Merkel: Ger­many should em­u­late Asia

Chan­cel­lor sug­gested in­creas­ing merg­ers could help Euro­pean com­pa­nies com­pete glob­ally

Financial Mirror (Cyprus) - - MARKETS -

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 or­gan­i­sa­tion 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% 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, char­ac­terised 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% 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 longterm 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 longestab­lished 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 in­cen­tivis­ing 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 desta­bil­is­ing 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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