Kaput: The End of the German Miracle, by Wolfgang Münchau (Swift Press, 256 pp., $27.05)
A country’s economic decline is not always obvious. In the 1980s, numerous American and European commentators hailed Japan as the world’s economic future. Japan’s subsequent slump into its “lost decades” came as a shock. But the signs of deterioration—failing industrial policies, the gradual growth of a massive asset-price bubble, political cronyism, an overpriced property market, banks making hugely risky loans—were there all along. Japan’s economic downfall took time. People had been mesmerized by the nation’s seemingly miraculous transformation from the rubble of 1945 to its boom in the 1950s and 1960s and emergence as an economic power.
The other postwar miracle, far to Japan’s west, is the subject of a new book, Kaput: The End of the German Miracle. Its author, financial journalist and New Statesman columnist Wolfgang Münchau, claims that Germany has entered a period of economic malaise with no apparent exit. Predictions of postwar Germany’s economic eclipse are not new, and Münchau notes that the nation has always bounced back. (Never bet against the German economy, a friend advised him.) Yet this time is different, he believes, laying out a compelling case with lessons for any country, including the United States, where neo-mercantilist ideas and policies are on the rise.
The German economy faces manifold problems. Among them, as the IMF recently reminded us, are an aging and shrinking working population, infrastructure challenges, overregulation, declining productivity, and rising demand for health care. While that may sound like most contemporary European economies, Münchau writes, Germany’s technology lags that of most comparable countries. Far from being an innovation hub, Germany has fallen “behind in digitalization generally” and has “one of the worst” modern digital infrastructures “of all advanced nations.” What’s more, German teachers tend to frown on digitalization, part of an “anti-tech” outlook that prevails in the nation’s universities.
Germany’s technological woes are partly a result of its leadership’s mistaken policy decisions in the 1980s, 1990s, and 2000s. Successive governments promoted, and businesses subsequently bet on, analog technologies. Why did German firms follow the government’s lead and not get on the digital train? According to Münchau, it’s because German businesses, policymakers, and political parties share a neo-mercantilist economic vision.
Mercantilism, as Adam Smith demonstrated long ago, is obsessed with exports and trade surpluses. As Münchau points out, citing Paul Krugman, this perspective fails to grasp the real benefit of trade: that it enables you “to consume goods and services that you either could not make yourself, or that you could not make at a profit.” This is why countries should capitalize on those industries in which they hold a comparative advantage, and not worry when, say, textile manufacturing goes abroad.
Mercantilists worry about such changes because they equate a country’s economic success with its exporting more than it imports. Governments, they believe, must counter rising imports with efforts to bolster exports via, for example, subsidies and industrial policy. This is counterproductive, however, since it shifts capital to less productive economic sectors and stifles a country’s capacity to adapt to changes in comparative advantage. It also distracts people from the ultimate point of trade: to obtain goods that you want by free exchange.
The second factor explaining Germany’s ongoing economic decline is the prevalence of corporatist attitudes and practices throughout German society. As Münchau observes, governments that seek to bolster exports inevitably work hand-in-hand with businesses—typically, I would add, with established firms already known to policymakers rather than with upstart entrepreneurs.
This is classical corporatism, and it has a long history in Germany, going back to the mid-nineteenth century. Reflecting on growing up in the North Rhine-Westphalian town of Mülheim, Münchau remarks, “It felt at times as though the car industry chiefs had their own private keys to the chancellery in Berlin.” Even the ostensibly free-market classical liberal party, the Free Democrats, has its own ties to specific businesses, notably Porsche. Trade unions are also wired into the corporatist system, thanks to Germany’s codetermination laws, which put employees—who are invariably union officials—on the supervisory boards of firms with more than 500 employees. These laws enable union leaders to resist changes that might negatively affect workers but are nevertheless necessary for businesses to survive, compete, and grow.
Beyond the inherent collusion and cronyism associated with it, corporatism often generates groupthink and discourages critical reflection. As Münchau notes, “when a misjudgment is made” in a corporatist system, “there is nobody there to correct it.” Indeed, entrepreneurs who could fix those errors often give up and move to countries where they believe their ideas won’t be ignored or blocked.
Münchau shows how Germany’s mercantilist-corporatist economic system has crippled key engines of growth, starting with the nation’s banks. “The rise and fall of Germany’s corporatist financial sector—the ultimate power behind the neo-mercantilist system—foreshadowed the crisis that would later befall the wider German economy,” he writes. While policymakers did not manage German banks in a command-and-control way, the banking system “might as well have been run by politicians.”
Münchau documents a stunning degree of collusion between German banks, industrialists, and political leaders. The chairmen of one major Landesbank, BayernLB, for example, were “high-ranking CSU officials, mostly former state ministers.” Another bank, WestLB, “was the quintessential Social Democratic Landesbank.” Such cronyism had many predictable consequences: politically driven investments, reluctance to call in loans to political friends’ failing companies, regulators’ inability to detect major problems, and efforts to marginalize anyone willing to call out errors.
This mercantilist-corporatist dynamic has had far-reaching effects. Münchau describes how it has distorted German energy policy (especially through former Social Democratic Party chancellor Gerhard Schröder’s “corporatist network” and its links to Vladimir Putin’s regime); led to serious errors in German trade policy toward China; and fueled the mindset that Germany must, seemingly at any cost, remain an export-led industrial economy.
The lack of meaningful opposition to neo-mercantilist-corporatism within the German political system has driven some voters to the peripheries of left and right. As Münchau notes, “This is what you get when all the centrist parties huddle together in government for far too long and when, at the same time, your economy becomes over-reliant on a dysfunctional model.” Parties like Alternative für Deutschland or the Bündnis Sahra Wagenknecht don’t necessarily disagree with that model. But precisely because such groups are not part of the establishment, they benefit from the frustration generated in part by the nation’s sclerotic economic approach.
Münchau does not offer Germans a way out of this mess. His purpose, he specifies, isn’t to offer policy prescriptions but to help readers understand what has gone wrong with the second economic miracle to emerge from the losing side in World War II.
I suspect that readers will notice similar trends at work in their own countries—the embrace of protectionism and industrial policy, for example, or the collusion between legislators of all parties and politically connected businesses. We may not yet all be Germans, but too many Western economies, including America’s, have become far more German than we care to admit.
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