Jörg Rocholl he is President of the European School of Management and Technology in Berlin.
Better than expected and worse than possible: this is the summary of the state of the German and European economy at the end of this “turning point” year. Better than expected because none of the horror scenarios – deep recession or even the end of the German and European economic model – materialized. The forecast for 2023 calls for only a mild recession, if any.
This is good news given the enormous challenges posed by Russia’s war of aggression against Ukraine and Europe’s heavy dependence on gas and other fossil fuels. They show the enormous adaptability of the market economy system, in which many decentralized decisions ensure that the economy adapts quickly to new challenges.
This systemic force should give confidence in competing with the centrally controlled Chinese system, which is currently reaching its limits with the devastating zero-Covid policy.
There is no German company among the 100 most valuable companies
At the same time, however, the German and European economies are faring much worse than possible by international comparison. Studies show that US companies have the highest profits and best returns on sales in the world. They are far ahead of German and European companies. There is hardly any European or even a German company among the 100 most valuable companies in the world.
Worse still, companies like gas specialist Linde decide to turn away from the Frankfurt stock exchange. As a result, Germany and Europe are increasingly losing touch with international competition. Due to the low market valuation, the risk of being acquired by foreign competitors also increases.
A new transatlantic trade conflict would be better than expected from Putin’s point of view, much worse than what is possible for Europe and the United States.
Jörg Rocholl, ESMT Berlin
A permanent weakness in earnings compared to non-European competitors not only threatens European companies, but also the location of activities. So it’s no surprise that the US state of California, with its big tech companies, is soon expected to overtake Germany in economic power — and with less than half the population.
Despite sufficient capital, there is a lack of investment
The reasons for this decline have been widely discussed, but the economic policy responses that can derive from it are still too weak. We start from the capital market, the European financial system is still too fragmented to be competitive with the USA. Investments in growth companies lag far behind the US and are often even financed with US capital in Europe, although there is sufficient capital in the old continent.
This weakness has direct effects: while Europe manages to keep pace with the US and other regions of the world in basic research, investment in sectors such as the life sciences is sometimes even higher than in America. But when it comes to marketing inventions, Europe’s lead turns into a laggard.
Inevitably, this is particularly true for the growth phase of innovative companies, i.e. precisely when real added value occurs and large economic profits are generated. That is why European economic policy must do everything possible to vigorously compensate for this disadvantage, above all by strengthening the internal market.
Economic policy initiatives tend to separate the EU and the US
When the European Union was founded, the end of border barriers symbolized the growth of the continent. Today, the less visible but much more powerful barriers in the financial and capital markets must be removed, especially as another possible threat looms.
With the Inflation Reduction Act (IRA), the US government has launched an economic policy initiative that is as ambitious as it is forward-looking: hundreds of billions of dollars will be invested in the climate and energy sectors. Whether and to what extent European companies may also have a chance is currently the subject of fierce protests, mainly from Paris and Berlin.
So far, it appears the IRA could serve as a protectionist catalyst for new and increased trade restrictions between Europe and the US at a time when Europe-US unity on Russia’s war of aggression is as important as it has been for decades. no longer.
Indeed, exactly what should apply to European financial and capital markets should apply to industrial policy relations between Europe and the United States: further market integration would be the best solution for all involved and would make possible European countermeasures against ‘IRA not needed.
A new transatlantic trade conflict would be better than expected from Vladimir Putin’s point of view, but much worse than possible for Europe and the United States.
