OPINION:
Olaf Scholz takes the reins of a Germany in crisis. Looking beyond the coronavirus, the foundations of economic strength are eroding — quickly. Under Angela Merkel, German prosperity was built on superior manufacturing within Europe, and exports of autos, industrial machinery, robots and engineering products and supporting services to China and America.
The industrialized south is profoundly dependent on internal combustion engine automobiles, but Daimler, Volkswagen and BMW have the resources to make big bets to catch up with Tesla.
Once they have affordable platforms, they should do well. Tesla and other upstarts can’t quickly build the network of assembly plants Germany’s incumbents can marshal to meet Scholz’s goal of putting 15 million electric vehicles on the street by 2030 and similar ambitions throughout Europe.
The massive pyramid of components suppliers, on whose shoulders rest much of the employment in the auto industry, are not so well positioned.
EVs have many fewer moving parts. Batteries account for about 40% of their cost, and China controls the lion’s share of cell manufacturing.
China’s Contemporary Amperex Technology, Ltd., is building a massive German plant to supply European automakers. Bosch, the world’s largest automotive supplier, won’t build batteries for EVs but instead will cooperate with CATL. Consequently, the royalties and profits that will fund R&D Systems for future generations of batteries will flow to Chinese, not German, engineers.
German firms that bore tunnels, lay rails and built mass transit systems worldwide are losing market share to China. In Europe, Chinese firms are now digging tunnels for the Stockholm Metro and supplying railcars in Portugal, not to mention buses in Norway, wind turbines in France and power grids in Poland.
Just as Mr. Scholz’s Social Democratic Party coalition government must reassess Germany’s relationship with China, it faces Russia instigating a migration crisis across the Belarus-Polish border and threatening Ukraine.
Efforts to beef up Germany’s underfunded and ill-prepared military run smack into a national cultural resistance to an army capable of projecting power beyond its borders.
Mr. Scholz’s coalition government plans to increase public spending on R&D — the best way to leverage private innovation and entrepreneurs — but the new government aims to get Germany out of coal by 2030 and construct 400,000 new homes annually to address shortages and affordability.
After the 2011 Fukushima nuclear accident, Germany abruptly decided to phase out nuclear power, and the country already uses too much Russian gas — imposing national security vulnerabilities and constraining foreign policy.
Consequently, Mr. Scholz’s environmental goals require massive investments in wind and solar power. Here Scholz’s problems look too much like those of an American president.
Investments in green power may create more externalities for the competitiveness of domestic industries, but Germany already has the highest electricity rates in Europe. Mr. Scholz can’t push its utilities to borrow, modernize and pass along the costs without industry screaming.
The regulatory bureaucracy annually costs German businesses about €55 billion. That’s 1.6% of GDP and more than the federal government spends on national defense.
Michael Mann, an entrepreneur in western Germany, built wind turbines three decades ago about 30 miles from the largest town, and government approval took three months at a cost of €5000 at current prices. Recently, he sought approval to replace those with new turbines that would generate 40 times as much energy, and the approval took seven years and €300,000.
Germany still lacks an adequate grid to transfer enough wind and solar power from the north to the industrial south. Still, legal challenges from not-in-my-backyard protestors have blocked the construction of power lines.
Mr. Scholz and his coalition partners want to slash regulatory approval times, but Germany has its own deep state.
The Greens’ co-leader Robert Habeck has been appointed minister for the economy, climate and energy. He earned his progressive chops campaigning for bike paths, writing children’s books and as environmental minister in Schleswig-Holstein. It will be interesting to watch him try to dismantle the morass of obstacles and confront the bureaucracies and legal barriers his constituencies so happily exploit.
Germany’s national debt is lower than other major European states, so it can afford to borrow to invest in a brighter future.
However, the necessary support of the conservative Free Democratic Party for Mr. Scholz’s coalition was obtained by ceding control of the finance ministry. The FDP managed to extract a pledge of continued budget discipline — no outsized borrowing and no new taxes.
Mr. Scholz offers much to be admired — we should do so when well we conservatives must endure a Democrat in the White House — but accomplishing his agenda under those political and fiscal constraints will require a Houdini, not a Bismarck.
• Peter Morici is an economist, a business professor emeritus at the University of Maryland and a national columnist.
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