WHY GERMANY NEEDS A NEW MODEL

The German approach to economics, especially on a global scale, has been criticized and hated, yet always studied and inevitably copied. Today, this model is being questioned. What could change in Europe?

To lift itself out of the crisis it finds itself in, Germany is searching for a new economic model, and its imitators and critics, both near and far, await its codification, aware that ignoring German economic choices is an illusion before it's a mistake.

There's an adage so false that it doesn't need refutation, telling us how it was the Americans who were the first, decades ago, to promote the imitation of a German model: When in Europe do as the Germans do.

However, this example has also been obstructed, especially in the classrooms of European institutions, where for years, every country has at least once taken lessons from the old German master, the country known as the old master of accounting.

But let's stay on the abstract for a moment: if it's a model, albeit hated, it's because it has ensured leadership to those who promoted it, namely the ability to influence the writing of rules, to be the best at applying and enforcing them.

So, for decades, Germany has outlined the scope of action for European economies and institutions, ending up influencing, if not outright binding, their choices, right or wrong, for itself or for those implementing them.

Good or bad, it's a model that has guaranteed Germany power and political control externally, internal economic growth and prosperity, but it has also inspired other countries. But what exactly is it?

How does the German model work?

Like all models, it has been structured on a set of interconnected elements capable of leading to success for at least twenty years, given that in 2000 Germany was called "the sick man of Europe".

So what are the most or less decisive elements that have allowed Germany to remain the majority shareholder in Europe, capable of influencing countries, companies, and institutions?

Let's try to list some.

• Export vocation: the ability to quickly orient towards customers/countries with the highest growth (like China in recent years);
• Production arbitrage: taking low-quality and low-cost production from the East, high-quality production from countries like Italy, and developing specialized production at home;
• Energy: buying it at low cost – mostly gas – from Russia;
• Education: continuous growth of a skilled workforce, even imported;
• Defense: mostly outsourced, especially to the US (paying dues to NATO).

This mix has allowed for years to control inflation, sell products worldwide, and keep the value of Made in Germany high. And it has shaped a mercantilism in which the state has helped, promoted, and defended national companies and their interests abroad.

We're talking about companies entrenched in the old industrial economy, such as steel and automotive, mechanics, chemistry, and pharmaceuticals. And also pushed to the maximum towards innovation and digitization.

German manufacturing, very strong, has thus danced for years embraced by the US, China, and the rest of Europe, to the extent that the economy became dependent on exports.

But not only.

Because accompanying the dance there has been maximum debt control and a balanced budget constraint orchestrated for years by Finance Minister Wolfgang Schäuble.

More than a model, it has been a style, that of Angela Merkel called merkeln and made of austerity and pragmatism, but above all of waiting and compromises, and of the categorical refusal – Nein! – for Europe to go into debt.

To set the rhythm, there has also been the spread, which although not a currency, has replaced the German mark as the shared and binding reference point for the dance steps of others.

So why does the German economic model have to change?

It's a model liked by some, less so by others. But it has exerted its action by positioning Germany at the center of European interests and making it the unique counterpart for those coming from outside. The day before yesterday Russia, yesterday the US, and today China.

And now what are the stimuli to change it, both internal and external, but all contingent?

External stimuli

• Ukraine has changed security and defense logic, as well as energy ones expressed until yesterday in a close relationship with Russia;
• Regarding defense, the US has long thought that Europe should pay for its own (see NATO spending), and that Germany should take care of itself (and perhaps also other European countries, openly returning to being hegemonic);
• China – which for Germany is the largest importing country with €190 billion and for which 46% of German companies use Chinese goods, and much of the German automotive industry relies on factories and sales there – is now weakened.

Internal stimuli

• The economy has not grown for two years and is experiencing inflation;
• Its infrastructure needs modernization;
• The issue of labor is increasingly hot;
• Farmer strikes and the growth of extreme parties press on politics.

How does the German model impact globalization?

However, the strongest stimulus is the profound change in globalization in which the German model is intertwined, or perhaps embedded. A context that now changes in real-time.

It's a clear intertwining peculiar to Germany, as Angela Merkel herself said at the Munich Security Conference in 2019, citing the motto written in the diary of the German scholar and traveler Alexander von Humboldt in 1803: everything is interactive.

So what happens if globalization changes its face and your economic model is the one centered on it?

Germany in search of a new narrative

Driven by all these stimuli, the German elite is indeed trying to decide what the new and best model is. It does so with difficulty, risking a bipolar syndrome in which one part of the country wants to erase the principles that have sustained the model up to now, and another fights to make them remain, perhaps in a revised version.

It is a transition that is felt and painful, but above all costly because this moment costs both in terms of collective psychology and in real terms.

For Germany, it is indeed time to spend and redirect its resources in terms of:

• Incentives (for electric cars and sustainable homes);
• Debt (the International Monetary Fund predicts that national debt, between 2023 and 2028, will increase by €208 billion);
• Subsidies (see the citizenship income);
• Training and professional re-qualification (never gone, and today even more necessary);
• Rearmament (the announced €100 billion one is still on standby) and defense (with aid packages in arms to Ukraine).

It is not known whether it will be able to afford them all, but these seem to be the ingredients of a new model, so different from the previous one and so in need of people capable of representing it as new and useful.

Good or bad, leadership will end up in the hands of those who can build on it a new narrative.

A modern epic, equally useful.

Published in Changes Unipol

About the author

Antonio Belloni was born in 1979. He is the head of the research department and a senior management consultant for Confartigianato Artser. He writes about business and management for online and print publications and has published "Esportare l'Italia. Virtù o necessità?" (2012, Guerini Editori), "Food Economy, l'Italia e le strade infinite del cibo tra società e consumi" (2014, Marsilio), and "Uberization, il potere globale della disintermediazione" (2017, Egea).