Germany’s geo-economic challenge

Germany is an economic powerhouse. It got this far by undergoing two successive economic phases. The first, following the end of the Second World War, was inward-looking, defined by reconstruction and industrial consolidation. Benefitting from the political and military protection of the United States, the West German economy experienced a period of rapid development known as the Wirtschaftswunder, while ‘Deutschland AG’ (Germany, Inc.) – a system of informal coordination between major banks, insurance companies and industrial conglomerates – limited foreign competition and allowed the further consolidation of German industry.

Towards the end of the Cold War, Germany entered its second economic phase. Benefitting immensely from economic and financial globalisation, it turned outwards. Its companies internationalised, expanding into rapidly growing foreign markets. This second phase has been categorised by hard-nosed commercial realpolitik in which the US took care of geopolitics, providing Germany with the freedom to focus exclusively on economic matters.

This approach, however, is no longer tenable. The political and economic tectonics on which Germany built its prosperity are shifting. In the words of Robert Kagan, ‘the jungle is growing back’. Great power politics has returned. The international order is breaking down, and the United States and China are locked in a conflict over its reconfiguration. The WTO is facing an existential crisis, protectionism and economic sabre-rattling are on the rise, and NATO and the transatlantic relationship, under President Trump, are being questioned.

In this new world order, business-as-usual is not an option. Germany cannot afford to stand on the sidelines and simply pursue its own commercial interests. For the sake of Europe, indeed of the liberal international order, what is now needed is a third economic phase. Geostrategic considerations must be brought into German economic policy.

This will be a steep learning curve. German politicians have repeatedly cautioned against letting economic policy be determined by geopolitical factors. Some, such as former German President Horst Köhler, have even gone so far as to advocate the use of geopolitics to further economic interests. The long-held German policy of Wandel durch Handel (change through trade) vis-à-vis countries such as Russia and China is a rare case of an economic policy claimed to pursue geostrategic ends. However, it has turned out to be a mere fig leaf for chasing commercial interests as the policy has not led to greater liberalisation and democratisation in those countries.

This is not to say that Germany should introduce a policy of large-scale statist interference in the economy, nor that it should politicise every economic matter. Rather that in the context of a new international order, geopolitical considerations must feature more strongly in its economic policy. It must learn to pursue economic statecraft, not just commercial economic policy.

This will not be easy. Germany certainly has sufficient economic influence to pursue political ends, but it has in the past lacked the geostrategic culture and the political will to do so. As Europe’s economic hegemon, it has pursued a dogmatic economic policy paying a geopolitical price. Its tough handling of Greece’s debt problems, alienated Europe’s South and invited foreign investors, primarily China, to increase their economic – and thereby political – influence in the region. Its dogged defence of the Nord Stream 2 pipeline, which Chancellor Merkel has labelled a purely economic project, has alienated its Eastern neighbours. And Germany’s national solo effort discussing a possible EU trade deal with the US in spite of the fact that trade is an EU competence, undermined European unity.

Simultaneously, Berlin has allowed China to buy up German companies with strategically relevant technologies and is – unlike the US and Australia – letting China’s telecoms giant Huawei build Germany’s future 5G telecommunications network, without considering possible geostrategic consequence.

There is evidence, however, that the tide is slowly turning. While the United States formerly had to warn Germany about foreign acquisitions by China, as in the case of the German semiconductor company Aixtron, Germany is now starting to stand on its own two feet. In July, Minister for Economic Affairs Peter Altmaier acted decisively to block the acquisition of German electricity grid operator 50Hertz by China’s State Grid on national security grounds. And in August, the German government vetoed a possible acquisition of machine tool manufacturer Leifeld Metal Spinning by a Chinese investor, again citing national security concerns.

Other moves include advocating a European foreign investment screening mechanism and Foreign Minister Heiko Maas’ support for the establishment of a European payment system as an alternative to US-backed SWIFT. But there is still a long way to go. Germany has allowed geopolitical competitors such as Russia and China to build influence in key areas of its economy and has alienated its EU partners allowing these same competitors to increase their geo-economic influence within the European Union. By failing to include geopolitical considerations in its economic policy, Berlin has put itself and Europe at a disadvantage. Economically, Germany might be a giant but geo-economically it’s a sleeping one. It’s time for it to wake up.

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