03 March 2019

Wolfgang Münchau: China gains the upper hand over Germany

[...] The economic relationship between the two countries is interesting. Germany is ambivalent about China. It needs Chinese technology, such as Huawei’s. German mobile phone operators are particularly keen on Huawei’s 5G bid because they already use the Chinese company’s hardware in their networks.

But Germany also worries about Chinese companies acquiring its technology. Last December, a new law reduced the threshold of equity stakes that automatically trigger a mergers investigation. The new industrial strategy, recently proposed by Peter Altmaier, the economy minister, wants to protect entire sectors from Chinese acquisitions — aircraft, finance, telecommunication, trains, energy and robotics.

In his recent book, Belt and Road, Bruno Maçães, Portugal’s former Europe minister, notes that the Chinese-German relationship has changed profoundly. Germany once saw China as an export market for machinery with which China would develop its industrial base. Today, China is becoming the senior partner in the relationship.

The car industry is going to be key. It is the source of Germany’s past success, and China’s future prosperity. But the two sides have opposing interests. Overreliance on diesel technology made the German car industry a late investor in artificial intelligence and electric batteries. Mr Maçães notes that China plays a different game. The Chinese are not primarily interested in securing production plants. They want to control the entire electric car value chain. In order to do so, China has locked up large parts of the global supply of cobalt, an essential metal in producing batteries.

The two countries do have a lot in common. Both are export-driven economies with large external savings surpluses. But Germany’s economic strategy is not nearly as consistent. The German political preference is to reduce public debt. Yet the country’s biggest problem is falling behind in the technological race. Excessive fiscal consolidation has been the main cause of under-investment in roads, telecoms networks, and other new technologies.

Germany is also under-investing in its defence sector. Ursula von der Leyen, defence minister, recently proposed a plan to increase the defence budget from the current 1.3 per cent to 1.5 per cent of gross domestic product by 2023. But Olaf Scholz, finance minister, objects.

The episode is symptomatic of a fundamental European problem: unlike in China, macroeconomic policy, industrial policy and foreign and security policy are run independently of each other. The Huawei 5G bid shows that the EU is not well prepared to deal with a connection between security and industrial policy. Nor have the Europeans paid much attention to the impact of their fiscal rules — not least on defence and security policies. China, by contrast, has an integrated approach to economic and foreign policy. [...]

Public sector debt reduction was a political choice. If Germany had instead invested in defence and future industrial advantage, allowing the fiscal position go where it wanted, we would be in a different place today. But that would have required a degree of geo-strategic thinking that is absent in policy discussions across the EU.

Perhaps the Europeans have been so self-absorbed over the past 10 years that they did not see this coming. The now emerging protectionism, the sudden realisation of a need to protect against Chinese takeovers, are signs that complacency is about to turn into panic. 

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