Action Plan for the Economy and Foreign Policy
The direction of German economic policy – in particular, foreign economic policy – is a key issue for Germany’s new federal government. At the heart of this issue is the trade-off between promoting growth and employment through further economic integration and seeking to protect universal values such as human rights.
This Action Plan is an edited and slightly updated translation of the German text that was originally published on September 20, 2021, as part of the DGAP Report Smarte Souveränität (“Smart Sovereignty”). It was written in the framework of the project “Ideenwerkstatt Deutsche Außenpolitik,” which is funded by Stiftung Mercator.
An English PDF of this text can be found as a chapter in the DGAP Report “Smart Sovereignty.” Download the full report here.
Enhancing the Resilience of the EU and the Eurozone
The trade-offs between security policy and economic objectives are more concrete. For example, there is a major economic interest in an international division of labor in the technology sector. Yet this can result in security vulnerabilities if, for example, Germany lacks the domestic capabilities to respond to cyberattacks or if the country becomes dependent on suppliers of key technologies. Finally, German and European policies seek to support global public goods such as the fight against climate change, but there can be a trade-off between calling for the establishment of environmental standards and concluding international trade agreements rapidly.
Another significant aspect of the current situation is the rising tension between the United States and China, and its potential impact on Germany. The diminishing effectiveness of international and multinational rules in a geopolitical environment in which many powers are pursuing different interests is also a key issue. The events of recent years have shown how the United States uses economic pressure points to push through its geopolitical interests in relation to Germany, an approach now also being employed by China. For example, the United States used threats to halt Europe’s economic trade with Iran and, by doing so, also undermined an important European security interest.
Openness also Means Vulnerability
This raises the key question of how Germany should deal with international pressure on its own economy, and to what extent Germany and Europe can, for their part, use their trading partners’ economic pressure points to pursue their own interests around the world. An approach often suggested in the United States is to scale back economic ties in order to be less vulnerable. This stands in contrast to the approach taken by the EU, which in 2019 described its relationship with China as a strategy of cooperation, competition, and systemic rivalry (see also the Action Plan for China and Foreign Policy).
To ensure that it is capable of action in the future and to protect its own interests, Germany must actively shape globalization
This is an extremely important discussion for Germany because its economy is highly open. Exports account for more than 30 percent of gross domestic product. Fifty percent of German trade in goods is with the EU, while 10 percent is with China, 7 percent is with the United States, and 4 percent is with the United Kingdom. The openness of the German economy, with the EU as its main trading partner, is the foundation on which German prosperity is built. For its part, the EU has concluded trade agreements that provide a secure basis for German and European companies to do business worldwide.
At the same time, openness also means vulnerability. Germany must therefore actively shape globalization in order to ensure that it is capable of action in the future and to protect its own interests. A strategy of decoupling or scaling back international ties is not recommended. At the same time, instruments must be refined in the European framework to allow interests to be defended and asserted, and to reduce Europe’s susceptibility to economic pressure.
Domestic Economic Weaknesses
Germany’s economic development has been generally positive since 1999. Growth in gross domestic product per capita is very similar to that of the United States. France and the United Kingdom are somewhat behind Germany and the United States; Italy has been stagnating for decades. Meanwhile, China’s rise is so impressive that it eclipses all developed economies in terms of growth.
Yet a more in-depth analysis also reveals significant structural weaknesses in Germany, to which German economic and foreign policy must respond over the coming decade:
- Germany and the EU have a relatively old corporate structure with few young and growing companies. In the Top 50 of the Fortune 500 Global Companies, 22 companies come from the United States, 12 from China, and just 7 from the EU (3 from Germany: Volkswagen, Daimler, and Allianz). For the first time, China now has more companies in the Top 500 than the United States.
- The shortage of qualified personnel, for example in the digital sector and especially in the field of artificial intelligence, is hampering the introduction of cutting-edge technologies. Germany risks losing its leading position in important sectors where data-driven and AI-based solutions are becoming the industry standard.
- Germany’s “energy transition” is incomplete; the country faces a combination of comparatively high energy prices and inadequate progress on decarbonization. Although the share of renewable energy is rising, it is below the EU average and lags far behind the front-runners, the Nordic countries.
- Significant weaknesses are also clear in the context of public administration efficiency. The OECD Digital Government Index, which looks at the openness, use, and reusability of government data, ranks Germany below the OECD average.
These weaknesses are the background against which German foreign economic policy will be shaped in the coming years. Remedying domestic weaknesses is clearly an important task for the new federal government to make the economy more competitive. This will also make Germany stronger in the field of foreign policy. Recommendations are set out below for four key areas of foreign economic policy that will be vital for German prosperity and for achieving more far-reaching political objectives.
The EU has made substantial progress on remedying the eurozone’s initial flaws. Important steps have included the creation of the European Stability Mechanism (ESM) and the European Central Bank’s OMT program for the purchase of government bonds as well as joint banking supervision, an improved bank resolution mechanism, and the recovery fund that is supporting the weaker EU countries during the pandemic. That said, systemic weaknesses still exist alongside country-specific problems.
Germany’s next federal government should develop a proactive strategy to reduce the eurozone’s weaknesses. This involves issues such as completing the banking union, deepening and integrating capital markets, and increasing the available quantity of safe assets. Not only would this bring direct growth and stability dividends; but it would also be an important contribution to strengthening the euro’s international role via the creation of attractive investment opportunities. This, in turn, would make it easier for the EU to withstand pressure, such as in the case of the Iran sanctions.
Germany’s close economic integration with the EU means that it is in Germany’s interest to continue to strengthen the EU single market, the macroeconomic and financial resilience of the eurozone, and the conditions for growth in the EU. A weak single market not only means missing out on opportunities for growth; the resulting financial fragility can also have a negative impact on political stability.
Technology policy (see also the Action Plan for Technology and Foreign Policy) has risen up the agenda to become one of the main fields of foreign economic policy. This is due, first, to the key role that digital technologies play in all economic sectors. Second, competitors can exploit digital interdependencies for geopolitical purposes. The EU has focused more on this issue in recent years but does not have all of the necessary tools to respond effectively. While it can push through important standards in this area through regulation, it lacks financial instruments to promote new technologies. Additionally, decisions on foreign investment in European companies with key technologies are mainly still taken at the level of the member states.
In the field of data sovereignty, the EU has set international privacy standards, but it now needs a strategy to facilitate digital trade with countries with a lower level of data protection. The lack of investment in new technologies, networks, and human capital is a fundamental problem. For example, the EU has too few graduates in AI. It is essential to launch a training drive, strengthen the digital single market, boost investment, and improve venture capital funding to keep Europe from falling further behind in the field of digital technology. This, in turn, is vitally important to enable Europe to manage interdependencies better and thus reduce its level of vulnerability.
The most important objective of European policy will be to reduce vulnerability to China and manage interdependence
The conflict between the United States and China in the field of technology will shape German and European foreign economic policy in the coming years. Europe cannot be a neutral onlooker. Of course, there will also be disagreements with the United States. But the most important objective of European policy will be to reduce vulnerability to China and to manage interdependence. In addition to boosting domestic investment and making consistent use of the “Brussels effect” to set international standards, Europe also needs defensive tools. For example, creating investment control mechanisms is a necessary and useful step to ensure that acquisitions of key technologies can be prevented.
When taking decisions on the use of technologies, it is important to consider Europe’s robustness and resilience. On the whole, however, a defensive strategy will not be enough. Europe must invest more in digital technologies – not just so it can better manage geostrategic dependencies, but first and foremost so it is equipped for the future in terms of these key technologies. In recent years, Germany has rightly begun to invest more in digital technologies. However, the current levels of investment are still inadequate and should be increased.
In the field of climate policy (see also the Action Plan for Climate and Foreign Policy), there are two main areas for action that are relevant in terms of foreign economic policy. First, the European Green Deal has direct and indirect implications for trading partners around the world. Second, German and European policy must aim to accelerate decarbonization worldwide.
The European Green Deal will change trade flows. The ambitious target of full decarbonization by 2050 and a major reduction in emissions by 2030 means that the EU will lower its fossil fuel imports. As of 2030, in particular, there is projected to be a significant reduction in gas imports from Russia. But other energy suppliers in the European neighborhood will also be affected. These direct impacts can adversely affect countries’ economic models and thus also have an impact on political stability. Autocrats who depend on oil and gas revenues may potentially come under pressure. Managing this political transformation will be a major challenge.
European foreign policy cannot ignore the Green Deal; on the contrary, it will have to manage its global effects
The energy transition also means that the EU requires considerable imports of raw materials for “green” technologies. Resilient supply chains will be important to avoid new dependencies on suppliers of raw materials. Finally, falling demand for fossil fuels will have global implications; all other things being equal, it will result in lower prices. The EU is among the biggest importers; consequently, the impact will certainly be relevant for global prices. European foreign policy cannot ignore the Green Deal; on the contrary, it will have to manage its global effects. Bruegel has designed a work program that includes development assistance and technical aid, for example, to address the transformation of economic systems. At the same time, it is important to drive forward the development of green energy generation in Europe’s neighborhood. For example, green hydrogen could become a new export for countries that see their fossil fuel exports to Europe fall.
The other big question is whether and how the EU and Germany can accelerate decarbonization worldwide. First, it must be noted that global emissions are continuing to rise. The EU now only accounts for around 8 percent of global emissions, far less than China (26 percent) and the United States (13 percent). Consequently, the European Green Deal alone can only make a small contribution to tackling climate change. One key question will be how China can be persuaded to embrace decarbonization more quickly. This is not just a matter of cooperation, but also of ensuring that it is in China’s interest to rapidly reduce its emissions. In this context, a transatlantic agreement with a border adjustment mechanism for emissions is recommended. This would give China an incentive to step up its climate efforts and could also have a positive influence on other countries.
Technology partnerships with third countries, particularly poor third countries, could help to globalize the Green Deal by lowering the cost of use of green technologies. Flanked by financial support, this could lead to a cost-effective reduction in global emissions.
Health policy and efforts to tackle the pandemic should also become a key pillar of German foreign policy – not only because of their economic relevance. Although significant progress has been made on controlling the pandemic, the global economy remains vulnerable, and the number of COVID-19 cases around the world is still high. At the same time, there is a risk of new pandemics and other health risks.
That said, this also represents a major economic opportunity for Germany and Europe, which have strong health sectors. For example, the EU could expand its role as a key global producer of essential medical goods. From a foreign policy perspective, the most important aspect is how the EU and Germany would enhance their global reputation by playing a leading role in tackling the pandemic. Getting a grip on this health crisis as quickly as possible is a moral imperative. The world has the financial and technological means to achieve this, and the EU should play a key role in this context.
The immediate and most urgent task in the coming years is to accelerate vaccinations against COVID-19 in low-income countries around the world. The world and the global economy cannot be safe while there are high numbers of cases and while it is possible for new variants of the virus to emerge. German foreign policy should continue to prioritize this issue.
Germany should work with other G20 partners to strengthen the global health system
It is perfectly possible to immunize the majority of the world’s at-risk population by the end of 2022. According to estimates by the International Monetary Fund (IMF), this would cost roughly 50 billion US dollars, 35 billion dollars of which would have to come from international support. The IMF estimates that the economic benefits of ending the pandemic more rapidly would be worth 9 trillion dollars, making this the most important and profitable global investment at present. Germany’s new federal government should continue to spearhead international support for global vaccinations. It would make sense to press for the EU to order larger quantities of vaccines and pass them on cheaply to low-income countries. This would create incentives to rapidly increase production capacities. Financial benefits could be used to improve prevention measures in low-income countries.
The risk of pandemics has risen more generally. COVID-19 was not a one-off event; experts believe there is a high risk of a similar pandemic in the next ten to twenty years. This means that efforts to tackle pandemics must, like climate change, occupy a key place in German foreign policy. For example, Germany should work with other G20 partners to strengthen the global health system, improve early warning systems for pandemics, and boost basic research in the field of health.
In the medium term, Germany and the EU should seek to play a key role in supplying the world with medical goods to control pandemics. Large vaccine production capacities will have to be maintained even in pandemic-free times so that production can be scaled up rapidly in the event of an outbreak of disease. The EU has kept its borders open during the COVID-19 pandemic and continued to export vaccines. With its many innovative pharmaceutical companies, it can now play an even bigger role.
In Conclusion: Forging a Strategy
In times of major geopolitical tensions and severe economic crises, there is a political tendency to want to solve problems by embracing protectionism. This is rarely successful, however. Brilliant minds, such as Adam Posen, are now warning that a protectionist trade strategy would betray the interests of the middle class. Particularly in Germany, it would involve considerable risks for the export-oriented SME sector and the employees of these companies. The historical evidence even suggests that a severe economic crisis could usher in a new golden age of globalization.
Germany should choose a strategy that focuses on managing globalization and economic interdependencies rather than pursuing decoupling
Consequently, Germany should choose a strategy that focuses on managing globalization and economic interdependencies rather than pursuing decoupling. However, economic interdependence also means vulnerability to foreign political pressure. Therefore, three guidelines are of key importance.
- To be able to assert its positions credibly, the EU needs stronger instruments, such as a more robust investment screening process or a subsidy screening process. Such instruments can increase the stability and openness of globalization, as they act as a deterrent to other trading powers and thus encourage them to comply with global trade rules. The multilateral system is strengthened if Germany and the EU remain a strong pillar alongside the United States and China.
- The EU is the appropriate framework for action to achieve this. Germany has neither the economic nor the political power to withstand pressure from China or the United States on its own. It is a major inconsistency that, in an integrated single market, the tools to provide protection from external threats, such as hostile takeovers to acquire key technologies, remain located at national level for the most part, even though the investments, once made, allow access to the entire single market. Germany should support EU initiatives that provide for greater centralization of such decisions. It would be advisable to reconsider the unanimity principle in the field of foreign policy.
- The resilience of value chains must be boosted in economic sectors of outstanding strategic importance. This means pursuing a diversification strategy to reduce dependencies on individual producers, for example in the case of modern digital technologies. Examples include key technologies such as computer chips or essential raw materials for the production of green technologies.
Implementing the proposals made in the four concrete fields of action discussed above – resilience, technology, climate, and health – would have clear benefits for Germany and the EU. Strengthening the European economy and European decision-making structures would not only benefit business, but also create room for maneuver in relation to international partners and competitors. One of the strengths of the EU and Germany is supporting and reinforcing global public goods. The new federal government should press ahead with this because it increases Europe’s influence worldwide and enables it to better assert its interests and values.
This Action Plan is an edited and slightly updated translation of the German text that was originally published on September 20, 2021, as part of DGAP Report No. 17 Smarte Souveränität (“Smart Sovereignty”). It was written in the framework of the project “Ideenwerkstatt Deutsche Außenpolitik” about which you can find more information here.
An English PDF of this text, including the infographics, can be found as a chapter in the DGAP Report “Smart Sovereignty.” Download the full report here.