More than Trade Policy: U.S. and German Responses to the New Global Economy
Professor Marcel Fratzscher, the president of DIW Berlin—a leading European research institute—and one of Germany’s top economists, spoke at a recent AICGS lunch event on “More than Trade Policy: U.S. and German Responses to the New Global Economy.” Prof. Fratzscher’s main argument was that political polarization and social dissatisfaction in both the United States and Germany can principally be attributed to rising wealth and income inequality. Despite their differing economic models, a close examination of the two countries’ situations reveals considerable similarities.
Despite high levels of overall growth and low unemployment in Germany and the United States, the successes of these two economies has not been experienced equally by their citizens. Urban centers have done better than small towns, and in Germany there is a divide not only between the richer West and poorer East but even more between the South and the North. In both poorer areas there is a stronger presence of left-wing (the Left Party) and right-wing (the Alternative for Germany) populist parties.
In terms of inequality, Germany is more like the United States in this regard than one might typically think, he argued. Germany has the second-highest level of wealth inequality in Europe behind the United Kingdom, with 40 percent of Germans holding no net wealth. In both Germany and the United States, there is a concentration of wealth in families through inheritance. Fratzscher also noted that Germany has a larger low-wage sector (centered in the services sector) than the United States, which is not often understood.
Inequality has two main drivers: hyper-globalization and technological change.
Prof. Fratzscher asserted that this inequality has two main drivers: hyper-globalization and technological change. Globalization has led to market concentration and a greater divide between winners and losers. In the future, Germany will also be more susceptible to technological change than the United States because many jobs in Germany, such as those in the automotive industry, can be easily automated.
Instead of investments in education the world has seen three common policy responses: populism, protectionism, and paralysis.
The most important counterweight to globalization, technological change, and the inequality that comes with these phenomena is education, said Fratzscher. But instead of investments in education the world has seen three common policy responses: populism, protectionism, and paralysis. In Germany populism takes on an anti-EU flavor, while there is increased protectionism in the form of picking industrial winners and restrictions on Chinese investment. Paralysis takes the form of a lack of real structural reform in Germany, for example in competition and tax policy.
The best policy responses for Germany would include reinvigorating the World Trade Organization and bilateral trade deals like the Transatlantic Trade and Investment Partnership, a more active competition policy, and a more dynamic welfare state that enables rather than appeases people who need help to take part in today’s global economy.
To close, Professor Fratzscher noted that it is up to Europe to decide whether there will be a G2 world of the U.S. and China or whether the EU will come to the table as a leader of a G3. For Europe to step up, Germany will need to become more comfortable sacrificing some sovereignty in the short term for a better long-term protection of its interests.