Is Germany Nearing the Abyss?
European Straits #171
Hi, it’s Nicolas from The Family. Today, I’m pursuing my series focusing on specific countries and how they’ve been faring so far in the Entrepreneurial Age. Here’s Germany 🇩🇪
⚠️ If you’re not a paying subscriber to European Straits, here’s what you’ve missed lately 😉
A note on Marc Andreessen’s smashing essay IT’S TIME TO BUILD and economic development: Marc Andreessen on Building Things.
A first round of analysis on how corporate finance should be upgraded for the Entrepreneurial Age: Principles for Capital Allocation (Round 1).
A discussion of the UK’s Future Fund and the oft-quoted idea that the state should invest in startups: Should the State Invest in Startups?
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As for today, I’d like to move forward in my series of country-focused discussions. After the US and China, today it’s Germany’s turn 🇩🇪👇
1/ I’ve had a long relationship with Germany, which I’ve visited almost yearly since a very young age:
My maternal grandfather Xavier had a passion for foreign languages. A devout Catholic, his favorite was Italian, which he learned so as to be able to listen to Radio Vaticana and read the Osservatore Romano. But his second favorite was German—a rather unusual preference for a man of his generation. Xavier frequently travelled throughout Germany with my grandmother Marie-Thérèse, and when I was a teenager they even took me with them (to Konstanz) for an entire summer so that I could improve my German skills through daily lessons.
One of Xavier’s daughters, Agnès, married a German man named Eckhard. Since Agnès is very close to my mother Thérèse, we often travelled as a family to visit the couple in Bavaria during the holidays. And so my uncle, who passed away in 2011, played a role in my upbringing. He was quite a character: a radical leftist who had his own design agency, drove fancy sports cars, and travelled around the world. Eckhard spoke French well, so I never had to learn German to converse with him; still, the relationship left me with a deep attachment to Germany.
Considering this background, maybe it’s no coincidence that I married a German! My wife Laetitia was actually raised in France, and in French, by her German mother Ingrid. But like me she travelled to Germany frequently and eventually became fluent in the language by staying for weeks at a time with her grandmother Erna in Schleswig-Holstein. (And now we’re actually planning to move to Germany at the end of this year, probably to Munich, because it’s our kids’ turn to learn the language. Read more about that project here.)
Finally, I have a professional history with Germany as I was twice employed there: in 1997 for a summer job at Deutsche Telekom in Konstanz (again) and then for an entire year at Siemens in Munich. I could speak German fluently back then (1999). Now, though, I’ll have to shake the dust off, as I haven’t practiced for a while (even if I can still follow a conversation in German).
2/ Although Germany was a familiar place for me as a child, I only learned about the intricacies of its history much later. One of the first things that struck me is that unlike France and the UK (and, to a certain extent, the US), Germany is a young nation. It was unified only in 1871, with Otto von Bismarck as its founding father.
Second, since its founding, Germany has been a country constantly exposed to external threats—from the West because of France and from the East because of Poland and Russia. As such, it tends to get insecure and belligerent, which sadly gave us both World War I and World War II. Here’s geopolitical strategist Peter Zeihan on that:
Germany cannot hide how good they are. Make anything as big as Germany as efficient as Germany and its mere existence is interpreted by everyone as an existential threat, prompting a pan-European alliance that tears it down.
Germany can deal with this in two ways. Option one is to hope against hope that no one will come for it in the night. Every time that do-nothing strategy has been chosen, Germany eventually suffers cataclysmic defeat and dismemberment. Option two is to attack first, trying to defeat its rivals in sequence before they can overwhelm Germany. Every time that strategy has been chosen, Germany eventually suffers cataclysmic defeat and dismemberment.
3/ The best I’ve read recently is The Shortest History of Germany by British novelist James Hawes. It’s a great piece of work that dispels many misconceptions about the country:
There’s the cliché that Germany excels at doing capitalism because it’s a Protestant country (remember Max Weber?). Yet industrial excellence, that very important dimension of Germany’s heritage, is clearly related to the West and the South, which are mostly Catholic.
There’s the idea about Bavaria being the reactionary heartland of Germany, including because Hitler’s early career as a budding dictator took place there. Yet Hawes points out that the Catholic parts of Germany (Bavaria and the Ruhr valley) were the least supportive of the Nazis during general elections at the time, while Hitler’s party found more support in Prussia, where he was especially favored by the military, agrarian, feudal elites that were the Junkers.
This all reminds us that Germany is plural. German traits such as austerity, bureaucracy, and belligerence are in fact related to the more Eastern (and Protestant) part of the country (Prussia), not the parts of the country with which I’m most familiar—starting with Bavaria. Even if Prussia as a region has been somewhat wiped out by history (and then completely reshaped by the Communist regime in East Germany), the culture that it once harbored is still present in the German psyche; but that’s not the whole of Germany.
4/ What became of Germany after World War II? This is critical if you want to understand Europe today:
First, Germany was divided because of the complex game played between the US, the UK, and the USSR. The Marshall Plan was received as a provocation by the Soviets and led them to tighten their grip over Eastern Europe, including the parts of Germany which they controlled. Then the introduction of a new Deutsche Mark precipitated the country’s division. It was simply impossible, in the context of the nascent Cold War, to rebuild Germany with a new currency while maintaining its unity as a country. And so in 1949, Germany became divided again, only 78 years after Bismarck brought it together in 1871!
It was then decided that the Western part would be re-industrialized. The counterparty was that West Germany had to work on its alignment with France, its archrival on the continent. That took the form of the European Coal and Steel Community, which in 1957 became the European Economic Community, which in 1992 became the European Union. Obviously the idea of France and Germany overcoming their rivalry and working together was terrifying for the UK, which explains why the British first tried to prevent the whole project (but the US imposed it) and then decided to try to regain some influence on the inside by joining (in 1975).
By the way, the whole effort to rebuild West Germany after World War II left one big problem unsolved: many former Nazis remained at the helm of both the business world and the political system, which explains why younger Germans (including my uncle) went on protesting after 1968. Some fell into the trap of left-wing terrorism in the 1970s, while others decided to focus on more mundane issues like getting rid of US military bases / nuclear power plants / patriarchy / surveillance / and other things, too.
5/ For the past 70 years, the German economic approach has relied on well-identified pillars. The overall framework is that of ordoliberalism, a doctrine theorized by economist Walter Eucken. It can be summed up with two concepts:
A weak government, Germany’s being even more so because it was constitutionally divided so as to split power between the Bund and the Länder—which was compensated for by a stronger civil society. In particular, the government is prevented from intervening (too much) in the economy.
A stable currency, which makes it possible for everyone to think about the long term and fosters competition on the market. A corollary is that the government shouldn’t run budget deficits, which explains the German obsession with fiscal discipline.
In this context, the German economy has been able to grow again, particularly excelling in one field: exporting industrial goods. Here’s Peter Zeihan again:
As West Germany-the-country was rebuilt, it was only one small step to West Germany-the-export-machine. Germany’s position in the middle of the Northern European Meat Grinder meant Germans had long been used to deferred gratification. Their savings tended to get funneled not into personal consumption, but instead into state-centric investment plans that typically had at least a heavy dusting of military purpose. But with the Nazi regime gone and the rebuilding largely completed, Germany’s (in)famous efficiencies were no longer applied to tanks or planes or rail lines or smokestacks, but instead to export goods such as automobiles and chemicals. West German exports were highly sought after the world over, largely because they were the highest quality goods humans had ever produced.
By the way, two things happened on the economic front after Germany’s reunification in 1990:
First, the prospect of a reunited Germany was so frightening to its old rival/ally France (and to a lesser extent to the UK) that the Germans had to agree to give up the Deutsche Mark and merge it with other European currencies so as to give birth to the euro.
Second, Germany doubled down on exports since it had to pay for the reunification, and at the same time it now had access to a more abundant, cheaper workforce in the Eastern part of the country (not to mention access to new, fast-growing markets in Eastern Europe).
6/ These days, however, Germany is not doing so well. There are several problems:
One is demographic: Germany is getting old, and recent efforts at improving the quality and availability of child care can only go so far. The population getting older means that German businesses are even more dependent on exporting what they manufacture.
Yet at the same time, the world is fragmenting at an accelerated pace and the US is renouncing its role as the guardian of global trade routes, which means it will become more and more difficult for exporting countries like Germany to make a living.
Add to that some other cultural problems at the core of the German society, such as less recognition for women’s roles in an economy that can only prosper by developing in sectors which are traditionally seen as being more feminine.
7/ Meanwhile, Germany’s transition to the Entrepreneurial Age is kind of a mixed bag. As I a wrote in an early issue in 2017, Germany's Problem With Tech:
In theory, there are reasons why Germany should succeed in the transition to the [Entrepreneurial Age]...Why doesn't it happen? Because the German entrepreneurial ecosystem is not there yet: there’s the lack of venture capital, as well as the many strong incumbents that make life difficult for early-stage startups. Above all, corporatism stands in the way: as much as it provides balance in the German economy, it also creates legal and cultural obstacles for entrepreneurial efforts at discovering new business models.
In his When China Rules the World, Martin Jacques mentions an index of countries based on how much people comply with the rules, and the two countries where people are the most disciplined are Japan and (you guessed it) Germany. I happen to think that too much respect for the rules goes against the rebelliousness needed to make successful entrepreneurial ecosystems. And so the fact that Germans submit to rules explains a part of their difficulties in the shift to the Entrepreneurial Age.
(By contrast, in countries such as China and France, people have no problem going around the rules—a trait that comes with being ruled by a strong, centralized government (trust me on that one).
As for the US, it’s an interesting hybrid. There are many rules, often strict and sometimes stupid—and people, inspired as they are by the mighty rule of law, are eager to comply with them. But Americans also have the ability to pay lawyers to help them bend the rules in their favor or delay lawsuits while they “move fast and break things”. As I often say, the US doesn’t have less regulations, it just has more lawyers!)
8/ Another problem is Germany’s problem with doing capitalism. Here’s what I wrote in my book Hedge two years ago:
Legendary hedge fund manager Julian Robertson was astonished to discover in 1989 that German managers “were running the companies for the sake of the employees rather than the shareholders” and that they “couldn't care less about returns on equity”.
The German indifference to short-term shareholder interests is a legacy of Ludwig Erhard’s fateful decision in 1948 to bail out German business assets while wiping out paper money for private savers: it contributed to much of German industry still being owned by families rather than investment funds and other institutional investors. And to this day, the German economy continues to stand out in this regard. Due to the large German banks’ shareholding interest in corporations and the unique role of trade unions and industry associations, it keeps on imposing a long-term view of corporate management.
Well, that used to be a strength... but it’s not anymore (despite exceptions such as the masterful strategic move that was Bertelsmann’s reinvention of its music subsidiary BMG by way of divestment and then rebuilding). The history of German business after World War II put it in a position to excel in the stable, predictable world that was the 20th century industrial economy. On the other hand, it put Germany in a difficult position when it came time for a shift to the Entrepreneurial Age.
9/ Of course, not everything is bad. Here are two things that I think are interesting in Germany:
Germany has been a pioneer on the energy front. Their decision to close down nuclear plants in 2011 (following the accident at Fukushima) might be objectionable in the context of fighting climate change, but it has fostered massive public investment in clean and renewable energy, the kind that could pave the way for startups and venture capital thriving in that particular sector in the years to come. See how it all works with Bill Janeway here.
It should also be noted that Germany seems to be doing rather well when it comes to fighting COVID-19. As Andreas Kluth has written in Bloomberg, “the flip side of Germany’s “small-steps” politics is order, reliability and dispassionate competence. It’s not exactly a recipe for vibrancy in good times. But it keeps more people safe when things are bad.” Do read the whole article as it goes into the details that made Germany “the opposite of the U.S. under Donald Trump” 😮
10/ What’s my long-term assessment of Germany in the Entrepreneurial Age? Here are three ideas:
Demographics aren’t destiny. As my wife Laetitia wrote in Our future depends on old people, you can get economic growth with an ageing population. What it takes is a radical upheaval as to how the economy functions and how institutions are designed. See also Laetitia’s Why Over-45s — Not Millennials — Represent the Future of the Workforce.
Expect more fragmentation between the various German regions. The world is fragmenting at every level: the UK leaving the EU; Scotland perhaps leaving the UK; American states drifting away from one another. Considering the fragility of Germany as a nation, I wouldn’t be surprised if richer regions such as Bavaria tend to renounce solidarity with poorer, less industrialized regions, especially in the Eastern part of the country. The ultimate outcome could be Germany separating again into the equivalent of two Switzerlands, one or two Austrias, and a few others—with all of them being connected to the network of tech ecosystems across Europe.
If that extreme doesn’t happen (which is likely), expect more tensions at the EU level. I’m quite a believer in Peter Zeihan’s thesis that Germany will be smashed by the end of globalization and will try to turn the whole of Europe into its backyard in order to keep on exporting. From an entrepreneurial perspective, maybe Germany could finally give birth to the European tech giants we’ve all been waiting for. But if you don’t believe in this second thesis (and I don’t, either, not really), then it will only mean more trouble for Europe as a continent.
I realize I didn’t cover German tech that much—which I’ll dig into with the reading list to be shared in next Friday’s Friday Reads edition. It’s time to subscribe if you want to receive it! 👇
📻 A while back (that is, before COVID-19), I was invited by my friends Ben Robinson and Dan Colceriu of Aperture to record a podcast about the future of Europe and the US. More recently they asked me to come back for a redux, along with two other guests (Ian Stewart and my wife Laetitia). You can listen to this new round here: Previewing the post-Pandemic World (#17).
👂 Following inquiries by friends, I’m thinking about growing my existing business of advising CEOs and corporate executives to help them navigate the shift to the Entrepreneurial Age. If you know people who could be interested (either executives in a large corporation or owners of a medium-sized business), or if you’re one yourself, please contact me! I’ll be happy to better understand your needs and see if I can help 🤗
The comprehensive reading list attached to the European Straits weekly essay is part of the Friday Reads paid edition. Subscribe if you want to receive my list of articles on Germany in the Entrepreneurial Age!
From Normandy, France 🇫🇷