The Reconfiguration of the World Economy – and Germany’s Geo-Economic Readjustment

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In 2009, we have witnessed a “world in transition.” The global economic-financial system has not disintegrated, as many feared a year ago, but both the world economy and the global political system are being profoundly transformed. Old habits have become unsustainable – and are indeed being replaced by new attitudes.

by Michael Liebig


As we are approaching the turn of the year, it seems reasonable to look back at the year 2009. In December 2008 – three months „after Lehman“ – many thought that the breakdown of the world financial system and a 1930-style world depression were imminent. Today, we know that 2009 has not turned into the big annus horribilis – even though it would certainly be fallacious to proclaim “all clear” for the world economy and particularly the financial system.

In December 2009, we can unambiguously state that the condition of the world economy is exceptionally heterogeneous and uneven. We have sectors in the world economy which are in deep crisis (USA, Britain), and other sectors which are growing robustly (China, India, Brazil). Germany and continental Europe are somewhere in the middle between these two dynamics.

In December 2008, I wrote an article titled “The Crisis and the Multipolar World System”, stating: “I think, the term ‘global financial and economic crisis’ is problematic, if not misleading. I do not see the inevitability of a global depression, which however does not mean that it cannot happen. The internal problems in European Union and the Chinese, Russian, Indian, Brazilian and other “emerging” economies/financial systems are severe, no doubt about that, but they are of a different quality than those in the USA. Relevant here are the ‘dialectics’ of globalization which features both connectivity/conformity and diversity/multipolarity. This ‘paradox’ marks a key difference between the present world situation and that of the 1930s ‘Great Depression’… Today, we have a multitude of economic power centers and/or regional combines with significant economic ‘eigenvalue’. The endogenous economic development potential of these economic power centers and/or regional combines is great and can be a significant buffer against exogenous shocks – provided concerted efforts by both state and private actors are undertaken for domestic/regional development.”

I did underestimate the collateral damage of the financial crisis for Germany and continental Europe. German banks, notably the public-owned Landesbanken, were more deeply entangled in securitization and other speculative schemes than I had thought. On December 18, the European Central Bank (ECB) in Frankfurt put its estimate of bank losses in the Eurozone (excluding Britain) at a total of 550 billion euro for the 2007-2010 period. In the European Union and in Russia, economic output has significantly shrunk in 2009 – 5% in case of Germany.

Nevertheless, in the ongoing reconfiguration of the world economy, Germany is in a rather advantageous position towards China, India and Brazil and other “emerging” countries which are growing (again) on scales that are comparable to their performance prior to the financial shock in Autumn 2008.

Currently, we witness Germany’s adapting to the new “division of labor” in the world economy, which is generating a new global nexus of trade and investment flows. And, the reconfiguration of the global economic and political system, necessitates profound cognitive and behavioural mutations by all actors. Brazilian President Lula da Silva , during a state visit in Germany in early December, cogently noted: “The international financial crisis has catalyzed new attitudes.” How do these “new attitudes” manifest themselves in Germany?

The Downside

But first let’s look at the downside of the world economy in 2009. When reading alarmist media reports about financial and/or fiscal crises in Dubai, Greece, Hungary, Ireland or Japan, we should not forget that the real crisis center of the world economy are the United States. During the past 15 months about 10 million jobs got lost in the USA. Since the beginning of 2008, the number of the recipients of “food stamps” – a reliable indicator of poverty – has risen by 9 million to 35 million Americans at present. In 2009, 3.9 million foreclosure sales have been initiated in the USA.

The terrifically expanded state expenditures – the US budget deficit amounts to $1.4 trillion in 2009 – have not significantly „stimulated“ the US economy, but have merely kept the US banking system above water. The US banking system, like Britain’s, is not primarily focussed on providing credit to the real economy, but on the trading of securities, particularly public and commercial bonds, (speculative) proprietary trading and consumer/real estate loans.

The vast expansion of money supply through the Federal Reserve’s „quantitative easing“ – i.e. the central bank buying US government bonds and paying by “printing money“ – will necessarily lead to accelerated inflation and further exchange rate losses of the US dollar during the coming years. With a net US indebtedness to foreigners amounting to $3.5 trillion, one can easily imagine the losses coming up for foreign creditors of the USA.

Also in the European Union, state indebtedness has dramatically grown in 2009 (by far most dramatically in Britain). But, while vast amounts of public money have “vanished” in the banking sector, on the European continent at least, a significant portion of state deficit-spending has gone to the real economy – stabilizing it and keeping down unemployment. Protecting the productive economic potential by state intervention has preserved the core capacity for Germany adapting to the radically changed conditions in the world economy.

Germany’s Geo-Economic Reorientation

About 50% of Germany’s GDP is generated by exports. The main export market – more than 60% – is the European Union. The remaining 40% of exports – at least 300 billion euro – are going to markets outside the EU. And in this export segment we see a dramatic shift towards Asian markets and those of other „emerging” countries like Brazil.

Thorsten Schulte is to my mind one of the best economic-financial analysts in Germany. On December 12, 2009, Schulte wrote in his Silberjunge newsletter: „In the longer run, China, Brazil or India are much more important than the USA“. Indeed, if you glance through the economic sections of leading German newspapers, you will be astonished about the frequency of articles on China, India or Brazil and other “emerging” countries. The contrast to the coverage of these economies just 12 months ago is striking. Not only has the frequency of such articles surged, also the “tune” has changed markedly: It’s mostly objective, respectful and appreciative. The erstwhile habitual criticism and presumptuous “counselling” has mostly vanished.

Currently, lots of books are being published on China, India and Brazil – and reviewed in leading newspapers. For example, Alexander Busch’s just released book Brazil: The Economic Power – The Green Giant is Awakening. Busch, correspondent of the business paper Handelsblatt in Brazil, tells his readers that Brazil “has a vast domestic market, a growing middle class, solid corporations and banks, a healthy mix of raw material produces, industries and service firms, endogenous R&D, products and brands, enormous natural resources, the world’s biggest agricultural potential, diversified export markets, and a sound balance between market and state.” Certainly a “different tune.”

Germany’s reorientation on Asian and other “emerging” economies is most clearly illustrated by the car industry. Besides the EU, China has become the most important market for Volkswagen, selling there four times as many cars as in the USA. In early December, VW formed an capital-sharing alliance with Suzuki with the aim to attain a leading position in the Indian car market as well. In 2010, BMW plans to sell in China as many cars as in the USA. Mercedes-Benz has sold in October 6600 luxury vehicles in China; that is still only one third of its sales figure in the USA – but its Chinese sales increased by 80% during 2009 compared to the previous year. Surely, that the German car industry has made it rather fairly through the year 2009 is not only due to the famous „scrappage subsidy” by the government, but the dramatically risen sales in Asian and other “emerging” countries.

Expanding sales and investments in Asian and other “emerging” countries are by no means limited to the car industry. The German chemical industry, notably BASF, is massively investing in Asia; in 2010, BASF will generate 10% of its global turnover in China. Similarly, the electrical engineering industry. For Siemens, China is now its second most important market and it has 43,000 employees there.

These examples should illustrate that the economic development dynamic in Asia and in other “emerging” countries has become a decisive pillar sustaining the German economy as whole.

And this includes the mostly medium-sized German machine tool sector with its 80% export dependency. This business sector was very badly hit by the crisis in 2009 – sales have declined 30-50% on average. But the construction of new plants, the enlargement and modernization of existing plants in Asia and in other “emerging” countries will inevitably lead to fresh demand for production machines, machine parts and corresponding technical services.

The quality and innovation capacity of the German machine tool sector assures that its products cannot be substituted by cheaper, but technologically inferior and less reliable equipment of competing manufactures. With this view, the medium-sized machine tool producers have not laid off their highly qualified work force during the extremely difficult year 2009. And the German government’s subsidizing the retaining of staff – the “short time” program – will prove a very productive public investment in the longer run.

Another important aspect of the ongoing geo-economic readjustment of the German economy is that it differs from “outsourcing” of production facilities to low-wage countries which was typical for the 1990s and the first years of this century. Investments in the economies of rising powers do mostly not substitute production in Germany, but service new, rapidly growing markets. Demand is being satisfied that simply didn’t exist 10 or 20 years ago. Meanwhile, it has been understood that the competitiveness of the German economy is not determined by labor costs, but the quality of the labor force and its corresponding innovation capacity.

Lula’s Visit to Germany

As already indicated, the reorientation of German exports and investments is not limited to China and Asia generally. On December 3-4, 2009, Brazilian President Lula da Silva was in Germany for a state visit. On the first day he stayed in Berlin, where he conferred with Chancellor Merkel, President Köhler and other senior government officials. Several German-Brazilian cooperation agreements were signed in Berlin. „With the today’s commitment to stronger cooperation, Chancellor Angela Merkel and President Luiz Ignácio Lula da Silva have set a landmark for German-Brazilian economic relations „, said Ekkehard Schulz, vice president of the Association of German Industry (BDI) and chairman of Thyssen-Krupp, which is building a steel plant – with an annual output of 5 million tons of steel – in Brazil.

On the second day, Lula took the high-speed ICE train to Hamburg, accompanied by German secretary of economics Bruederle and Siemens chairman Loescher. In Hamburg, Lula was the keynote speaker at the „Latin America Day 2009“. There he said: “I feel, no, I know that we have reached a new moment in German-Brazilian relations. Now we are opening a new chapter, because the international financial crisis has catalyzed new attitudes. Brazil and Germany are complementing each other, some people have known this all along, soon all will know.” Lula is obviously a very insightful man.

At their joint press conference in Berlin, Chancellor Merkel had made a rather embarrassing faux pas. She welcomed Lula at his „first state visit in Germany.” However, in January 2003 Lula had already been on state visit in Germany. Gerhard Schroeder was a chancellor then, the Iraq war was imminent, the acronym BRIC wasn’t invented yet, and Brazil was not yet perceived as leading actor in world political and economic affairs.

I checked some press articles from 2003 on Lula’s first state visit, and I realized that times have changed indeed. The “tune” of the articles in 2003 was not unfriendly, but not really appreciative – and there was quite a bit of presumptuous “counselling.” But no more. In 2009, the media interest in Lulas visit was big and the tenor of the press reports was: “A Self-Confident Visitor,” as the lead editoral in the Frankfurter Allgemeine Zeitung put it. Adding that in the coming decade Brazil will bypass Britain and France becoming the fifth-largest economy in the world.

In Hamburg, Lula did not only meet with top business leaders, including the head of Thyssen-Krupp Maritime Systems, building submarines and other naval vessels. Lula also met Helmut Schmidt. He said that in 1979, during a state visit in Brazil, Schmidt had insisted on meeting Lula, in spite of the objections of the then-military regime: “Those 20 minutes with Schmidt in the Sao Paulo ‘Hilton’ were very important to me,” said Lula who also met the chairwoman of the socialdemocratic “Friedrich Ebert Foundation” and the chairman of the German Trade Union Federation.

Well, business relations are very important, but there’s more that matters in bilateral and international relations. The ongoing reconfiguration of the world economy translates not only into political power shifts, but also means changing values and norms in international relations.

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