The specter of de-industrialization is haunting Germany – that’s what can be heard in many places. And in economic policy Berlin there is a heated debate about the next “boom” that is supposed to prevent exactly that.
It is usually times of crisis when the call for a strong industrial policy becomes louder. If you look at the minutes of the plenary session of the German Bundestag, it is striking that statements on this subject often occur during periods of economic upheaval. For the first time during the oil crisis in the 1970s – then regularly when the economic engine sputtered.
However, just as quickly as the crises flare up, the desire for such an industrial policy disappears again when the economy recovers. Very rarely, however, is this the result of a strategically oriented industrial policy that courageously develops future economic structures and thus sows the seeds for tomorrow’s growth.
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European Commission data
A big mistake that we are now feeling. Because an industrial core wants to be maintained. This is exactly what we have neglected to do for far too long. If you look at the productivity of industry as an expression of its competitiveness – it measures how high the economic output is per employee in a sector – Germany as a location has been losing ground compared to most industrialized countries for years.
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In the meantime, Germany has reached the midfield here, as a current evaluation by our association of research-based pharmaceutical manufacturers shows. Among the 36 OECD countries, Germany only ranks 20th in terms of productivity development over the past 15 years.
There are reasons for this: The machines and systems used are getting older, and buildings and infrastructure are showing the ravages of time. And even the existing knowledge capital is becoming increasingly obsolete.
Germany invests too little in its future
This can be seen from the composition of the capital stock. If the proportion of machines and systems that have clearly exceeded their useful life increases, then this is evidence of careful handling of the asset. At the same time, in the international competition for locations, German companies are increasingly competing with vintage cars on bumpy roads against modern cars on freshly asphalted racetracks.
In short: Germany is investing too little in its future and has been doing so for years. The level of modernity in fixed assets has fallen by almost a fifth since the mid-1990s – more than in any other OECD country.
However, our export success is largely based on high-tech products from high-tech production facilities. Only modern systems and innovations ensure a lasting competitive advantage in a country that is poor in raw materials and has traditionally high energy and labor costs. In addition, the USA and China have long been challenging Germany and Europe with extensive subsidies in the race for the cream of green industrialization.
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So what to do with the unexpected problem child industry? Entering into a blunt subsidy race with the USA and China would be one of the simpler economic policy responses to the challenges.
Aligning one’s own industrial policy with the decisions of other economic areas is more evidence of a lack of strategy. Excessive economic policy orthodoxy is not advisable in view of the major challenges in the energy transition, digitization, geopolitical upheavals, but above all because of demographics.
Industrial policy should be geared to change
Rather, Germany should have an interest in strengthening the most productive part of its economy – the industrial core. In contrast to other large European countries, the manufacturing industry in this country has always managed to successfully adapt to the changed situation on the world markets.
The structural change within the industry was the key to maintaining the entire production network. Weaknesses in the basic industry were compensated for by larger shares of added value in the area of vehicle construction or electronic data processing or the pharmaceutical industry.
An industrial policy should therefore not be based on maintaining the structure by means of short-term subsidies, but on change. It has to meet the future challenges at the location and capitalize on specific strengths.
Three points for a successful German industry
Three elements of an industrial strategy are important for this: First, it makes sense to strengthen the conditions for the country’s key industries – high-tech sectors with a promising future such as mechanical engineering, the automotive industry, IT or the pharmaceutical industry as a whole. On the one hand, because without private research funds, no major jumps in R&D investments can be expected.
On the other hand, because the innovative industries usually radiate much further into other economic sectors than simple manufacturing. The tax incentives for research, which are primarily aimed at medium-sized companies, should therefore be provided far more generously, company foundations should be made easier and their financing strengthened.
Second, it takes greater courage to support the transition from manufacture to industrial production. The scaling of the first industrial production lines should also be the subject of public funding if innovative production networks can be set up more quickly in this way.
If other economic areas are faster, there is a risk that no new industrial jobs will be created despite technological breakthroughs. The European programs with this goal are far too cumbersome to seize opportunities.
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Thirdly, the public infrastructure, but also the private capital stock, needs more than just selective cosmetics. Investments have been reminded for years, needs calculated and yet too little is done. In the case of companies, the consumption of assets that has been going on for years must be stopped.
A large write-off program combined with an offensive to reduce bureaucracy could provide the necessary impetus for private investment. The public sector should remedy the infrastructural weaknesses and, above all, create the conditions for finally realizing the great gains of digitization.
Industrial policy is usually expensive and risky. At the same time, public budgets are finite. It is therefore all the more important to have a well-prepared strategy and a targeted, above all future-oriented policy that means more than just a slight “makeover” of the industrial location.
dr Claus Michelsen is Chief Economist of the Association of Research-Based Pharmaceutical Manufacturers.
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