The first casualty of war is the truth they tell, and Russia’s aggression against Ukraine has proved this once again. At the same time, war can also bring to light truths that would normally remain hidden and unspoken in peacetime.
Martin Brudermüller revealed a hard truth about the German economy in an interview with the conservative German daily newspaper Frankfurter Allgemeine Zeitung recently. The head of the world’s largest chemical group, Germany-based BASF, said it was an indisputable fact that “Russian gas is the basis of German industry’s global competitiveness”. Asked whether Germany was fueling Putin’s war with its energy imports from Russia, he said a ban on those imports “will destroy the welfare of Germans.”
What Brudermüller described as “a mainstay of Germany’s economic power” is an integral part of the country’s business model and has secured its place as one of the world’s largest export nations. One of the successful business models of German companies over the past 20 years or so has been to import energy below market prices and use it to develop competitive products.
DW business editor Henrik Böhme
Russia, China and the forces of globalization
In recent years, China has also made a significant contribution to the success story, after German CEOs jumped on the Chinese economic giant much earlier than their competitors elsewhere in the world. This not only enabled them to secure large parts of the Chinese market, but also access to China’s rare earths and other valuable minerals. No wonder that the German car giant Volkswagen (VW), for example, currently sells around 40% of its annual production in China.
Germany also benefited from the fact that national economies around the world were opening up to international competition as a result of globalization. “Made in Germany” could only shine in a global market environment.
Cheap Russian energy and China’s huge markets, coupled with liberalized trade and a strong domestic industry, provided the perfect framework for the German economy to thrive. The consequences are a massive foreign trade surplus with exports far exceeding imports and at the same time precarious dependencies on Russia and China.
But what used to be a straight path to success for German companies has suddenly turned into a steep abyss as a result of the brutal war in Ukraine. The COVID-19 pandemic was already a kind of harbinger of what many believe to be the “end of globalization.”
Executives are starting to think seriously about untangling supply chains that have proven too complex in times of a global pandemic. In Germany, the lack of medical mask production has opened the eyes of politicians and the public alike to the fact that essential infrastructure has been completely outsourced to other parts of the world.
“Reshoring” is likely to become the buzzword for the post-COVID era, although moving manufacturing home could prove a major challenge for most developed countries.
“Bipolar” economic world order?
Now, the Ukraine war has given a new twist to Germany’s deglobalization narrative, increasing the national sense of urgency that the country must wean itself off of Russian energy imports in order to stop fueling Putin’s aggression.
Also new on the horizon is the question of how to deal with China, which appears to be supporting the Kremlin. Mind you, this isn’t out of sudden love for Putin in Beijing, but out of the Chinese president’s shrewd awareness of the sudden availability of vast amounts of Russian energy and raw materials. What unites Putin and Xi, however, is their shared hatred of Western values such as democracy, freedom of expression and the rule of law.
So is the world splitting again into two antagonistic blocs, or are we witnessing, as the German economist Gabriel Felbermayr put it, “the end of 30 glorious years of globalization”? Are we headed for a world where Europe and the United States lead the West while Russia, China and probably India, which is still undecided, join forces in the Far East?
Will the multipolar world of globalization collapse and give way to a new East-West confrontation?
Such a “bipolar world” would seriously undermine the German business model, and corporate leaders would do well to prepare for a new one. The undeniable adaptability of German companies to the vicissitudes of economic life can be helpful here. Focusing on the opportunities arising from the urgently needed energy transition and the decarbonization of German industry could pave the way for the future.
First of all, Germany must finally get serious about energy self-sufficiency, because electricity from renewable sources and hydrogen could bring a competitive advantage.
Economics Minister Robert Habeck wants Germany to have carbon-free electricity in the next 13 years and has declared electricity generation from sun, wind and biomass to be of “overriding public interest”. If achieved, it would be a great step forward and would allow German industry to continue producing at competitive prices while ensuring Germany’s prosperity in the future.
Edited by: Kristie Pladson