Structural Changes: Do Germany and Its Appendix, Lithuania, Have No Future?

“The Chancellor is betting on steel and cars. However, the country needs innovation and disruption, economists demand. In the mean time the ministers for innovation are arguing.

 

The coalition summit on Wednesday evening in the Chancellery didn't produce much concrete news. What the CDU/CSU and SPD were able to agree on, however, was that there should be a "summit" for two struggling economic sectors with the Chancellor and industry representatives.

 

Specifically, the meeting will focus on the steel and automotive industries.

 

The government spokesperson was unable to comment on the scheduling on Thursday. He only said: "We're working on it."

 

Outside the government district, the announcement sparked a mixed response. BMW CEO Oliver Zipse expressed his delight that the auto industry's position was being recognized. "A focus on the industry alone is not enough," criticized Dirk Jandura, president of the German Wholesale Trade Association (BGA). Economists are also following the development with skepticism.

 

The question that troubles them: Is the federal government clinging too tightly to past economic structures and thereby missing out on building new ones?

 

The timing of the summit announcement is no coincidence. Local elections will be held in North Rhine-Westphalia on September 14. According to forecasts, the SPD will lose many seats to the AfD, as it has done previously in other former industrial strongholds. The SPD called for a steel summit at the end of June. At that time, steel manufacturer Arcelor Mittal announced that it would not convert its plants in Germany to climate-friendly technologies because, despite subsidies, it would not be profitable. The Social Democrats want to save jobs, if necessary, through state intervention. The Chancellery initially had little interest in a summit. Now it is set to take place – and another for the auto industry, which is struggling between Trump's tariffs and Chinese competition.

 

"We must create space for new industries."

 

Leading such a focus on steel and cars is a mistake, according to leading economists. They argue that Germany will only be economically successful if politicians allow structural change, focus on future technologies, and do not try to preserve existing structures. "At summits like these, one must always be careful that the new things that move us forward don't get lost," warned Clemens Fuest, President of the Munich Ifo Institute, on Thursday as he presented his institute's growth outlook. The automotive industry's great growth periods are over. The sector will remain economically important, but less so than before. Fuest's appeal: "We must create space for new industries."

 

Achim Wambach argues similarly. "The money from the Climate and Transformation Fund is flowing far too much into companies' production and far too little into their research and development," said the President of the Mannheim Research Center (ZEW) in an interview with the Frankfurter Allgemeine Zeitung. "The traffic light government already made this mistake, and the new government now risks repeating it." The Climate and Transformation Fund is a special fund alongside the regular budget, from which, among other things, climate protection agreements are financed. These compensate energy-intensive companies for the higher costs of low-CO2 production using green electricity or hydrogen.

Money should be directed more specifically

 

Wambach doesn't see directing money to the automotive industry as fundamentally wrong. After all, a large portion of German patents, including those in the field of electromobility, are created in these companies. "But even here, the money should be directed more specifically," the economist demands. Areas such as battery research, for example, are being neglected.

 

A report on industrial policy that Wambach recently prepared for the Scientific Advisory Board of the Ministry of Economic Affairs sees research and development as the core of a promising economic policy. The key to greater economic independence is a strong innovation policy. "We must develop technologies that make money and that are in demand in the rest of the world," says Wambach. The steel industry, which has few innovations and a lot of mass-produced goods, is less suitable for this.

 

While Germany's economy has produced many innovative projects in recent years – one example is the BioNTech coronavirus vaccine. According to the German Start-up Association, there are currently around 30 German "unicorns" – start-ups valued at at least one billion euros by international investors. However, association head Verena Pausder believes that her industry is not receiving sufficient attention and support from politicians.

 

Dispute between the Economics Minister Katherina  Reiche and the Research Minister Dorothee Bär

 

Research Minister Dorothee Bär (CSU) was relatively quick to present a "high-tech agenda" intended to advance Germany in areas such as AI, quantum computing, and biotech. The fact that Economics Minister Katherina  Reiche (CDU), who recently visited companies from traditional industries on her summer trip, was not well received by the startup scene. In addition, there has been a dispute between Reiche and Bär for weeks over responsibilities in innovation policy. It's about power in the form of subdivisions, departments, positions – and funding pots that can be distributed with high publicity.

 

The CSU successfully pushed for an upgraded research ministry during the coalition negotiations. The key details, such as the transfer of responsibility for the German Aerospace Center and the Agency for Disruptive Innovations to Bär, were regulated by an organizational decree from the Chancellor. However, the ministers have to work out the further details among themselves, which is apparently proving difficult. Bär markets herself as the minister for everything promising for the future, while Reiche doesn't want to be just the minister for the old industries.

 

"This power struggle is irritating," says Pausder, chairwoman of the German Start-up Association. The industry is waiting for clear responsibilities and a strategy – and an announcement as to whether and where a start-up commissioner will be appointed again, as in previous governments. Writing in the coalition agreement that start-ups are the DAX companies of tomorrow, but then engaging in trench warfare, is inconsistent, Pausder believes: "With regard to promoting innovation, no progress has been made in this country for four months."

 

Similar debates to those in Germany are taking place in other European countries. "We are investing far too little money in disruptive technologies and are so far behind in some areas that we can no longer catch up," French Nobel laureate Jean Tirole recently criticized in the Frankfurter Allgemeine Zeitung. Former ECB President Mario Draghi also criticized the fact that, while the EU invests as much money in research and development as the US, measured as a percentage of gross domestic product, the money is distributed too haphazardly. "That's exactly what we shouldn't do," he said recently during a scientific conference in Lindau.”

 

No worry. Our military will buy a lot of tanks, and drive fishing, pretending to do training. Nobody goes to war these days with tanks - they are vulnerable to attacks from drones, artillery (supported by surveillance drones), and nuclear weapons. We don't care. We live in our glory days - cars, tanks and steel.