MNI INTERVIEW: Germany Needs Solid China Strategy - Wambach

German companies are facing growing challenges from China and there is still no overarching strategy in place to deal with this threat, a senior government advisor and the head of the Leibniz Centre for European Economic Research (ZEW) told MNI.

While Berlin lacks a comprehensive strategy to deal with the challenges posed by the Chinese competition at home and increasing dominance of markets abroad, there are signs that may change, Achim Wambach said in an interview. 

“The Minister of Economic Affairs complained only a couple of weeks ago that companies are still not diversifying enough, and have single-source strategies that are dependent on China. But that was the first time that I’ve heard a minister say it so clearly,” he said.

“While the automobile sector has strong competition coming from China, it’s also true that the number of Chinese cars in Germany is still very limited,” noted Wambach, lead author of a recent report on German and European industrial policy produced for the Federal Ministry for Economic Affairs and Energy.

“If you look at patents German manufacturers are filing, especially for electric vehicles and autonomous driving, it’s fair to say that while we are undoubtedly going through a rough patch, the potential to turn things around is there.” (see MNI SOURCES: No Significant Shift Seen In ECB Dec Projections )

GROWTH IMPACT

Germany's EUR500 billion climate, infrastructure, and defence package is likely to have a bigger positive impact on GDP than recent pessimistic assessments suggest, Wambach said.

While the short-term growth effect of the special funds could be as low as 0.3%, Wambach said, citing a German Council of Economic Experts' report, there is also reason to be positive about the longer-run impacts despite the money already being used to cover budgetary costs - such as tax cuts and pension increases - rather than pro-growth investment. (See MNI INTERVIEW: German Energy Cap Impact Limited-GCEE's Werding)

If the remaining funds “are used for growth-enhancing measures — and there's a lot, including the money given to the states, much of which will be spent on local infrastructure: bridges, roads, schools, etc. I'm more optimistic,” he added.

Defence spending in particular should have a bigger impact than seen by the GCEE, Wambach said, although by how much remains unclear. “We see new startups coming up in that area and existing companies moving in that direction, investing in new technologies. This could be significant.”

Barriers between private companies and university researchers are coming down, he said, with Germany increasingly following the examples set by South Korea, Israel and the US — countries which do a good job in bringing research-based innovations around the defence sector to market.  "And it's not just in defence — although we have strength in that area — where things are moving fast.”

The creation of a government-backed EUR 100 billion investment fund, dubbed the "Deutschlandsfond," to further encourage private investment in key economic sectors is a step in the right direction, Wambach said. 

“But it is only one instrument among several, and we don’t yet know enough about it. And firms will need to be convinced of the value of the whole package,” he added.

Equally, the patents German companies and universities are filing, including those in artificial intelligence, suggest that local industry can be improved and big productivity enhancing effects can be expected, he noted. 

FISCAL PRESSURES

Germany does need to keep control of its borrowing, Wambach added. A projected increase in debt-to-GDP is acceptable in the context of high defence-related spending over the next few years, but it cannot become the norm.

“At some point defence expenditure has to be funded from the budget, not through borrowing,” he said.

“There is a risk that if the [defence] objectives are not met, we could end up with structurally higher debt levels,” he warned.