Episode 113: A Geoeconomic Europe?
Jeff Rathke
President of AGI
Jeffrey Rathke is the President of the American Institute for Contemporary German Studies at the Johns Hopkins University in Washington, DC.
Prior to joining AICGS, Jeff was a senior fellow and deputy director of the Europe Program at CSIS, where his work focused on transatlantic relations and U.S. security and defense policy. Jeff joined CSIS in 2015 from the State Department, after a 24-year career as a Foreign Service Officer, dedicated primarily to U.S. relations with Europe. He was director of the State Department Press Office from 2014 to 2015, briefing the State Department press corps and managing the Department's engagement with U.S. print and electronic media. Jeff led the political section of the U.S. Embassy in Kuala Lumpur from 2011 to 2014. Prior to that, he was deputy chief of staff to the NATO Secretary General in Brussels. He also served in Berlin as minister-counselor for political affairs (2006–2009), his second tour of duty in Germany. His Washington assignments have included deputy director of the Office of European Security and Political Affairs and duty officer in the White House Situation Room and State Department Operations Center.
Mr. Rathke was a Weinberg Fellow at Princeton University (2003–2004), winning the Master’s in Public Policy Prize. He also served at U.S. Embassies in Dublin, Moscow, and Riga, which he helped open after the collapse of the Soviet Union. Mr. Rathke has been awarded national honors by Estonia, Latvia, and Lithuania, as well as several State Department awards. He holds an M.P.P. degree from Princeton University and B.A. and B.S. degrees from Cornell University. He speaks German, Russian, and Latvian.
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Moritz Schularick
Kiel Institute for the World Economy
Moritz Schularick is President of the Kiel Institute for the World Economy and Professor of Economics at Sciences Po. He is an elected member of the Academy of Sciences of Berlin and a Research Professor at New York University. In 2015-16, he held the Alfred-Grosser-Chair at Sciences Po in Paris. Previously, he taught at the Free University of Berlin and was a visiting professor at the University of Cambridge.
He is one of the recipients of the 2022 Leibniz-Prize, Germany's most prestigious research prize awarded by the German Research Foundation (DFG). In 2018, he received the Gossen-Prize of the German Economic Association that is awarded every year to honor a German-speaking economist whose work has gained international renown. He is a Fellow of the Institute for New Economic Thinking and a Managing Editor of Europe’s most important policy journal, Economic Policy, a joint initiative of SciencesPo, CEPR, and CESIfo.
His work on credit cycles, asset prices, and financial stability has provided the backdrop for so-called macro-prudential policies aimed at curbing credit booms and stability risks. With Niall Ferguson he coined the term “Chimerica” and authored a number of influential papers on US-China relations. He is a frequent consultant to central banks and contributes to public debates across different media.
His research spans macroeconomics, finance, international economics, and economic history and has been published in the American Economic Review, the Quarterly Journal of Economics, the Review of Economic Studies, the Journal of Political Economy, the Journal of Monetary Economics, the Journal of International Economics, and several other journals.
His research is supported by major grants from the European Research Council, the German Research Foundation (DFG), and the Institute for New Economic Thinking.
Peter S. Rashish
Vice President; Director, Geoeconomics Program
Peter S. Rashish, who counts over 30 years of experience counseling corporations, think tanks, foundations, and international organizations on transatlantic trade and economic strategy, is Vice President and Director of the Geoeconomics Program at AICGS. He also writes The Wider Atlantic blog.
Mr. Rashish has served as Vice President for Europe and Eurasia at the U.S. Chamber of Commerce, where he spearheaded the Chamber’s advocacy ahead of the launch of the Transatlantic Trade and Investment Partnership. Previously, Mr. Rashish was a Senior Advisor for Europe at McLarty Associates, Executive Vice President of the European Institute, and a staff member and consultant at the International Energy Agency, the World Bank, UNCTAD, the Atlantic Council, the Bertelsmann Foundation, and the German Marshall Fund.
Mr. Rashish has testified before the House Financial Services Subcommittee on International Monetary Policy and Trade and the House Foreign Affairs Subcommittee on Europe and Eurasia and has advised three U.S. presidential campaigns. He has been a featured speaker at the Munich Security Conference, the Aspen Ideas Festival, and the Salzburg Global Seminar and is a member of the Board of Directors of the Jean Monnet Institute in Paris and a Senior Advisor to the European Policy Centre in Brussels. His commentaries have been published in The New York Times, the Financial Times, The Wall Street Journal, Foreign Policy, and The National Interest, and he has appeared on PBS, CNBC, CNN, and NPR.
He earned a BA from Harvard College and an MPhil in international relations from Oxford University. He speaks French, German, Italian, and Spanish.
The German economic model is facing headwinds: a loss of secure energy from Russia, renewed urgency to rebuild its defense capabilities, and a fragmenting global economy where not everyone plays by the rules. Can Germany implement an economic Zeitenwende to spark growth, and what role does Europe play in managing the new economic order? President of the Kiel Institute for World Economy Dr. Moritz Schularick joins The Zeitgeist to discuss the German economy, how German politics is impacting new investments, and what the new European Commission means for European competitiveness.
Host
Jeff Rathke, President, AGI
Guests
Peter Rashish, Vice President and Director, Geoeconomics Program, AGI
Moritz Schularick, President, Kiel Institute for the World Economy
Transcript
Jeff Rathke
Well, I want to welcome all of our listeners to this episode of The Zeitgeist. We are speaking on September 19th with Moritz Schularick. Moritz, thanks for joining us.
Moritz Schularick
Thanks for having me.
Jeff Rathke
Moritz Schularick is one of Germany’s leading economists, and I have to say, reading through a list of items you have authored or co-authored in recent years, it covers basically all of the global challenges in a period of enormous structural reform and global change. Not just in the economy, but in, I think, the phrase you use is geoeconomics and the intersection of international affairs, security policy, and economic relations. So, we’re really delighted to have the opportunity to talk with you about geoeconomics and the German and European economic model. Peter Rashish is here with me, a senior fellow, vice president of AGI, and director of our Geoeconomics Program.
Peter Rashish
Hello Jeff and Moritz.
Jeff Rathke
And so, I wanted just to get us started with one thing that always nags me when I look at the German and European economic situation and in particular the debate around international challenges. There is a prevailing wisdom that Germany enjoyed cheap energy from Russia before February 24th, 2022. It doesn’t seem to be well backed up by data and analysis, but you’re more of an expert on this than I am. How do you see this?
Moritz Schularick
Right, Jeff, it’s true that with the war in Ukraine, gas prices in Europe spiked and in Germany, because the supplies from Russia were no longer coming in. But as far as gas is concerned, prices are now back essentially to where they were before the war. So that is no longer a concern. That doesn’t make it a less attractive narrative for many people who want to put the finger on Germany’s current problems. When you talk about electricity, we can talk for literally hours and hours, because the picture is not very clear. It has to do with a lot of things including deferential treatments for industry, depending on how energy intensive they are. It depends on what sorts of energy, what day. So getting something like a time series for the average industrial electricity price in Germany is more art than science at this stage. We have European prices, and they indeed show that the price differential relative to the U.S. and China has grown a little bit over the last few years. So there is a concern, but it’s—in my view—not the only not the only problem we’re facing.
Jeff Rathke
Well, thanks for indulging my curiosity at the start. But we’ve invited you on because in addition to your many writings, you’re also the President of the Kiel Institute for the World Economy, a position you’ve held for just over a year, and one that plays an extremely important role—not only you personally, but the institution as well—in trying to inform the economic policy debate in Germany. With the war Russia is waging against Ukraine, also the move toward de-risking from China that is happening in Europe, in the United States, it seems like we are in a period of rethinking economic policy. Germany is rethinking its economic engagement in the world. How do you see the future of Germany’s economic model?
Moritz Schularick
If you look back at the last three years, I think what clearly has happened is that there is a feeling that Germany was naive vis-a-vis Russia. And I think there are good arguments to say, “yes, we were naïve.” Many people have wanted our leading politicians and industry not to get too dependent on Russia. You think about the NordStream pipelines, our allies and eastern neighbors were very unhappy. Various U.S. administrations were also warning that this could be a trap and guess what? To some extent, it turned out to be a trap. What we’ve done, however, is I think after some initial fears, the German economy was extremely resilient, dealing with the cutoff from Russian gas, and coped with this shock rather well. So in the end, if you will, Putin’s weapon was not a particularly effective or particularly dangerous one, but that was something we didn’t know exactly. So it was clearly a risk that things could have gotten worse.
I think at this point the energy question and the question of foreign economic policies is really a very big part of that soul searching that’s going on in Germany. I would say like no other economy in the last twenty years, Germany has jumped on the globalization bandwagon. It was the defender of open global markets, of the rule-based international trading system and was probably one of the countries that also profited most from that opening of the world economy, and that is going in a different direction. We are no longer opening. Many trade barriers are increasing. And China in particular, that has been, you know, China’s economic rise has been a big push and boon for the European, for the German economy specifically. That is going to reverse. China struggling domestically and growth in China is not as high as it used to be, and on the other hand, China has upgraded, it has become a really fierce competitor to the German car industry, the German machinery industry on global markets. So I think if you want it in a nutshell, globalization has been a big tailwind to the German economy and now it’s really becoming more of a headwind.
Jeff Rathke
And what is your assessment of the efforts at the European level to get a handle on these headwinds? In some ways, it seems that the European Commission and the European Union have been a bit more ready to engage to try to reposition the block in light of these changing international circumstances.
Moritz Schularick
Yes, I completely agree with your analysis. I think it’s spot on. Germany is not a country that likes experiments. If you dial back in history, one of Konrad Adenauer’s, the first chancellor after World War II, key slogans was no experiments, and so Germany is a country that changes slowly, both in its institutions and also in its thinking. And the Commission and other countries in Europe have been quicker, I would say, in updating that we are in a new global economic environment and we need to rethink some of the policies. To put it simply, if you have a game with another player, let’s call the other player China, and that player is no longer playing by the rules, then it’s rarely optimal in games that you agree to still stick to the old rules. But that’s right now what Germany wants to do. We will get, I think, to the point where we think like, “OK, how do we react to this new situation?” but it is from the inside also sometimes a very painfully slow process.
Peter Rashish
Moritz, if we could return to the China angle a bit, I think today, the day we’re recording this podcast, a senior Chinese official is in Brussels following the European Commission’s proposal to levy tariffs on imports of Chinese electric vehicles out of concern that they’re unfairly subsidized. And we’re hearing reports that the German government is trying to work with colleagues in the European Union to find a way to avoid these tariffs and find some kind of negotiated solution with China. What do you think of this step by the European Commission? Do you think it’s right for the EU to impose tariffs on Chinese EVs? And how do you see what some people see as a trade-off between, on the one hand, access to as many cheap electric vehicles as possible in the European market to promote decarbonization on the one hand, and on the other hand, fostering a homegrown European EV industry in Europe?
Moritz Schularick
Look, I think on this one, the Commission has it right and the German government is a little bit weak in what it’s arguing. What we’re seeing right now is indeed that the German government, you know, under some pressure by the car industry. But the German car industry, that is a premium expensive car industry and there’s still relatively good money in China and there’s fear that if the Commission of Europe imposes tariffs on sort of mass market electric vehicles, the Chinese might retaliate in the luxury segment. So, I do think that is short-sighted for two reasons. First, I think in this new world economy, Europe will only be able to make its weight and its voice heard when it stands together, so undermining the Commission’s authority and trade policy is a very short-sighted idea and I think the Commission has the better arguments.
This is not unlike what the Biden administration and before that, Trump has done. These are not made-up, punitive, quasi-random 100 percent tariffs. We don’t talk about American trade policy, but there is certainly a degree of arbitrariness in these numbers. Why is it 100 percent, no one knows. But what happened is that the Commission sent teams to China and investigated for many months the degree of industrial subsidies given by the government for these sectors and then imposed what are so-called equalization tariffs. So these are basically tariffs company-specific. We’re talking about somewhere between 20 and 15 and 30 percent depending on the company, and they are supposed to just generate an equal playing field in Europe. So they’re trying to sort of undo the subsidy, undo, if you will, the unfair competition that is induced by the Chinese government interventions. I would have wished for the Commission to make one additional step to be even more convincing, mainly at the same time lower tariffs on EVs and on batteries on everyone else, to make very clear, send a very clear statement to the rest of the world: “This is not about Fortress Europe or protecting Europe. This is really just about getting a level playing field with the Chinese. And we welcome everyone else who produces electric cars fairly and cheaply, and we’re ready to face the competition. Japanese cars, American cars, you name it, Korean cars.”
So, maybe one last thought is there is of course a very strong argument, a very strong case to say, “Well, if the Chinese taxpayer subsidizes these cars and we get them cheaper than we would get them otherwise, why not take the present? And why not just strike a deal?” And that is a good argument, and I would immediately say we should do so in industries that are, let’s call them, close to the end of their innovation cycle. Solar industry for solar panels. I’ll say, exactly. Let’s do that. Let them subsidize. Let them subsidize more. It makes the climate transition for Europe much cheaper. For industries that are arguably at an early stage, and will have many more innovations coming, and are really growth industries for the next decade or two, there are good arguments, economic arguments to say that you don’t want to be cut off from all these developments and dynamics early on because your competitor basically takes over the entire index. At least you want to have a fighting chance, you know, to be on the table. And that’s what the Commission’s doing.
Peter Rashish
Right. And I think it’s correct that the subsidies the Commission has proposed are considered to be WTO legal and kind of a way of reinforcing WTO rules. Is that right?
Moritz Schularick
That is correct. You can always sort of argue the details. I’m sure people will, but I think all you have to do is look at the Chinese reaction and that China’s reaction was very large. We haven’t had anything. There’s been some idea of, “well, we could impose higher tariffs on cheese in retaliation or something like that, or dairy products.” But overall, there’s been very little pushback from Beijing in terms of saying, “this is totally absurd.” And I think even from the Chinese electric vehicle makers. I think that, I mean, I don’t have the exact number, it probably depends from company to company, but they’re still highly, highly competitive, even with that 20 to 30 percent surcharge.
Peter Rashish
Got it. Sticking with the EU for a moment, earlier in the year we saw the report from the former Italian Prime Minister Enrico Letta on the single market and just I think on Monday the one from another former Italian Prime Minister, Mario Draghi, on EU competitiveness. They’ve gotten a lot of press, a lot of general attention. Do you think these reports target the right issues, and which two or three would you put at the top of the new European Commission’s inbox?
Moritz Schularick
I think the Draghi report in particular—and both have some similar themes but maybe focusing on the Draghi report because it’s fresh and really comprehensive; it’s a 300-plus page document, and I would highly recommend reading at least a short, condensed version. It comes from a very senior policymaker and very good economist, and someone who’s really been following Europe from a very sort of pro-European point of view over many decades. So there are a lot of really good points to agree with in this report. The general theme is that Europe has not managed in this new technological and global economic environment, to realize economies of scale to the same degree that the U.S. and China are doing it, meaning that we still remain fragmented in ways that go far beyond what we actually thought was the internal market. There are things that we haven’t done that come back to hurt us now, like we haven’t really finished the capital market union. So we really lag behind in everything that’s venture capital and everything that’s early stage financing. But we also have maybe to some extent focused too much on internal competition rules. The example: I think the top ten largest European banks together don’t have the market capitalization of JP Morgan. Europe still has, I think somewhere twenty-two telecoms operators, the U.S. and China each have three or four. And it doesn’t mean necessarily that this is a better deal. When I lived in the U.S., I noticed how much more expensive broadband and all these things were. But there is an argument, and maybe the telecoms is a bad one because it’s probably market power that’s abused, but there is the point that if Europe wants to be competitive in this much bigger global economy going forward, we need to become and act more like one economy, one state, one country. And so I took this away from the report; Draghi actually says the most important structural reform for Europe is essentially to become a country.
Peter Rashish
I mentioned the European Commission and it just does seem like it’s a busy week in Brussels because Ursula von der Leyen, who is just starting her second term as commission president has unveiled her College of Commissioners, and there are a few innovations. There’s, for example, we see that economic security has been added to the trade commissioner’s portfolio. There is now, I think interestingly, a single executive vice president who’s in charge of both climate but also competition policy; there is a defense commissioner. How do you see this constellation that she’s put forward, and do you think it’s meaningful, the changes she’s instituted? And what do you think the chances are that it’s going to lead to success for the EU over the next five years?
Moritz Schularick
I think as far as these things go, the priorities of the Commission are right, the team is good. Of course, in each and every cabinet you have stronger and weaker positions and people, and I’m hopeful that this will be a successful Commission going forward. It doesn’t feel right now sitting here in Europe that the Draghi report and its key messages of making big steps toward more integration essentially will be heard. You know there are counter, there are other currents. To think of migration, we’ve just introduced border controls in Europe again because of the migration issues. To my great sorrow, we don’t make progress on joint defense and defense procurement. We’re very slow. But you know, there’s an obvious one where economies of scale matter. If you want to get the cost down of producing whatever artilleries or drones or whatever the mass-produced military weapons of the future are, if you do that as one of the largest economies in the world in an integrated way, it gets much cheaper than twenty-seven countries buying three different tanks each. I’m not super hopeful. Although we should make a lot of progress, given what’s happening in Ukraine and other ways that Russia has evolved.
And I’m also not happy with the role that Germany has played in the past few years. We have not been willing to take up Emmanuel Macron on many of his big ideas. And you might say, maybe we include nice words and how do you get from words to doing something, but we haven’t really tried to turn these big words and big proposals into reality. And if you think about capital market union, banking union, it’s often German and often quite parochial interest on the savings bank side or others that prevent progress there. So I think the updating there, that the only way to achieve economic security and make Europe a strong player in world economic affairs in this however-shaped post-rules-based globalization era, is to go through Brussels. That has not settled deeply.
Jeff Rathke
You expressed, Moritz, some frustration that German approaches still remain, I think the word you just used was, “parochial.” As you put it in an interview a few months ago with the Süddeutsche Zeitung, you said, “Germany’s budget policy is a security risk for Europe.” And that’s a theme that you’ve returned to in some of your work, especially since the Russian invasion of Ukraine. You’ve talked about ways for Germany to ensure that it has an adequate level of defense spending, either through using the exception provisions in the so-called debt brake or creating a new off-budget fund that would carry on after the current 100 billion euros is depleted, which will probably happen in 2026-2027. And I would say personally, I share your assessment and the prioritization you place on this. I guess my question to you is, do you see the political ground shifting in Germany? Of course, there are some outspoken voices that have talked about this, but it seems when I try to figure out where the political center of gravity is, it hasn’t moved at the level of party leaders, opposition leader, caucus leader, about coming up with solutions to this problem before the next German election in the fall of 2025.
Moritz Schularick
I think you’re right. I think the political leaders are aware of the necessity to increase our investment in security and defense, but it hasn’t led to that sort of political mobilization yet. It probably has to do 1) with the current coalition, that traffic light coalition, there’s no champion for that. The Social Democrats are still a little bit divided; they have had a very different, difficult time coming around to supporting Ukraine and seeing Russia in a different light and giving up some of their, clearly now, with hindsight, faults, the ideas about Putin’s Russia. The Liberals are, you could almost say, ideologically focused now on the debt brake and public finances. It’s become the unique sales argument, and although on content they probably agree, but they’re at the big risk of being thrown out of the parliament at the next election and feeling, “if we give this up this fiscal element, you know, we’d rather we’d rather have the country invaded by Russia than get rid of the debt brake.”
Jeff Rathke
Our next guest from the FDP, we’ll ask if they can affirm or refute that position.
Moritz Schularick
Yeah, I mean you know how politics works, then probably this person’s going to tell you, “Well, there’s so much money in the budget and other parts that we could use for that.” And I think that’s just political rhetoric. The needs are so large. We’re talking about mobilizing probably another 50 to 100 billion per year permanently in addition to what we do now. You can cut all social spending that’s in the budget, and you won’t get to that amount, so something will have to give. Eventually, we’ll have to make these adjustments. But I mean it’s just not possible, not even thinkable, to do this overnight. So we need a plan where we increase defense spending in the regular budget by 10,15 billion a year until 2030. Until then, we need some form of debt financing, and we can integrate, and I think people agree. But what the debt brake has done, of course, it has even put questions of national security really in the party infighting arithmetic. I think that’s a negative side effect of the debt brake. And I’m not opposed to fiscal rules. And you know, if you look at some of the things that are happening in your country, it’s certainly not a bad idea to want sustainability in public finances at some point.
But I think that we are unable to react in a question of if European freedom and security are really in danger because we have petty infights over 3 billion in an economy of 4.5 trillion or something like that. It’s just it’s just ridiculous and we need to grow up and understand that the debt brake is not an end in itself, but a means to an end. And the end is to live in freedom and security and prosperity and not just to follow blindly a rule.
But that being said, then there’s a last party, the Greens, which have actually done an amazing transition. They have updated. They grew out of the peace movement of the 1980s. They have updated; they’re the strongest supporters of Ukraine in the government right now. And they’ll be certainly open to the idea that this rearmament comes with two nice side effects, potentially. One is the economy badly needs some stimulus, and B.) we also need a technological upgrade, and in a lot of these areas you think about drone technology and also the whole artificial intelligence. There’s no other policy area in sight, where the amounts the money mobilized will be nearly as big as what we could possibly do for defense and need to do for defense. So, it’ll be positive spillovers and I think they’re open to that. But it’s also again, that’s the Green Party. The main focus is climate change and maybe the energy transition. They’re not going to win elections with defense. So there’s no champion. And then the traditional champion, the Conservatives are not in government. I think everyone agrees that we will need a new big extra-budgetary fund. It’s probably not going to be 100 billion, it’s more going to be like 300 billion. And then people say we’re going to do this after the next election. The big risk, however, is that after the next election, you no longer have a 2/3 majority in the Bundestag, which you need.
Jeff Rathke
Exactly.
Moritz Schularick
And that’s something now we’re back at slow updating that. It’s an idea that, I talked about with senior CDU politicians actually in the last two weeks, I was in Kyiv last weekend and some were there. And I think they’re waking up to it, but It hasn’t trickled up, if you will, to the highest levels that maybe this needs a strategy shift. But it’s getting clearer and clearer.
Jeff Rathke
Well, you’ve taken us on a tour from Berlin to Brussels around the world and back again. And so maybe this is a good point at which to wrap up. Moritz Schularick, I want to thank you for spending this time with us and for giving us your insights into the shifting global economy, the challenges that presents for Germany and for Europe and the ways that we try to get a handle on and manage these changes that are really unlike any we’ve seen for probably the last three decades or so. Thank you for being with us.
Moritz Schularick
Thank you very much.
Jeff Rathke
And to all of our listeners, we look forward to having you with us on the next episode of the Zeitgeist.
