Kaput

Prologue

The town in which I grew up in Germany was not very large, but it had large companies. Mülheim is situated at the western edge of the Ruhr basin, and today has a population of 170,000. On my daily tram journey to my high school in the centre of town, I passed two factories located next to each other. They were surrounded by large grey apartment buildings, characteristic of industrial towns in Germany and other parts of central Europe at the time. The first of the factories made pipelines. The second one made nuclear power reactors. The parents of several of my friends used to work in those factories - some as engineers or managers, and one as a nuclear physicist. Pipelines and nuclear reactors were the gears that powered the German economy. They were the life force of Germany's industrial model.

This was in the 1970s. Back then, Germany was the world's leading producer of nuclear plants, and opted for nuclear power for its future energy needs. Pipelines, too, played an important role in German energy policy, especially after the first oil crisis in 1973. It was these pipelines that would later give Germany access to Norwegian oil and Russian gas.

There was another strand of the German economic miracle that was prominent in the 1970s - that of the self-made entrepreneur. This era of entrepreneurship had started in the late 1940s and early 1950s, and it lasted approximately until German unification. Of all the entrepreneurs in Germany, Mülheim was the home of the country's most successful - and most secretive. Karl Albrecht was the elder of two brothers who, in 1946, took over their mother's grocery store in the neighbouring city of Essen. After the introduction of the Deutschmark in 1948, the two brothers invented a new retail concept - the discount store, with a limited range and very low prices. They called it Aldi, which stood for Albrecht Discount. By 1955, Aldi had already expanded to one hundred stores in the home state of North Rhine-Westphalia. In 1961, the two brothers went their separate ways. The younger brother, Theo, moved to the north of Essen, while Karl moved west to Mülheim, where he ran Aldi Süd.

The Albrechts were the ghosts of our city - ever present with their stores, occasionally spotted, but mostly invisible. We all assumed that Karl lived locally, but nobody really knew for sure. Not only were the Albrecht family invisible to us, they were also invisible to the media and politicians. A local newspaper even went so far as to charter a plane to scour the neighbourhoods where they suspected Karl Albrecht lived, in an effort to find him. The Albrechts never gave interviews. By the time Karl died, at the age of ninety-four, in 2014, he was not only the richest man in Germany, and number twenty in the world, he had also never met a German chancellor in his lifetime. He, like much of his generation of entrepreneurs, did not owe his success to politics.

The Aldi brothers and the heavy engineering companies I passed on my way to school could not be more different. But, together, they made up the two pillars of the German economic miracle - the corporatist industrial and the entrepreneurial. Aldi is still there, but the entrepreneurialism it used to represent is gone.

The two factories are also still there. Several of Germany's best-known industrial companies were founded in the nineteenth and early twentieth centuries. Some are struggling. Higher energy costs have made industrial companies less competitive. The old Mannesmann pipeline factory is nowadays owned by Europipe, which supplied two of the oil pipelines that connect Germany with Norway. The other company used to be called Kraftwerksunion, a joint venture between Germany's two largest electrics companies, AEG and Siemens. Today, the plant is run by Siemens Energy. The company was briefly in the national news after Vladimir Putin reduced the output of gas through the Nord Stream 1 pipeline during the summer of 2022, a few months after he invaded Ukraine. Germany's chancellor Olaf Scholz paid a visit to the Mülheim plant because he was desperate to get a gas turbine that was sitting there back to Russia so that the pipeline could resume operations. It reads a like a story from a long time ago, but, in the summer of 2022, Germany was still relying on Russian gas. The gas flows ended in late September 2022 with the explosion of the Nord Stream pipelines. The last of Germany's nuclear power stations went offline in April 2023.

The change of my town's fortunes were a microcosm of what happened in the country at large. Germany was the industrial powerhouse of Europe, and the world's largest exporter at one point. But its specialisation created vulnerabilities and dependencies. It became dependent on Russia for gas, and China for exports. Before Brexit, the UK was the largest source of German current account surplus - which measures the gaps between exports and imports and investment flows. Then came the break with Russia. Relations with China, the largest trading partner a few years ago, are also no longer what they used to be during the heyday of hyper-globalisation. Perhaps the biggest of all shocks came from technology. Germany was the world champion of the analogue era. But digital technologies have been progressively encroaching into our lives. Germans invented the fuel-driven car engine, the electron microscope and the Bunsen burner. But they did not invent the computer, the smartphone or the electric car. Over the years, that has become a problem.

This book is the story of the rise and decline of a hugely successful industrial giant. It is not a policy book. I am not giving prescriptions for what I feel needs to be done to reverse Germany's industrial decline. That would require a very different and much larger book. This is the story of how and why it happened. Neither is it a 'sick man of Europe' book. The trophy that passes from one European country to another represents little more than a snapshot of the economic cycle. By the time this book is published, I would expect Germany to have come out of the recession that started with the pandemic in 2020 and continued with Russia's invasion of Ukraine in February 2022, lasting until at least late 2023. The underlying malaise, however, will persist, and it is this that forms the subject of this book. The German economic model has come unstuck, and the economic recovery won't fix it.

*

The German social market economy model has a lot of admirers abroad, especially in the UK. One of them, a British journalist and friend of mine, warned me not to write this book. He said the overarching lesson in his professional life had been never to bet against the German economy. What I am trying to do here is to ignore his advice, yet respect the underlying sentiment behind it.

Germany has had its fair share of detractors, who often mock the German obsession with industry and the country's failure to accept that modern Western economies are based on services, not manufacturing. I do share this perspective to some extent. Germans have a far too narrow view of services, which are often seen as an adjunct to industry. But I also feel that the anti-industry sentiment in some parts of the West has gone too far. Industry creates powerful network effects that are often underestimated in places like the UK and the US.

Germany has a history of bouncing back when you least expect it. Periods of strength were the 1950s and the early 1960s, then from the mid-1980s until the mid-1990s, and again during the first half of the last decade. Could the current weakness that started around 2017 be just another interlude? Would I not be repeating the mistake of so many detractors of the German model if I were to prematurely declare the decline of Germany, only to be surprised later by its rebound?

I think not. Germany's current economic malaise differs in one important respect from those of previous periods. If companies become uncompetitive, the government can cut taxes, introduce labour reforms or manipulate the exchange rate. But if you are a specialist in making gas heaters or diesel engines, your problem today is not cost, but the product itself. If people are forced to install heat pumps instead of gas heaters, or forced to buy electric cars after the 2035 cut-off for the production of fuel-driven cars in the EU, you have a different problem. While German car makers are still competitive in their classic product range, they cannot compete against the Chinese in electric cars. It's no longer about how you do it; it's about what you do.

Another important difference is the arrival of new competitors. Germany's reliance on manufacturing exports used to work so well because nobody else did it. For most of the period of hyper-globalisation, from 1990 to about 2020, Germany was unchallenged as an industrial producer. The US, the UK and France had vacated the field. China was not yet there. Since the pandemic, the rest of the world has rediscovered engineering and has started to crowd in on what used to be a German fiefdom. President Joe Biden introduced the Inflation Reduction Act that provided instant subsidies to companies that moved over to the US, in segments like green tech. China, too, shifted its growth model from subsidising infrastructure investment to subsidising manufacturing exports.

The world changed, but Germany did not, and this is a story of how Germany mismanaged industrial capitalism, and misjudged technology and geopolitics. It is also a story of national narratives, the myths we keep telling each other and eventually start to believe. And, like all tragedies, this one begins during the good times.

The post-unification era was...