy. Germany’s infrastructure of all kinds needs a bold improvement. Unfortunately, the structure of public spending is biased toward the past as it focuses on generous old-age packages and ineffective but expensive social spending instead of on infrastructure; this must be reversed. The bureaucratic burdens have grown in recent years despite much political lip service. Last but not least on the list, there are still many shortcomings in research and education policy. On the international level, Germany should focus on a reform of the World Trade Organization and do everything to maintain and strengthen multilateralism. The Strategy 2030 is obviously doing the opposite; Zettelmeyer quite correctly calls it economic nationalism.
In reaction to the sharp criticisms, the Minister has claimed that he wanted to initiate an open discussion. And indeed, one may hope that this discussion quickly buries the Strategy 2030. Instead, a rejuvenation of the “Social Market Economy” would be the best answer to Chinese and other challenges.