By George Friedman
German Chancellor Angela Merkel has proposed a new model to help increase the competitiveness of European companies. On Monday, she said she disagrees with the European Union’s approach to corporate organization and antitrust regulation. Similar to the U.S. model, the European policy has been to avoid having one or even a few major players dominate an industry by encouraging competition and limiting corporate mergers. This is in contrast to places like China, as Merkel noted, where a very small number of telecommunications companies provide services for a very large population. Merkel predicted that more mergers in Europe would come in the future. In her view, “if we want to keep up, we’ll have to be able to develop ‘global players.”
Her argument appears to be that having a few companies dominate the domestic market enables them to grow and become more competitive on the global stage. But her proposal, which French President Emmanuel Macron has already dismissed, is less important than what it reveals about the German economy and the pressure it’s currently under.
Germany is the world’s fourth-largest economy. It is also one of the most export-dependent economies, deriving almost 50 percent of its gross domestic product from exports. Much of those exports go to the European Union, but the EU is fraying. It’s in contentious negotiations with the United Kingdom over Brexit and battling with Italy, Poland and Hungary over economic and political issues. Another dispute is also emerging with Switzerland, which is in talks over a treaty that would govern its economic relationship with Brussels. The German-dominated trade zone is fragmenting at the same time that the United States, another important consumer of German goods, is ramping up its own battle over trade.
The EU’s long-term future is now in question. Increasing German domestic consumption to compensate for potentially lost foreign sales is unlikely, and even if it were possible, the German economy is geared toward exports, and changing it now would be exceedingly difficult.
Merkel, as she moves toward the close of her political career, understands Germany’s vulnerability and has decided it needs to be dealt with by emulating economies in Asia that are dominated by a few large companies. Interestingly, she did not choose to emulate the American model, characterized by a vibrant small-business sector and a small number of global powers like Apple and Amazon, both of which began as startups. The United States has been able to build a strong economy in this way because only 12 percent of its GDP comes from exports, a large proportion of which goes to Mexico and Canada. The U.S. market is the first and only focus of many American companies. They compete globally, but that’s not their primary compulsion.
Germany is filled with 1950s-style corporations that are large, are protected from effective competition and offer long-term employment. The business environment doesn’t allow entrepreneurial activities to be a dominant part of the economy. As a result, Germany has not produced many companies on the scale of Amazon, Apple or Microsoft over the last generation. There are, therefore, limits to German innovation because the focus is on perfecting existing technologies.
Merkel is not so much suggesting that Germany emulate China as she is doubling down on the existing German model of dependence on exports built on the foundation of long-established companies. She is proposing that the competitive pressure on these companies must be reduced to retain the current level of exports. Only by doing that can Germany maintain the core structure of its economy.
Given the experience of 2008, when exporters around the world took a hit, one might think that increasing domestic consumption and driving innovation through regulations incentivizing startups would be her strategy. But Germany is walking a tightrope with a weakened banking system, heavy dependence on an increasingly fractious EU and a vast hunger for exports in Asia. She doesn’t intend to try to compete with American innovation and the U.S. market. That would be too radical and destabilizing a move. She is instead proposing an Asian-style model. And that reveals how serious Germany’s problems are in the long run and how little room for maneuver the country has.
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