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December 18, 2019

Wirtschaftswunder kaputt

The drivers behind Germany’s economic success have been innovation and skills, flanked by hands-off government policies. That business model more than offset a long history of often-poor macroeconomic management. Germany has been a country of progressive engineers and conservative economists. But successful as the model may have been, we doubt it is sustainable. There are many tell-tale signs, interestingly not visible in Germany itself.

Adam Tooze, the economic historian, has a fascinating article in Prospect Magazine comparing the UK’s and Germany’s energy industries. He finds that the UK is miles ahead in the development of renewable energy. This is contrary to public perception in both countries, which sees Germany ahead. 

We keep writing that Germany is on course to miss its Paris climate targets. One aspect that is interesting about Tooze’s analysis is how Germany started off with a technological lead and good policies, but lost the former and abandonned the latter. The red-green coalition of the early 2000s was one of the first to champion renewable energy on a grand scale. By 2012 Germany was the world leader in solar and wind power. But subsequent policy mucked this up. What killed the electricity sector in Germany was the funding model, Tooze writes. The German government was hell-bent on avoiding tax raises or running deficits. So the investment was funded out of a regressive levy on electricity bills, which protected industrial users at the expense of households. Tooze also goes into the way the German government has auctioned off various types of licences in the energy sector, thereby creating markets distortions and failing to generate investment. We see a parallel with the mobile telecoms auctions, which were designed to maximise revenue to the government but had the ultimate effect of landing Germany with the worst 4G network of all EU member states.

The combination of under-investment and poor policy is also affecting the car sector. A study by the Claudio Sabattini foundation in Italy shows that the EU is not getting anywhere with electric cars. In 2017, the European Commission estimated a volume of electric cars of between 9m and 20m on EU roads by 2020, rising to 40m-70m by 2025. We are at 5m now. The car industry and the governments were complacent until the diesel scandal prompted action. The problem is a lack of publicly-available electric charging points, so the electric car is only suitable for people with their own garage.

China, meanwhile, increased its global share of electric cars from 39% to 45% in 2018 alone. What is also interesting is that German car companies tend to invest more in China than in the EU, because this is where the market is. Asia accounts for 85% of global battery production, the EU only for 3%. We note that France and Germany are planning a joint battery factory, but this smacks of a defensive approach rather than an attempt to become global leaders. To be continued, for sure.

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