The Federal Government is determined to make the German economy fit for the future and to actively and energetically support the necessary structural change. It is no longer just about de-carbonization, but increasingly also about the targeted promotion of high-tech industries. To this end, Federal Minister Robert Habeck presented the BMWK’s new industrial strategy on October 24, 2023 – “Industrial policy in a changing era: securing an industrial location, renewing prosperity, strengthening economic security”.
In the BMWK paper – as is usual with strategy papers – there is a lot of talk about location conditions and how important the industrial sector is for the German economy and society. But the word “subsidies” also appears, but only with reference to the industrial policy of foreign countries, particularly China and the United States. The topic of subsidies also shines through again and again in the BMWK’s strategy, although the term is avoided explicitly. Rather, we are talking about an “active funding policy”. You can guess what could be meant.
Competitive through subsidies?
It is difficult for economists to understand how widespread the idea is in political circles that government subsidies can improve the competitiveness of industrial companies. Anyone who decides to dedicate their life to politics seems to be convinced that from now on they can actively shape anything and everything, if only they get the necessary political majorities. But how is that supposed to work? Do you relieve companies of competitive pressure and then expect them to focus even more on improving their own competitiveness than before? The incentives for this are not increased by state funding, but on the contrary, they are reduced. Anyone who can trust that, in case of doubt, the state will ensure their own competitiveness can rest assured and not have to worry about uncomfortable structural adjustments.
Of course, the active funding policy should not be spread across the entire industrial sector with the oft-quoted watering can, but should concentrate on strategically important industries and companies. Because you want to invest in the future and not in the past, i.e. in progressive and not backward industries and companies. At first glance, it’s an obvious plan, but does the ministerial bureaucracy really know the future better than the companies that have to compete every day?
Speaking of the watering can: It has always had a bad reputation among politicians because widespread successes cannot be marketed politically as well as spectacular individual actions. The same applies to investing in the future as it does to gardening: delicate plants will hardly thrive if you direct a powerful jet of water directly at them. The watering can is less spectacular, but better for the plants.
Bankruptcies with major government projects
Memories of the 1980s are awakened, when the specter of the Japanese MITI was to be combated throughout Western Europe with the weapons of strategic industrial policy. At that time, the focus of the strategic subsidy programs was the microelectronic chip industry. In the end, practically all major industrialized countries had maneuvered themselves into overproduction of standard memory chips. Unfortunately, the technologically more sophisticated and also more lucrative microprocessors were not considered at the time.
Other examples of large, state-funded projects from that time include the high-temperature reactor in Hamm, the fast breeder reactor in Kalkar, which has now been converted into a theme park, and the Transrapid, which whizzed past the astonished cows in Emsland with more than three hundred things. All of these projects failed – just like the Siemens mainframe program, in which taxpayer money was still being diligently invested even when the triumph of the PC was long foreseeable.
A recent example is the company CureVac, which, in the words of majority owner Dietmar Hopp, was supposed to develop “the best corona vaccine in the world”. In the summer of 2020, the state-owned Credit Union for Reconstruction also got involved, with a hefty capital investment of 300 million euros, which even exceeded Hopp’s capital investment. The profit-oriented private sector was not trusted to produce the urgently needed vaccine quickly and in large enough quantities. In addition, the expected large business with vaccines should not be left to the private sector alone. But CureVac was too cumbersome and too slow. In mid-October 2021, CureVac withdrew its CVnCoV vaccine from the approval process at the European Medicines Agency (EMA); the research work was stopped.
The magic word these days is AI. At least since ChatGPD’s spectacular appearances, all strategically thinking politicians only know this one focus. At least in Germany, it is usually dutifully mentioned that renewable energies are also the focus of strategic industrial policy, but these technologies are quite mature in many areas. Their implementation usually fails not because there is not enough technological progress, but rather there is a problem with network expansion so that green electricity can be transported from regions where the wind blows to regions where the factories are located.
The presumption of knowledge
If politicians believe they know more about the future than the companies competing on innovative markets, the path to technological exclusion is inevitable. Friedrich August von Hayek once coined the well-known phrase “the presumption of knowledge”. He was convinced that the invisible hand of competition was always more powerful than the visible hand of the state. Economy and prosperity would thrive best in systems without centralized control, without lofty government plans and without bureaucratic control. This is Hayek’s legacy. According to this legacy, a steering structural policy that actively intervenes in the industry structure of an economy will cause more harm than good in the long term.
It also seems less future-oriented that state funding is generally focused on large companies. Despite all lip service to the immense importance of medium-sized businesses, government support is always synonymous with support for large corporations. This is particularly noticeable in the plans for the so-called industrial electricity price, which is by no means intended to benefit the entire industry. According to the current plans, only the reduction in electricity tax should apply to all companies in the industrial sector, while the subsidies in the form of so-called electricity price compensation should only flow to particularly energy-intensive sectors. They should be fully reimbursed by taxpayers for their expenses for CO2 certificates, which play a central role in an economically well-thought-out climate policy. In total there are around 350 companies whose focus is on the chemical and glass industries. Both industries – spurred on by cheap Russian gas – had increasingly withdrawn from the production of high-tech products and concentrated on the energy-intensive production of chemical raw materials or on hollow and flat glass. They should now be helped out of the cost crunch with electricity price compensation. Does this look like a promising start to the future? There are also energy-intensive productions in medium-sized companies, for example in bakeries, paint shops and foundries or in chocolate production. Many companies here are at acute risk of insolvency, but electricity price compensation is not intended for them.
Who is we”?
But back to the BMWK strategy paper. Throughout the text, “we” is consistently mentioned when it comes to who should drive forward the modernization of industry. Behind this lies a strange understanding of the distribution of roles in our society. The idea that the state is responsible for the general conditions and that companies are responsible for specific economic activities is apparently no longer considered up-to-date in large circles in the federal government. “If we diversify value chains, …” or “If we… maintain and rebuild value creation in Europe, …” it says in the paper. If this conceals a fantasy of omnipotence in state economic policy that was long thought to have been overcome, we could be concerned about Germany as a business location, which first and foremost needs reliable framework conditions. The business itself can then safely be left to the entrepreneurs and workers in the private sector.
One hundred years ago, Lord Kelvin, the inventor of the temperature of the same name, stated about the supposed farsightedness of future-oriented industrial politicians: “Had government funding of science existed in the stone age, mankind would now have splendid stone machines – and no metal.”
Institute for the World Economy in Kiel (until 2017)