Merkel Is Seizing Her Chance to Revolutionize Germany's Economy

(Bloomberg) — On a gloomy Friday in March, with the devastation of the coronavirus becoming clear, senior officials in Chancellor Angela Merkel’s government realized that extraordinary measures were needed to shore up Europe’s largest economy.

At breakneck speed, aides based at the Economy Ministry’s former Prussian estate on the Spree river in Berlin pulled together a rescue program totaling 600 billion euros ($660 billion) to prevent a collapse.

With infection rates surging and stringent restrictions on people and businesses, there was little time for debate and no serious opposition. Yet behind the feverish crisis management was a deeper strategy that had been months in the making.

It had already been rejected as too radical for the political and business establishment when first proposed last year. But with the crisis as a catalyst, the package passed cabinet the following Monday and was law by the end of the week. It puts Merkel in charge of the most dramatic re-engineering of Europe’s biggest economy since the post-war reconstruction.

By the time she’s finished, the chancellor will have installed a kind of state capitalism in Germany that borrows heavily from France and is even informed by China’s success. It will give officials in Berlin new powers to intervene in the economy: they’ll be picking winners and losers, seeding new industries and grooming national champions. Buying stakes in companies is no longer taboo, and the touchstone balanced-budget policy has been jettisoned to unleash the full power of the German balance sheet.

In other words, this week’s landmark 9 billion-euro ($9.8 billion) bailout of Deutsche Lufthansa AG — including the government’s 20% stake and the right to block unwanted takeovers — is only the beginning. More than just securing Germany’s air links to the outside world, the deal sets down a marker for how the Merkel administration intends the economy to be run in the post-pandemic era.

The package was approved by Germany’s brand new WSF Economic Stability Fund, which includes 100 billion euros of taxpayer money to directly invest and even buy out companies. The fund was created during that hectic weekend in March, but its origins and the broader strategy behind it were sketched out more than a year ago by Economy Minister Peter Altmaier.

Spurred by leading German executives’ alarm about the country’s struggles against foreign competition, Merkel’s former chief of staff took it into his own hands to craft a response. Writing some of the passages himself, he presented the resulting policy paper in February 2019 — long before anyone had ever heard of Covid-19.

His industrial strategy called for enhanced government authority to invest in technology such as artificial intelligence, battery cells and clean energy. He wanted closer ties with industry to nurture homegrown global players.

The country will go “from a bystander of a process that’s already in full swing in the U.S. and China into a shaper,” he said at the presentation.

The effort was buried in an avalanche of criticism.

Germany’s powerful Mittelstand of family-owned manufacturers attacked it as a paean to big business, while lawmakers from Merkel’s Christian Democratic Union made it clear that they weren’t ready to give the government that much power. European partners also fretted about the protectionist, Germany First undertones.

Altmaier was forced to back down and in November presented a watered-down version — called “Made in Germany: Industriestrategie 2030.” The initiative was dead, until the coronavirus changed the game.

The new approach shows a country that is ready to make bold bets on its economic future, but true to Germany’s frugal traditions. In the Lufthansa deal, the administration —  still battling with the European Commission for approval — is paying less than one-third the market price for its stake, which can be raised to 25% plus one share if the airline doesn’t pay a guaranteed dividend on the bulk of the funding.

“We have sent a convincing signal of support for the free-market economy. But this is also a signal that the German government is willing to defend the technological and economic sovereignty of this country,” Altmaier said after announcing the bailout.

Contours of the strategy will become more visible in early June, when Merkel’s administration unveils a much-anticipated economic stimulus plan, totaling as much as 100 billion euros.

Another sign of the government’s determination to change things up is the one industry that will come up short: autos.

Germany’s powerful carmakers were the main beneficiaries of stimulus spending after the financial crisis. There will likely be some incentives for car purchases this time, but Volkswagen AG, Daimler AG and BMW AG won’t get another sweeping cash-for-clunkers program that bolsters profitable conventional vehicles alongside electrics.

In fact, Merkel canceled a meeting with leading representatives of Germany’s car industry scheduled for next Tuesday due to disagreements over the package. She has bristled at auto executives’ demands for the taxpayer to come to their rescue — a surprising snub from the so-called “auto chancellor.”

When she announced an end to stringent restrictions on the public earlier this month, she told the car companies they would have to pitch for funds like everyone else, making them sound more like startups rather than the titans of the German economy.

“It’s not like you can only talk about a restart of the economy if the state gives more money,” she said. “We will indeed need a stimulus program, but the initiative must come from the companies.”

The spending plan is only one piece of the puzzle. Strategic programs are either already under way or in the works, including measures to protect companies against foreign competition, to reduce dependence on overseas supply chains and to prop up local industry.

Key Pillars of Merkel’s Activist Strategy

100 billion-euro fund to buy stakes in companies, to be increased if needed; German states encouraged to set up similar funds to safeguard local champions Takeover controls are being extended to give the government authority to block foreign purchases for “potential interference” Seeding burgeoning industries like artificial intelligence, battery-cell production and clean energy; promoting local suppliers to reduce reliance on companies outside the EU

It’s a unique opportunity for Merkel to atone for past mistakes. Even before the pandemic hit, Germany was stumbling. A reliance on carbon-intensive technologies, a spotty national digital network and a plodding bureaucracy revealed cracks in the chancellor’s management of the country’s export machine.

After the financial crisis, her strategy had been simply to steady the ship and get out of the way. But the world has changed significantly since then.

The transatlantic partnership with the U.S. has frayed under President Donald Trump, and China is targeting Germany’s position as the world leader in advanced manufacturing. Beijing’s Belt and Road Initiative — an infrastructure program that ends at the inland port of Duisburg in Germany’s industrial Ruhr Valley — seeks to extend the country’s influence deep into Europe.

The Asian power has also been buying up German businesses including industrial-robot maker Kuka AG, and Chinese billionaire Li Shufu is the biggest shareholder in Mercedes-Benz maker Daimler. The concerns have caused Merkel to clash with European Union, demanding takeover law be changed to reflect global competition rather than focusing on the impact within the bloc. And they have inspired the more protectionist provisions in Altmaier’s plan.

Read More: Merkel Says EU Antitrust Rules Are Naive About Threat of China

Echoes of the activist strategy were there too in the proposal presented by Merkel and French President Emmanuel Macron to backstop a European Union recovery fund. That plan included policies for an ambitious overhaul of the bloc’s economy as well as looser state-aid rules to help foster the creation of larger and greener companies.

“We have seen that others, whether the United States of America, South Korea, Japan or China, have relied very heavily on global champions,” Merkel said. “I believe that this approach is the necessary answer.”

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