Emmanuel Macron made a revealing comment on the sidelines of the recent Western Balkan summit in Berlin last month. The French president said: “The German growth model has perhaps run its course”. I think this is quite an extraordinary statement coming from a French president. It shows that he must have reflected on this issue for quite some time. And it shows that thegreat love affair with Germany is over. We are clearly entering a different phase in the Franco-German relationship.
The demise of the German growth model would not be necessarily a calamity. If all goes well, the slow erosion of German uber-competitiveness could even be the fortuitous accident that triggers economic convergence in the eurozone. But on a continent where not everything goes well all of the time, it could pan out rather differently.
The German model has two interacting components — technological and macroeconomic. Germany is benefiting from the great inventions of the past, and managed to maintain market leadership in many specialised engineering disciplines. It has been a successful industrial strategy for a long time. Germany supported its model with an elaborate infrastructure: from skills-based, technical training to high-tech, applied research institutes, and industry-friendly government policies. Do not think for a minute that the lack of a speed limit on autobahns is simply a voter preference.
I would discourage readers from predicting the demise of the German growth model lightheartedly. One needs to appreciate both its past successes and the specific problems it now faces. It is rooted in inventions that proved economically persistent. We have seen successive generations of smartphone-makers come and go, but Mercedes is still selling the fuel-driven car Karl Benz first patented in 1886.
What gave German industry another lease of life was how globalisation increased demand for German machinery and how it led to integrated global supply chains. I admit I did not see the supply-chain effect when I predicted the demise of the German economic model over a decade ago.
New trends may intrude that would extend the lifespan of the growth model further. But Mr Macron is ultimately right. It is going to end — “perhaps”, as he wisely added.
The reason to expect this development is that the world champion of the analogue age is struggling with digitalisation. The German car industry is now trying to catch up with the technology of electric batteries, where the knowhow resides in the US and China. Germany is also trying to catch up in the research on driverless cars. On many levels, it has failed to make the transition to the 21st century. Of the ten most valued German brands, SAP, the software company, is both the highest rated and the youngest — if you exclude Deutsche Telekom. SAP was founded in 1972. The last big industrial success story is almost half a century old.
As industrial exports decline, so should Germany’s excessive current account surplus. But Germany may well compensate by cutting wages or increasing the fiscal surplus. It is already on course to over-fulfil the eurozone’s fiscal target to reduce public sector
debt to 60 per cent of gross domestic product.
The grand coalition is currently on a trajectory that — if pursued indefinitely — would get rid of all debt. The European Commission sees French debt hovering at around 100 per cent of GDP with no signs of going anywhere. And Italy is even on an upward trajectory from a much higher level.
The benign scenario would be for Germany to take the decline of its growth model on the chin, for everybody to converge, for the eurozone to drop its dependency on external surpluses and develop a much greater common economic identity.
This is not going to happen. As I find myself writing nearly every week, a eurozone safe asset would be absolutely essential for everything the eurozone could possibly want: from economic and financial stabilisation to the ability to use the euro as a geopolitical instrument.
In the not-so benign scenario — the one we are more familiar with — the opposite happens. Member states maximise their perceived competitive advantages against one another. Imbalances widen and financial systems remain prone to crises. And when the financial accident finally happens, Mario Draghi, the current president of the European Central Bank, will no longer be there to do “what it takes”.
My instinct is that Germany will not move on from its existing growth model easily or with dignity. Mr Macron is surely right in his analysis. But the more interesting question is this: where does it leave France?
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