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Companies that operate on a global scale such as Siemens, Mercedes, BASF, Bayer, ThyssenKrupp, Bosch, Continental, ZF, or Volkswagen represent a proud industrial history that often dates back more than 100 years. Yet those industrial enterprises stand for much more: they are symbols of »Made in Germany« all over the world. They have given firm grounding to the reputation of German engineering know-how and its capacity for innovation. Moreover, they inspire national self-confidence and give many people reason to feel proud.

Recently, however, the head offices of German industrial firms have been sending mostly messages of gloom and doom. The specter of deindustrialization is haunting Germany! And these are not just swan songs in the media. There are real dangers afoot for what is still the world’s third-largest economy. Since 2017, we have witnessed continuing weakness in industrial production, the disappearance of industrial jobs, threatened factory closures and offshoring of production, an increase in business bankruptcies, and more generally a decline in the value added by industry to the economy as a whole. By now many people have recognized the seriousness of the situation and are urging resolute action.  Among the political parties there is hardly any dissension when it comes to the goal: that Germany must continue to be an industrial country. Nevertheless, two controversial topics remain: what concrete steps to take to counter the risks of deindustrialization and which instruments might be best suited to accomplish that.

To begin with, the German economy as a whole finds itself in crisis mode. Many other European economies, China, and especially the United States have managed to chalk up respectable growth rates once the pandemic, energy crisis, and record inflation were behind them, but the German economy has not budged. In the aftermath of negative growth in the last couple of years (2023: -0.3%, 2024: -0.2%) it now looks as if economic performance will shift into reverse once again in 2025.  And even if the government’s forecast of marginal growth were to pan out, a really powerful upswing remains a distant prospect.

There are multiple reasons for these economic problems, some structural and geopolitical, others involving the business cycle itself. They are of a general nature and include inflation, rising energy prices, a shortage of both highly trained and less skilled workers, a higher propensity to save, reluctance to invest, increasing protectionism, and intensified international competition. With those causes in mind the hot political debates of the day are focusing intently on the issues of industrial policy and the role of the state.

During the global financial and economic crisis of 2008 – 09, German industry still was a stabilizing factor that ensured a quick recovery from the deep slump caused by the bankruptcy of Lehmann Brothers. While industry’s share in gross value-creation had dipped in almost every other country, Germany (until 2017) and China were able to buck the trend. From a comparative perspective we can see the dominance of German industry reflected in its share of gross value-creation: around 20% in Germany versus 18% in Japan and only 13% in the USA.

»It is understandable that the political leadership and indeed the entire society should have an interest in stabilizing German industry.«

In comparative terms, Germany industry offers coveted, well-paid jobs in a sector in which there is little unemployment. German firms are among the biggest taxpayers in the country; moreover, the overall economic importance of the industrial sector is magnified by its demand for a variety of component parts. Finally, industry and in particular the three German automobile manufacturers spend more on research and development (innovation) than other sectors. Thus, it is understandable that the political leadership and indeed the entire society should have an interest in stabilizing German industry.

For a decade or so, wrenching dislocations have afflicted world markets. Although its share in Germany’s gross value-creation had been declining since 2017, German industry, highly dependent on exports, was still able to hold its own. Meanwhile, China managed to expand its share of global gross value-creation in the manufacturing sector. In slightly more than ten years, China had taken over the top spot and, through its »made in China 2025« label, completed the transition from the world’s workbench to the status of a superpower in industrial production. The first Trump presidency as well as the Biden Administration’s Inflation Reduction Act managed to re-shore some industrial jobs back to the USA or attract new industrial production to the country.

In spite of their systemic differences and aside from the geopolitical tensions between them, the USA and China display some similarities when it comes to their protectionist, nationalistic, and Keynesian approaches. In both cases, the state plays a central role. Whereas China has come to dominate green tech (decarbonization), the USA is clearly ahead in big tech (digitalization). Meanwhile Germany and Europe are in danger of falling behind in both of these futuristic fields.

In light of those developments, there is an emerging consensus in Germany that cuts across partisan divides even before the expected formation of a new government in the coming months. It can be summarized under several headings:

»State-subsidized price caps could relieve the burden on both the economy and private households.«

First, Energy prices in Germany make this country uncompetitive internationally. While it’s true that LNG imports were able to compensate materially for the cutoff of Russian gas supplies, those imports proved to be far more expensive. In Germany, network charges and the costs of transmission grids are too high. State-subsidized price caps could relieve the burden on both the economy and private households. Furthermore, during the current phase of the transformation a separate industrial electricity price should be introduced and applied to a broader range of firms. 

Second, Germany exhibits glaring weaknesses in both investment and innovation. Our country is consuming its substance and investing too little in its future capabilities. The Federal Association of German Industry (BDI) pegs Germany’s investment needs between now and the year 2030 at 1.4 trillion euros. For that same time frame, the Institute for Macroeconomics and Business Cycle Research (IMK) and the Cologne Institute for the German Economy (IW) indicate that it will cost the public about 600 billion euro to finance the modernization of the country’s aging infrastructure alone.

Third, the labor supply must be expanded by retraining and upskilling people who already live in Germany as well as offering them continuing education. Those steps must be supplemented by a policy of targeted immigration: i.e., attracting skilled personnel to immigrate to this country.

Fourth, the current interpretation of the the debt brake, anchored in the Basic Law since 2011, has been construed in much too dogmatic a way. New, pro-economic-growth regulations better suited to the altered global situation are urgently needed. A sensible compromise might involve reactivating the so-called »golden rule,« the previous regime of constitutional law that regulated borrowing by the state. Like the debt brake, that pre-2011 legal regime would continue to prohibit the state from borrowing money to finance consumption.

Differences among the parties over these issues are not so great that they would block agreement in potential coalition negotiations, even though there might well be fierce fights over concrete instruments and forms of implementation. The requirements for a »state-led industrial policy« come cheaply, and not only because they allow for consensus. In fact, they result in no more than a truncated industrial policy that would indeed deliver needed relief to corporations and industry, but would leave serious structural problems in the industrial transformation untouched.

The promise of a »truncated industrial policy« is limited. It might be able to correct market failure in part, alter the broad framework within which firms operate, and offer them cost reductions. But it clearly falls short, given that substantial progress should and must be made toward decarbonizing and digitalizing the economy. There is no doubt that lower energy costs would be a boon to business enterprises and private households, but that is not yet the way to develop »trend-setting green markets.« For the latter to happen, costs would need to be only one factor. First and foremost, we would have to learn to control and localize value-added chains.

Mission-oriented industrial policy

We need a »mission-oriented industrial policy« in Germany too, the core element of which will be the pursuit of a democratically legitimized, overarching goal that generates society-wide benefits. This goal, which is yet to be defined, should be multi-sectoral and, in the process, bring about positive spillover effects in other areas. The latter, in turn, should encourage innovation and growth. In the November, 2024 issue of Neue Gesellschaft/Frankfurter Hefte, Benjamin Mikfeld laid out this approach with precision.

»China in particular represents a successful, geostrategically-directed industrial policy.«

China in particular represents a basically successful, geostrategically-directed industrial policy. As early as 1996, the country had already approved a national development plan for renewable energy. China strove to achieve a leading international role in the development, production, and marketing of »green technologies« such as photovoltaics, wind energy, electric vehicles, and batteries. By leading the transformation to new technologies and the gradual decarbonization of the economy, China also sought to overcome its status as the world’s longest workbench, which had clung to it from the early period of market-opening, and assume a central position in value-creation. The example of electric vehicles shows vividly that China’s expectations have been fulfilled. Its active, state-led industrial policy, introduced around 20 years ago, has attained some essential goals. It enabled a new technology to get established, to which consumers‹ buying behavior adapted, and created a new, »green« market. To top that off, China is also a leader in producing electric automobiles.

Furthermore, we absolutely cannot forget the second central dimension of the economic transformation: digitalization. Whereas – at least from the traditional German perspective – the decarbonization of industrial processes follows a certain path-dependency, digitalization demands a true paradigm shift. As before, Germany is having a hard time with that. When it comes to software and artificial intelligence, China and the USA at this point seem to have left us in the dust. But in this case, we also can observe a new kind of interaction between the economy and politics, principally in the USA. In contrast to decarbonization, in which public funds act as the main catalyst, the recent announcement by President Trump of the 500 billion-dollar Stargate AI initiative shows that it primarily will be private funds that drive development. The state will contribute by issuing faster permits and setting a clear political course in its choice of goals. If we here in Germany and in Europe want to cultivate »digital champions,« we absolutely must improve the incentives for private investments. The state can give a significant push in that direction.

Thinking through industrial policy to its logical conclusion

Nevertheless, the discussion of an active industrial policy by the state has been contaminated here in Germany. It starts to involve matters of fundamental beliefs or of the »big picture« touching the relationship between market and state. But to develop new markets for green products and technologies, we need the state to intervene, because the whole point is that politically defined and intended markets are supposed to emerge. 

Climate legislation, with goals that will prove disruptive in the medium- and long-term, ultimately will remain illogical, if not downright wishful thinking in the absence of rational guidance in industrial and technology policy. Theoretically, one could imagine how such guidance might take place via market instruments such as CO2 pricing or a CO2 tax. That might make sense on a case-by-case basis--for example, when applied to clients‹ specific consumption patterns--but using market mechanisms to bring about all the adaptations necessary for a technological transformation would lead to dislocations in social policy and generate conflict throughout society. 

Thus, if we think through industrial policy to its logical conclusion, we must go beyond isolated incentives and focus on integrated chains of value-creation. A first step in that direction would be to define the branches of industry that should be producing in Germany. A resolution approved by the SPD Presidium identifies those as steel, automobiles, the engineering industry, chemicals, pharmaceuticals, semiconductors, and battery cells. This list is very well-supported and convincing. However, in the 2014 alliance for »The Future of Industry,« we heard mostly high-sounding cliches such as that industry should remain the »anchor of stability, the core of innovation, and driver of growth in the German economy.« To avoid a repeat of such high-flown rhetoric, the state should undertake an analysis of what is lacking and what is needed to make sure that, in those fields, production is done domestically either by German firms or foreign-owned companies that operate here. Although classical supply-and-demand policymaking will continue to be significant, it is not well-suited to create and develop new green markets. Only the state can do that, and only through close cooperation with market actors.

(The text represents the author's personal opinion.)