19 Dec Choosing Decline in Germany
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
Will the Germans Get Wise?
As you may have heard, the German economy is in serious trouble. And that, in turn, means the entirety of Europe is in trouble. For decades, Germany has been the economic engine that pulled most of the rest of Europe along with it, compensating for the indolence and profligacy of its purportedly “capitalist” neighbors. Now, with Germany struggling, with its manufacturing sector fleeing to China, with energy prices skyrocketing, and with growth forecast to remain stagnant (at best) throughout 2025 at least, it seems likely that the entire EU is going to struggle mightily as well. To update Metternich for the economic realities of the 21st century: “When Germany sneezes, the whole of Europe catches a cold.”
Given the seriousness of the German economic slowdown, theories about the causes of the Teutonic Troubles abound. Bloomberg, for example, blames the Russian war with Ukraine, the nimbleness of Chinese manufacturers, demographic decline, decades of infrastructure neglect, and, of course, the ubiquitous answer-to-every-question, Donald Trump.
More interestingly, the financial journalist Wolfgang Münchau has just written a book called Kaput: The End of the German Miracle, and the brilliant and prolific Samuel Gregg (the Friedrich Hayek Chair in Economics and Economic History, American Institute for Economic Research) has written a useful review of it, summarizing its most relevant points. Among other things, Münchau blames Germany’s irrational hostility to digitization, its neo-mercantilist attitudes, and its predilections for corporatism. Gregg explains:
Germany’s technological woes are partly a result of its leadership’s mistaken policy decisions in the 1980s, 1990s, and 2000s. Successive governments promoted, and businesses subsequently bet on, analog technologies. Why did German firms follow the government’s lead and not get on the digital train? According to Münchau, it’s because German businesses, policymakers, and political parties share a neo-mercantilist economic vision….
Mercantilism, as Adam Smith demonstrated long ago, is obsessed with exports and trade surpluses…. Governments, they believe, must counter rising imports with efforts to bolster exports via, for example, subsidies and industrial policy. This is counterproductive, however, since it shifts capital to less productive economic sectors and stifles a country’s capacity to adapt to changes in comparative advantage.
The second factor explaining Germany’s ongoing economic decline is the prevalence of corporatist attitudes and practices throughout German society. As Münchau observes, governments that seek to bolster exports inevitably work hand-in-hand with businesses—typically, I would add, with established firms already known to policymakers rather than with upstart entrepreneurs.
Finally, Andrew Stuttaford, the erudite editor of National Review’s Capital Matters newsletter/webpage, identifies the elephant in the room, namely Germany’s leaders and their terrible decisions on energy and social policy. Decline, as Charles Krauthammer famously noted, is a choice. And Germany’s leaders openly and unapologetically chose to put themselves and their constituents in this position:
Germany’s vital industrial sector continues to struggle as it contends with the cost of two of former chancellor Merkel’s reckless bets, the first on the availability of “cheap” Russian gas, the second on “investing” heavily in renewable energy (made more reckless still by resuming the rundown of Germany’s nuclear power stations). The net effect of these wagers has been to increase German energy costs to a degree that has endangered the ability of its energy-intensive industrial sector to compete. Talk of deindustrialization is not an exaggeration….
For my part, I think that if you take bits and pieces from Münchau’s explanation and combine them with the obvious (though, in this case, unstated) conclusion of the narrative detailed by Stuttaford, then you arrive at an account of Germany’s economic woes that is both accurate and cautionary: political and business leaders should not get too big for their proverbial britches and should not, therefore, meddle in complicated systems about which they understand only slivers, at best.
The tendency among Western political and business elites since the end of the Cold War has been to look around them at the bounty that a market-based, commercial economy has delivered; to assume that they “made” that happen; and to decide, consequently, to “make” other, ostensibly beneficial things happen as well. From Klaus Schwab and the World Economic Forum to Larry Fink at BlackRock; from the CEOs at the Business Roundtable to the intellectuals preaching social justice in our universities, Western elites have promised to “remake” the global economy, to “redefine” the purpose of business and commerce, and to “realign” capital markets’ values with the center-Left. They promised the best of all worlds and then, promptly, failed to deliver. Not only are their fantastical efforts doomed, but they were doomed from the very start. They represented the height of arrogance, not the nobility of generous reform.
You don’t have to take just my word for this. Even the beleaguered German government appears to have come to a similar conclusion, albeit belatedly and half-heartedly, begging to be freed from the consequences of its own attempts to remake capitalism:
The German government is pressing the European Commission to scale back sustainability reporting regulations that it believes create obstacles to a path toward a more economically prosperous and competitive European Union on the global stage.
Several German ministries want the EU to slim down sustainability reporting requirements that are “overly extensive” – a burden for companies that can use their “resources for the benefit of sustainable growth and innovation in the EU”, said a letter sent to Maria Luís Albuquerque, the commissioner for financial services and the Savings and Investments Union, leaked by Table Media….
The government has asked in the letter to postpone the Corporate Sustainability Reporting Directive (CSRD) application deadline by two years, from the financial year 2025 to the financial year 2027, for large companies subject to first reporting next year or later, with the publication of reports scheduled then for 2028. For small and mid-sized (SMEs) firms, according to the government, the backbone of European economies, the CSRD application should be postponed from the financial year 2026 to the financial year 2028, while maintaining the opt-out possibility for an additional two years.
In other words, the German government now appears to understand what many European businesses have known for some time, that the sustainability/ESG regime that dominates continental economic matters is incompatible with business success. Certainly, in the immediate term, it is not conducive to competitiveness in the global marketplace. Moreover, Europe’s position is only going to get worse over the next several years, as the Trump team attempts to move the United States in the opposite direction on these matters.
If the Germans were smart, they’d call for the cancellation of the entire sustainability/ESG project. Nothing is going to happen in the next two years that will make this onerous and utopian regulatory effort more practical, more necessary, or less costly.
Decline is a choice, but then again, so is renewal. As with all recovery processes, though, the first step is admitting that there’s a problem.
