Unless everything is deceptive, then Germany is stuck in a real structural crisis. In no other euro economy is the economy running currently so bad
. Germany is the country with the red lantern again, like it was 20 years ago. And there is much to suggest that this will not be a temporary dip, but the beginning of a longer phase of weakness. This is how it looks: The previous German economic model is losing momentum. After many good years, it’s time for a course correction. The country needs new companies – and new entrepreneurs.
But, as is so often the case, the focus of the public debate is on redistribution measures such as citizen income. This is necessary, but not enough. Because the state can neither dictate dynamism nor innovation, growth or value creation. At most, it creates the conditions under which entrepreneurial drive can unfold to increase prosperity – or not.
Unfortunately it is with the Start-up dynamics in Germany
not far away. Since the turn of the millennium, the number of new openings in relation to the population has almost halved; last lay the start-up rate
at 119 companies per 10,000 employees. In the first three quarters of this year, the number of start-ups fell again the Federal Statistical Office
reported. In particular, more ambitious start-ups that directly create some jobs are declining. Compared to the previous year, their number fell by more than seven percent. An alarm signal.
So far, the lack of entrepreneurs has not been a big problem, because the established economy was flourishing. Now, however, there is a risk of a situation in which there are too few young companies to be able to replace the highly productive substance that is crumbling away.
Germany, we have a problem!
Even at the beginning of the Corona crisis, it became apparent that the pandemic would would be accompanied by far-reaching structural change. Since then, the Ukraine war and the geopolitical upheavals have underlined this assessment with a thick pen.
Three factors in particular are putting the German economy under pressure to act: The high energy costs resulting from the Russian attack on Ukraine are causing problems for local industry and are causing some companies to switch to locations where the costs for electricity and gas are lower. There are also delivery bottlenecks: Tense international value chains are still hampering production. But above all: The global demand for machines, plants, vehicles, car parts and chemical precursors, still the pillars of the German business model, is structurally declining because the phase of rapid industrialization is over in important customer countries. China and other economies have meanwhile put a lot of new factories, districts and traffic routes in the landscape. Saturation tendencies are gradually becoming apparent.
Capable competitors themselves have long since emerged in the emerging countries. What previously had to be imported in terms of high-quality technology can now be done by many themselves, and more cheaply. Western companies, on the other hand, are increasingly producing locally. China is now by far the most important market for large global corporations such as Volkswagen or Daimler, which they are increasingly serving with local added value. Germany, the nation that still likes to think of itself as the export champion (although that hasn’t been the case for a long time), has a problem. And a pretty fundamental one at that.
The amazing persistence of the industry
The strong export industry – that is still the productive heart of the domestic economy. To date, the manufacturing industry (excluding construction) contributes around a fifth to economic output, significantly more than in most comparable countries. That was an advantage for a long time: Germany had what the emerging and transition countries needed for their catch-up development.
Not only large corporations, but also many medium-sized companies began to supply markets around the world: first in southern Europe, then in ex-socialist Central Eastern Europe, finally in China and other Asian countries. Some medium-sized manufacturing companies now export 80 percent of their added value, most of it outside the EU. One expression of these successes is the gigantic foreign trade surplus that Germany has been running in for many years.
In fact, it’s amazing how long German industry has been able to buck the trend of crumbling globalization that began after the 2008 financial crisis. In the 2010s, local industrial production continued to increase, while global trade intensity was already collapsing. In 2018, however, the output of the German manufacturing sector reached a maximum. Since then it’s been going down. What now?
New companies, new impulses
There is no reason for despondency. Germany has an efficient science system. Industry and government together recently spent 3.1 percent of economic output on research and development (R&D) – a high value compared to other countries. But the same applies here: The position in the leading group is threatened. It is anything but certain whether R&D-strong industrial groups that are shutting down their domestic production will continue to increase their activities to the usual extent.
Accordingly, the state should spend more money on research, especially basic research. This is relatively cheap and promises enormously positive spillover effects in the economy as a whole. A few billion euros more or less can make a noticeable difference.
Forming economically viable products from this raw material is a matter for the private sector. And this is particularly important for young companies. The strength of established corporations lies in further developing existing technologies and marketing them on a large scale. They find it more difficult to tread radically new paths. Look at the auto industry, where the former startup Tesla has established a new e-car business model that traditional corporations are now emulating. Or the pharmaceutical industry, which is getting new impetus from mRNA specialists such as Biontech (Germany) and Moderna (USA).
Capital in the 21st Century
In order to master the structural change, young companies in particular are needed that are able to bridge the gap between science-based research and product-related innovation. So far, there have been two main hurdles for technology-oriented startups: capital and bright minds.
The capital market in Germany and the rest of Europe is primarily geared towards established companies. Real innovations, however, can hardly be financed with bank loans. It needs equity capital that provides entrepreneurial support for growth. And: Attracting talented and well-trained young people to new companies has so far been difficult because flourishing large corporations offer safer and apparently more attractive opportunities – high starting salaries, foreseeable career prospects.
The second hurdle is likely to fall in the course of structural change. When established companies in this country shrink, they create space for something new. Young and less secure employers suddenly seem relatively more attractive. In addition, it would be a sensible European project to create a central financial center for growth capital, presumably in Paris, where a large number of IPOs are already taking place.
Of course, times are uncertain. Interest rates are rising and company valuations are under pressure. But crises also offer opportunities. Structural change is accelerating. Needs and demands change. Technologies that have hardly been used until now are gaining ground. There is space for something new. The space of possibilities expands. Seen in this way, we should not let this crisis pass unused.
The most important economic dates of the coming week
Monday
Berlin – Heil and the entrepreneurs – Minister of Labor Heil (SPD) discusses “entrepreneurial freedom in times of multiple crises” with Employer President Dulger and ex-Prime Minister Koch (CDU).
Dortmund – Black and Yellow – Annual General Meeting of Borussia Dortmund.
Wiesbaden – Inflation dynamics – The Federal Statistical Office presents figures on the development of purchase prices for companies (producer prices) – an early indicator for the development of consumer prices.
Reporting Season I – Results from Vallourec, Julius Baer, Dell.
Tuesday
Wolfsburg – Generation Golf – continuation of collective bargaining at VW. The company wants to submit an offer. Since a metal agreement has now been reached in Baden-Württemberg that has pilot character, the guard rails should be set.
Reporting season II – Business figures from TAG Immobilien, Warner Music, HP.
Wednesday
Zurich – In search of capital – The ailing Swiss bank Credit Suisse has invited to an extraordinary general meeting to decide on a capital increase.
Earnings Season III – United Utilities, Deere financials.
Thursday
Brussels – And now all together – Meeting of the EU Council for Energy. The ministers responsible want to agree on rules on how they want to buy gas together in the future.
Frankfurt – shaky times – The Bundesbank presents its financial stability report. Last week, the ECB published its report for the euro zone as a whole – and warned of serious upheavals on the stock exchanges as a result of rising interest rates and dwindling liquidity.
Munich – The mood of the economy – publication of the Ifo business climate index
London – No Mail today – The next industrial action in the UK in a time of rising prices and taxes: strike at the Royal Mail.
FreitagBonn – Advantage Putin? – The Federal Network Agency reports on gas consumption and storage levels in Germany. Will the desire to save withstand the onset of cold weather?