Germany’s foreign economic policy has barely got a mention in the 2021 federal election campaign. Yet, the issues arising are all central for Germany’s prosperity: the potential impact on Germany of rising tensions between the United States and China; international climate diplomacy; climate action; the declining effectiveness of international and multilateral rules in a geopolitical environment in which a multitude of power poles pursue different interests; and European integration.
Openness implies vulnerability
The experience of recent years shows how the US and China use economic pressure points to assert their geopolitical interests against Germany. This raises the central questions of how Germany should deal with international pressure on its own economy, and to what extent Germany and Europe can work with their trading partners to pursue their interests globally. One approach, often suggested in the US, is to reduce economic interdependence in particular with China in order to become less vulnerable. It is in particular the systemic rivalry with China that should raise concerns in Europe. Germany needs to be at the forefront of defining an economic policy strategy to defend its interests while avoiding decoupling.
This discussion is of great importance for Germany because of the openness of its economy. Exports represent more than 30% of gross domestic product. Half of Germany's trade in goods is with the EU, 10% with China, 7% with the United States and 4% with the United Kingdom. This openness with the EU as its central trading partner is the foundation of German prosperity. The EU, in turn, has contractually secured the opportunities for German and European companies to trade worldwide by concluding trade agreements.
But openness also means vulnerability. To safeguard its own interests, Germany must therefore actively shape globalisation. A strategy of decoupling or dismantling international interdependencies is not recommended. However, instruments must be sharpened within the European framework to defend and enforce interests and to make Europe less susceptible to economic policy pressure.
Weaknesses in the domestic economy
Germany's economic development has been positive overall since 1999. Per-capita GDP growth compares favourably with the US. France and the UK lag behind Germany and the US; Italy has been stagnant for decades.
But closer analysis reveals clear structural weaknesses to which German economic and foreign policy must respond in the next decade:
- Germany and the EU have a relatively old corporate structure with few young and growing companies. Among the top 50 Fortune 500 Global Companies, 22 are from the US, 12 from China and only seven from the EU (three from Germany: Volkswagen, Daimler, Allianz). Among the top 500, China now has more companies than the US for the first time.
- The lack of qualified personnel, for example in the digital sector and especially in artificial intelligence, is making it difficult to introduce cutting-edge technologies. Germany risks losing its leadership position in key sectors where data-driven and AI-based solutions are becoming the industry standard.
- Germany's energy transition is incomplete. Comparatively high energy prices combine with insufficient decarbonisation. The share of renewable energies is increasing, but is below the EU average and far behind the frontrunners, the Nordic countries.
- There are also clear weaknesses in the efficiency of public administration. In the OECD Digital Government Index, which measures the openness, usefulness and reusability of government data, Germany is below average.
These weaknesses are the backdrop against which German foreign economic policy will be shaped in the coming years. Clearly, the new federal government must remedy the internal weaknesses to improve the competitiveness of the economy. This will also increase the foreign policy strength of the Federal Republic.
Recommendations for German foreign economic policy
- Increase the resilience of the EU and the euro area
The EU has made substantial progress in r