The first casualty of war is the truth they speak, and Russia’s aggression against Ukraine has proven this once again. At the same time, war can also reveal truths that would normally remain hidden and undiscussed in times of peace.
A hard truth about the German economy was unveiled by Martin Brudermüller in an interview with the conservative German daily Frankfurter Allgemeine Zeitung recently. The head of the world’s largest chemical company, Germany’s BASF, said it was an undeniable fact that “Russian gas is the foundation of German industry’s global competitiveness.” When asked if Germany was fueling Putin’s war with its energy imports from Russia, he said a ban on such imports would “destroy German welfare”.
What Brudermüller described as “a pillar of Germany’s economic power”, has been an essential part of the country’s economic model and secured its place as one of the biggest exporting nations in the world. Successful business models built by German companies over the past 20 or so years have included importing energy below market prices and using it to develop competitive products.
Henrik Böhme, Economics Editor of DW
Russia, China and the Forces of Globalization
In recent years, China has also made a significant contribution to success after German business leaders pounced on the Chinese economic juggernaut much earlier than their rivals elsewhere in the world. By doing so, they were able to secure not only large segments of the Chinese market, but at the same time access to China’s rare earths and other valuable minerals. No wonder German car giant Volkswagen (VW), for example, currently sells around 40% of its annual production in China.
What has also proved helpful for Germany is the global drive of national economies to open up to international competition under the banner of globalization. “Made in Germany” could only shine in a global free market environment.
Cheap Russian energy and China’s huge markets, coupled with liberalized trade and strong domestic industry, were the perfect setting for the German economy to get ahead. The results are a massive foreign trade surplus, with exports far exceeding imports, and at the same time, precarious dependencies on Russia and China.
But what has long been a straight road to success for German companies has suddenly turned into a slippery slope due to the brutal war in Ukraine. The COVID-19 pandemic has already come as a sort of harbinger of what many see as “the end of globalization.”
Business leaders are starting to think seriously about untangling supply chains that have proven too complex during a global pandemic. In Germany, the lack of production of medical masks has opened the eyes of politicians and the public to the fact that critical infrastructure has been completely outsourced to other parts of the world.
“Reshoring” is likely to become the buzzword of the post-COVID era, although bringing production home may prove a difficult task for most industrialized countries.
“Bipolar” economic world order?
Today, the war in Ukraine has added a new twist to Germany’s deglobalization story, reinforcing the national sense of urgency for the country to wean itself off Russian energy imports, so as not to further fuel the aggression of Putin.
The question of how to deal with China, which seems to choose to support the Kremlin, is also emerging on the horizon. Notice that this is not due to a sudden love for Putin in Beijing, but to an insightful realization on the part of the Chinese president that massive amounts of Russian energy and raw materials are suddenly up for grabs. What unites Putin and Xi, however, is their shared hatred of Western values such as democracy, free speech and the rule of law.
So, is the world again split into two antagonistic blocks or, as the German economist Gabriel Felbermayr puts it, are we witnessing “the end of 30 glorious years of globalization”? Are we heading towards a world where Europe and the United States will take the lead in the West, while Russia, China and probably India, still undecided, will join forces in the Far East?
Will the multipolar world of globalization collapse and give way to a new standoff between East and West?
Such a “bipolar world” would seriously undermine the German business model, and business leaders would be well placed to start preparing for a new one. What can contribute to this is the undeniable ability of German companies to adapt to the vagaries of economic life. Focusing on the opportunities offered by the much-needed energy transformation and decarbonisation of German industry could pave the way forward.
For starters, Germany must finally take its energy autonomy seriously, as electricity from renewable sources and hydrogen could be a competitive advantage.
Economy Minister Robert Habeck wants Germany to have carbon-free electricity within 13 years and said electricity generation from solar, wind and biomass energy was “of overriding public interest”. If achieved, it would be a huge leap forward and would allow German industry to continue producing at competitive prices, while safeguarding Germany’s well-being in the future.
Edited by: Kristie Pladson