After Karlsruhe: Germany’s economic security agenda on the brink

The ruling from the German constitutional court in Karlsruhe, declaring the transfer of 60 billion euros in COVID-related debt to the Klima- und Transformationsfond (KTF) unlawful, has cast a shadow of uncertainty over Germany’s economic security agenda, argues Tobias Gehrke.

Dr Tobias Gehrke is a senior policy fellow at the European Council on Foreign Relations (ECFR), where he covers geoeconomics and economic security.

While Berlin managed to address immediate budgetary concerns and keep a slimmed-down KTF alive, long-term questions about Germany’s geoeconomic position linger. Five questions to watch in 2024:

1. Will Germany Scale Down its Economic Security Ambitions?

The recent court ruling poses a formidable challenge to Germany’s economic security paradigm, rooted in its Zeitenwende philosophy.

Strategies released earlier this year, particularly the China strategy and the economy ministry’s industrial strategy, highlight the gravity of geoeconomic competition Germany is facing head-on.

Both identify China’s geoeconomic strategy as a significant threat which requires a forceful economic security strategy and toolbox.

The KTF was the pivotal tool to transform Germany into a more formidable player in the competition over who innovates, who produces, and who trade in the industries of the future.

While some flagship investments, like major chip investments in Saxony, may continue to receive funding, the cloud of uncertainty and scaled-down ambitions could cool future investment decisions in the country.

2. How Will Germany Preserve its Industrial Competitiveness?

Germany’s energy-intensive industries have experienced a substantial 20% production decline since 2021. Sky-high electricity prices for heavy industry, vastly exceeding those in the US, China, and France, exacerbate the situation.

A recent survey reveals that two-thirds of German firms contemplate relocating production beyond Germany, citing energy security and costs as primary concerns.

This trend is also reflected in diverging investment patterns between the US and Germany, notably in EV battery production. Alarmingly, some 70% of announced investments in European EV battery production face uncertainty due to energy prices or subsidies that favor cheaper production in the US.

A recent announcement from Berlin to subsidise industrial electricity, totalling 12 billion euros, may not be enough to slow down the trend.

Germany is losing global market share across its industrial heartland, from cars to machinery, materials, and chemicals. A forceful plan to revert this trend is yet to emerge.

3. How Will Germany Deal with Dependency on China?

Germany’s heavy reliance on Chinese imports poses a serious threat. Nearly half of industrial firms rely on China for inputs, but over half have taken no action to mitigate this dependency. Alarmingly, nearly half of companies reliant on Chinese inputs even contemplate strengthening ties with China further.

Reconsidering the chancellor’s stance, who earlier this year placed de-risking responsibility squarely on businesses, becomes imperative given these trends.

But the Karlsruhe decision will further restrict the government’s financial capacity to support crucial de-risking measures. Rather than offering substantial incentives to the most sticky dependencies, we can expect more soft-ball government consultations with the private sector.

4. How Will Germany Address Challenges from Chinese Clean Tech Overcapacities?

China’s substantial investments in clean energy and high-tech sectors pose significant challenges. The rise of China as an auto superpower has amplified Germany’s trade deficit with the country to €84bn in 2022 – a six-fold increase in just four years.

German carmakers also face challenges in China, where market shares stagnate or decline. German companies and government officials have expressed concerns over the trade actions against Chinese EV imports, which the Commission is pursuing, fearing retaliation against Germany’s heavily exposed carmakers in China.

The Karlsruhe ruling casts doubt over Germany’s ability to scale the European EV value chain. This, in turn, may see German industry increase its pressure to ease any trade measures against Chinese overcapacities.

5. What German role in the EU Economic Security Agenda?

The limited financial resources at EU level make it difficult to implement a solid common industrial policy. Parts of the German government have indicated a willingness to commit to a stronger common industrial policy at EU level.

However, there has been little practical success, and the risk of Germany going it alone has already caused headaches throughout Europe.

The legal failure of the German special fund could encourage those voices in Germany calling for a more European approach to industrial policy, for example, through a sovereignty fund financed by EU bonds.

But the looming defeat by member states to build out a strategic technology fund (STEP) – for which funding will be significantly cut – is not instilling confidence of such a path.