Some level of industrial decline cannot be prevented.
Should we go on using this "winning approach" to avoid deindustrialization?
Martin Höpner: Unfortunately, we can't stick to this solution. Germany's industrial success in the past few decades has been costly and non-replicable. The eurozone prevents currency adjustments, so a low euro value can't be sustained forever. Deindustrialization will occur, and we have to manage it effectively.
Are you warning us of something?
The fact that Germany has a larger industrial sector than other developed economies is no secret. Since the mid-60s, the industrial sectors of larger, developed countries like France, UK, the US, Germany, and Italy have been shrinking in comparison to their overall economies. Productivity gains from technological advancements in industry are usually higher than in the service sector. Even if the share of these sectors remains constant, fewer workers are needed in industry. The rising demand for services contributes to this. This is a natural process in successful, developed economies. But around the turn of the millennium, something strange took place in Germany.
And what was that?
Germany diverged from the global trend. The deindustrialization process slowed down or even disappeared. This was mainly due to a strong increase in export activity. This growth was strong enough to keep the relative size of the German industrial sector unchanged. From the mid-90s to the onset of the Covid crisis, two-thirds to three-quarters of German economic growth stimuli came from foreign demand.
How did they manage this success?
There were several factors, but one is particularly relevant to me: The adoption of the euro helped Germany maintain a favorable exchange rate for exporters. High interest rates and modest wage policies kept the domestic economy stagnant, at times even shrinking. This reduced inflation, and Germany faced fewer price increases than its trading partners. Normally, currency adjustments would take place in this situation. But such adjustments are no longer possible in the euro area, and a low euro exchange rate improved the competitiveness of the German industry not just against other eurozone countries but also against the rest of the world. Germany accumulated trade surpluses and became a headache for the global economy. This strategy for preventing deindustrialization can't be replicated and won't work.
This all took place during a specific phase of internationalization: hyperglobalization, a time of extremely strong economic interconnectedness. This phase benefited the German industry a lot. However, the internationalization of the world economy is evolving: first, the connection of goods markets. Then, the relocation of entire value chains. Then, the dismantling of these chains and their individual parts' international diversification. The phase of hyperglobalization must have passed. The internationalization of the world economy is even pulling back. New waves of undervaluation of German export goods are unlikely to result in enough export growth to stop deindustrialization and ensure future economic growth. Sticking with this approach could lead to a dead end. In the future, we'll likely have to focus more on the internal sectors and thus the development of internal demand.
There's an idea that the internal and export sectors have completely different interests. Many in Germany believe that the industry with its high export earnings is the basis of general prosperity. If it prospers, everyone does. What's wrong with that?
I believe that the sectors need different things to thrive, which can lead to conflicting interests - not always, but often. The service sector needs stable internal demand, the construction sector low interest rates, and the export sector low inflation and falling real effective exchange rates. How can these various needs coexist? Solutions that favor the industrial export sector are common in Germany. This is driven by a hegemonic export ideology: What we do here benefits everyone. We assume these partial interests are general interests without questioning it. In the US, for instance, such an approach wouldn't work.
However, the US has been moving away from this model for years and focusing more on the service sector. Now they're supporting industry. The US recovery from crises has been better than Germany's, with its industrial strength. But I agree with you: We shouldn't emulate the US. Instead, we need a measured realignment. Moving away from extreme export-centricity. Shifting toward a more balanced strategy that considers the requirements of both the internal sectors and the export sector.
In essence, you're advocating for less safeguards for the German industry.
The export-oriented focus is no longer beneficial for everyone. Each Euro spent on subsidizing industries could be used for other purposes, such as expanding daycare facilities, if we strictly adhere to the debt brake. Moreover, we might be wasting money if we can't keep energy-intensive industries in the country. The strong growth of German exports in the first decade of the century occurred during high unemployment. Now, labor shortages are being complained about, and will worsen with the retirement of the baby boomers. We need to consider more carefully how to utilize our limited labor supply. Does it make sense for the industrial sector to consume a significant portion of the workforce to generate balance-of-payments surpluses, while we struggle to find teachers, caregivers, and police officers?
Politics must also consider how to manage this transition without letting the industry collapse or causing a crisis. What type of industrial policy is suitable?
A conversation about what we should preserve in the country using public funds at what cost is required. The industry is burdened by the absurdities of our neglected infrastructure, including industries that predominantly rely on exports and those that focus on domestic demand.
There must be talks about strengthening domestic demand. This begins with wage development. Although tariff protection has eroded, only half of employees are now protected by a tariff contract. This is not favorable. Additionally, the strictness of the debt brake is hindering domestic demand and investment.
Do you think a shift in focus is imminent?
I don't observe any clear indications of it yet. Everything continues to focus on exports and competitiveness. It seems that we are moving scarce resources primarily into the industry without promoting growth. Also, if we persist in concentrating on export and balance-of-payments surpluses, the euro may eventually be destroyed.
Max Borowski interviewed Martin Hoepner.
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