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03 October 2021

The next generation

I have been campaigning in favour of European political and economic integration for as long as I can remember. Some of it has been realised, like the euro. Most has not, like a fiscal union. I still believe that European political integration constitutes a prerequisite for Europe to defend its interests in the world. But right now I would not recommend that European leaders spend their political capital on issues like the reform of the stability pact. Something more important has intruded.

To its credit, the EU got the macroeconomics broadly right this time. When the pandemic hit, they relaxed fiscal policy. But the hard part is managing the structural displacement: the boost of the digital economy at the expense of its analogue counterpart.

Post-pandemic economic policy should focus on competing for high-tech leadership. Europe needs to fast-track optical fibre and mobile network development, and invest in artificial intelligence and green technologies. This job cannot be left to governments alone, or to large European corporates.

The start-up sector is going to be critical. EU cities are way down in the start-up league tables, behind Silicon Valley, New York and London. In all probability, if humankind ever gets on top of climate change, it will be due to technologies that have yet to be developed, by companies that have yet to be created. If European politics continues to equate business-friendliness with corporatism, as it has done in the past, it will end up where the CDU leaders ended up last week: shocked by the sudden realisation that they are no longer in charge.

I wrote before that future historians will not marvel at Angela Merkel’s political longevity, but look upon her time in office as an era in which Europe sleepwalked into economic irrelevance. With the elections, a whiff of optimism has hit political Berlin. The Greens and the FDP might lead Germany and Europe into a new direction. They are the parties of the young voters. The ranking of German political parties in the age group of the 18-29 year olds is: 1. Green; 2. FDP; 3. SPD; 4. CDU/CSU. German politics is a matrix. On one axis you have the classic left-right division. But, on the other, you have a division by age. There is a lot that separates the Greens and the FDP. But what they have in common is that they both live in the digital 21st century, and they both realise that the rest of Germany does not. Nor does their future coalition partner, whoever that may be.

The Greens emphasise the role of the state. The FDP is a champion of the private sector. But this is not as incompatible as it appears. The bulk of the investment to save the planet will come from the private sector. The public sector will play a important supporting role through public infrastructure, regulation, investment incentives, and education. The big question of German politics is not so much whether the next coalition is called traffic light or Jamaica, but whether the FDP and Greens manage to prioritise the stuff that matters, and whether they can co-opt their future coalition partner behind an agenda of investment and modernisation.

The traffic light option, the SPD, Greens, and FDP, seems to be the commentators' favourite constellation right now. I am struggling to see an SPD-lead government ever becoming the champions of a start-up business culture. The SPD election manifesto included a threat to impose works councils on start-ups. If you want to kill fledgling businesses, the most effective way is not through taxes, but bureaucracy.

That’s what the real political battle is about. The views of Christian Lindner on the stability pact and the German debt brake, by contrast, are secondary. I am aware that commentators outside of Germany are obsessed with this sort of stuff. But Europe’s acute crisis is not one of macroeconomic instability. It is one of technological decline. The US and China are leading the EU in almost all high-tech categories. The EU’s global influence will vanish unless it can compete. Strategic autonomy can make up for that. Don’t think for a minute, as some in Brussels do, that the EU can influence the world through regulation. If you don’t have any skin in the game, you will not become the world’s regulator.

We will know that Germany has succeeded when politicians start to think about crypto as an opportunity, and not as a threat as they do now. I don’t get the impression that even the Greens and the FDP are quite there yet. Theirs is a sort of old-fashioned modernity. Their leaders, in contrast to Olaf Scholz and Armin Laschet, are at least competent enough to know how to shoot a selfie. It’s a start.

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