The Start of a New Economic Era

Jörn Quitzau

Bergos AG

Joern Quitzau is a Geoeconomics Non-Resident Senior Fellow at AGI. He is Chief Economist at Bergos, a private bank based in Switzerland. He specializes in economic trend research and economic policy. Joern Quitzau hosts two Economics podcasts.

Prior to his position at Bergos, Joern Quitzau worked for Berenberg in Hamburg (2007-2024) and Deutsche Bank Research in Frankfurt (2000-2006) with a special focus on tax and fiscal policy.

Dr. Quitzau (PhD, University of Hamburg) was a Visiting Fellow at AGI in April 2014 and September 2022 and an American-German Situation Room Fellow in April 2018.

The first quarter of the century is over. Economically and politically, this quarter-century can be divided into two major phases. The first phase can be described by the term hyper-globalization. The second phase was characterized by the increasing influence of the state, the return of “big government.”

Phase 1: Hyper-Globalization

The 1990s and early 2000s were the high time of globalization. Thanks to the end of the East-West conflict, the surge of innovation in information and telecommunications technology, and the belief in the benefits of the international division of labor, a veritable wave of globalization took place. The financial, goods, and labor markets were increasingly liberalized. Barriers of all kinds were seen by many decision-makers in business and politics as disruptive because they were detrimental to growth. To put it bluntly: the economic framework conditions were gradually reshaped in such a way that they moved ever closer to the ideal conditions of the economic textbook.

During this time, the so-called Washington Consensus dominated. International organizations such as the IMF relied on this consensus, which was based on market friendly solutions: sound public finances, privatization, trade liberalization, deregulation, and much more were recognized as the basis for economic stability and growth.

Phase 2: The Return of “Big Government”

All this changed abruptly. The global financial crisis from 2007 onwards, which was caused by excesses in the inadequately regulated financial sector, shook faith in the free markets. Due to globalized markets, the crisis, which originated in the subprime segment of the U.S. real estate market, was able to spread through the global financial system. In the end, the global financial system was on the brink of collapse.

Free-market economics came under general suspicion. Naturally, public criticism was mainly directed at the financial sector, which was henceforth subject to stricter regulation. The real economy initially got off lightly, although groups critical of globalization took direct aim at the entire market economy system. However, the political decision-makers did not want to repeat the mistakes of the global economic crisis of 1929. They did not want to exacerbate the downward spiral through isolationism and protectionism.

It was Donald Trump’s “America first” that led to the abandonment of the free trade idea and a new wave of protectionism. Free trade also had a difficult time during Joe Biden’s presidency. In fact, it became more and more acceptable in the United States, but also in Europe, to protect the domestic economy from international competition. Ultimately, the supply chain problems during the COVID pandemic and the Russian war against Ukraine were the nail in the coffin for old-style globalization.

Governments saw an opportunity to reclaim their right to shape the economy and society. “Big government” was back. During this time, the zeitgeist also changed in many places. Societies were increasingly no longer thought of in terms of individuals. Instead, overarching goals such as climate protection, coronavirus containment, and social cohesion led to more collective rules. The new zeitgeist did not even stop at the corporate world—shareholder capitalism had fallen into disrepute and was to be replaced by stakeholder capitalism. Until recently, the path seemed to be mapped out for a sustained phase of a state-controlled economy. But the countermovement is already here.

New Era: What’s Next?

The election of the ultra-free market or libertarian Javier Milei as president of Argentina heralded a new era. Milei had announced his intention to cut back the state with a chainsaw. Much more important internationally: Donald Trump is also planning a major reduction in bureaucracy and pruning of the state with the ‘Department of Government Efficiency’ (DOGE). Trump’s nature and his fellow campaigners from the tech sector suggest that the United States is unlikely to be working with a fine blade either.

It is the beginning of a new era. The relationship between market and state, collectivism and liberalism is once again being rebalanced. But the pendulum will not simply swing back toward the liberalism of the early 2000s. Trump and his economic views are contradictory. He is ‘pro-business,’ but not ‘pro-market.’ His trade policy ideas are anti-market. And so it remains to be seen what Donald Trump means by cutting red tape and deregulation.

From a market economy perspective, regulation is justified if it keeps markets open, ensures competition, and thus limits the power of companies. Trump’s deregulation policy will have to be measured by whether it only cuts back the excessive bureaucracy and deregulation that makes life unreasonably difficult for companies or whether it also removes the regulation that is supposed to protect competition. In the first case he would be doing a service to the whole of American society, in the second case only to his friends in the business camp. In the short term, the deregulation offensive is likely to unleash the U.S. economy (other things being equal). The longer-term consequences, however, cannot yet be assessed.

New Economic Policy Approach in Germany

Germany will also embark on a new economic policy course after the election. With Robert Habeck as economics minister, the former “traffic light” coalition had favored a dirigiste transformation of the economy. Shortly after taking office back in 2021, the Minister of Economic Affairs also questioned the importance of GDP as an indicator of prosperity. Instead, he favored a ‘beyond GDP’ approach. As Germany is now in the midst of a veritable economic crisis, the new government, which will most likely consist of the conservative CDU/CSU and the social democratic SPD, will return to a more growth-friendly economic policy. The CDU/CSU and SPD have different economic policy views in many areas. These include tax and fiscal policy and social policy. However, the differences are not irreconcilable. As the clear winner of the election, the CDU/CSU—with almost twice as many votes as the SPD—will be able to leave its mark on this coalition. Friedrich Merz, who has a free-market approach, will probably be the next chancellor. The coalition constraints will not allow for a radical reform policy. However, it will still be enough for a noticeable change of course. Compared to the Trump administration, German politics will be one thing above all else in future: reliable.

A version of this commentary originally appeared in Handelszeitung.