Interview with Wolfgang Münchau about the book “Kaput. End of German economical miracle”

Leszek Jażdżewski talks to Wolfgang Münchau about his latest book “Kaput. The end of the German economical miracle”, translated into Polish by Przedświty publishing house.

If there's 1 villain in your book, it's neomercantilism. Why is that, and what does it mean?

I thought you were gonna tell Angela Merkel or Gerhard Schröder.

We'll get to them...

The problem never boils down to 1 individual or even 1 group. For me, this “evil” is primarily the thought of neomercantilism. Of course, it should not be identified with classical French mercantylism, which consisted in generating permanent trade surpluses towards abroad – selling more than you buy. In the days of Jean-Baptiste Colbert, the creator of this concept, erstwhile the currencies were linked to gold, it simply meant collecting it. Today, in terms of fiduciary money, this mechanics looks completely different.

So what did neomercantilism mean in the postwar German context?

Neomercantilism is simply a systematic quest for export surpluses and that is what has become the basis of the German economical model. However, this is not due to the fact that Germany is an industrial country. In the 1950s, 1960s and 1970s, there were many highly industrialised countries that did not make permanent trade surpluses. As their economies became more competitive and exports grew, the exchange rate strengthened, which automatically restored balance. This mechanics has ceased to work with the introduction of the euro. After entering the euro area, Germany's competitiveness was no longer appreciated. As a result, Germany began to accumulate immense trade surpluses at the expense of another euro area countries, leading to a quasi-colonial relationship.

Nevertheless, many experts praised the German economy.

This was in fact very short-sighted, due to the fact that this situation yet limited Germany's ability to transform into something else erstwhile this model ran out and ended around 2018.

There was Brexit, a shock in the supply chains, and Germany's predominance in the early 2000s, resulting from the enlargement of the EU to east Europe – including Poland, the Czech Republic and Slovakia in the German supply chain – was no longer a novelty and additional asset. There was no longer any benefit from always more fresh and cheaper supply markets. The pandemic revealed problems in the supply chains, government spending shifted towards defence, reducing the "peace dividend" and China, until now a complementary country, became a competitor.

This model of generating surpluses, favoring industry, inexpensive Russian gas, a crucial increase in the number of workers and favorable demography – all of this started to turn around. Many of the factors that favored Germany began to work against them and the full period, which lasted until 2018, came to an end.

However, it was not a abrupt fall.

If you look at the data on German industrial production, there is no dramatic breakdown. This is mostly due to the political, legal and labour "stiffness" of the German system. The closure of the mill in Germany entails costs of up to 3 years of production.

As a result, the crisis was slow and gradual. This decline brings with it the alleged "cooked frog problem": there are no abrupt shocks or mass unemployment, but life conditions are gradually deteriorating. Wages halt growing, workers request to work more and more to keep the same level of production, or are pushed towards part-time work or short-term contracts.

It's a small bit like highways that are not repaired on time – insignificant negligence increases and over time they turn into a serious problem.

Ultimately, investment is crucial. Meanwhile, in fresh years, after the 2007–08 financial crisis, the government has pursued a belt tightening policy (austerity), reducing public spending.

Today he tries to make up for the losses by investing in roads, bridges and railroads. These are essential but insufficient. At the same time, there is no investment in areas that will find the future competitiveness of the economy, specified as artificial intelligence, quantum computers or another advanced technologies.

In the "Kaput" you mention that in 2024 there was virtually no 5G in Germany, although this is not very advanced technology, is it?

No, but it's better now. We besides have little faxes...

Can anyone else admit them?

The changes take place and Germany now even have the Minister of Digitization [Dr. Karsten Wildberger, the first ever, position created in May 2025].

If you don't know what to do, call the minister. And even better – the committee.

That's it. There are commissions, lots of plans, and the government will most likely start introducing certain digital technologies to ministries. But it will do it very slowly, due to the fact that with the supercomplex systems they have, digitalization is very difficult. If something doesn't make sense, digitally it's as meaningless as analog. Bureaucracies are simply besides complicated, and Germany "pays" EU regulations – that is, if the EU adopts any legislation, Germany adds something else to them, making them even more restrictive. Everyone talks about debiurocartization, but it almost always ends in failure.

Perhaps due to the fact that bureaucrats are liable for the trial.

What you gotta do is get free of the rules. If you want the AI sector to work, you do not improve the AI regulation – you destruct it. And then you start over.

The problem with European regulations is that they started on the incorrect side, and since they are regulations, associate States have been allowed to implement them in their own way. That is why Mario Draghi said that the current regulations are a burden on the single marketplace – they are barriers to trade. The General Data Protection Regulation is different in Spain and different in Germany. This is no longer a single market.

Germany besides has a problem with economical growth.

If you look at the average structural growth rate, the possible growth of the German economy present is about 0.5%. The long-term forecast for the global Monetary Fund is only somewhat higher – 0.7%, i.e. at Italian level. The IMF is forecasting somewhat higher growth only due to the fact that it assumes fiscal expansion alternatively than real structural reforms. In another words, everyone spends a small more money today, and the increase in spending itself automatically translates into economical growth – by definition it is simply an increase resulting from financial activity. If you spend money for example on soldiers, you are not tall next year – only in this. But if you spend it on AI...

...this multiplier is different.

What are we spending on in Germany? Road repairs, railroads. Yes, it is necessary, but it is not investment – it is maintenance. And that doesn't increase our productivity. The fact that we have a somewhat more pleasant journey is not a origin of productivity in the economy.

I was in India late at a conference attended by the Minister of IT, Ashwini Vaishnawwho thinks of artificial intelligence in a way that Europeans don't usually think of it. Of course, India will gain jobs in another sectors than those in which they lose jobs is simply a political issue. But this minister already present considers the AI as a tool for expanding the productivity of the full economy. Olaf Scholz, erstwhile he heard about the AI, said, "Oh, that's another way for the computer to lie to me." He thought it was witty and brilliant. but that approach means you don't take the subject seriously. I don't think anyone around him has always talked about productivity growth. erstwhile he was told that Germany had an economical crisis, he invited representatives of the automotive and steel industries, as if the full economy ended there.

As a result, we do not invest in productivity growth as we should, and we think that everything can only be solved by macroeconomic tools.

Why is that a problem?

Macro-economicists have a lot on their conscience here, reasoning it's adequate to spend a small more and invest, and everything will be fine. In this decade we spent immense money – during the pandemic and after the invasion of Russia. Each country's debt will explode, and yet we have a low growth rate. If the Keynesian explanation were correct, the economies would be doing much better.

You describe neomercantilism as a fundamentally incorrect idea, at least for Germany. Neo-keynesism doesn't seem to work either. Do you see any economical explanation to be applied today?

We are after the age of large theorists and theories. I think the best indication for today, although this is usually controversial among economists, are this year's Nobel Prize winners focused on innovation and breakthroughs.

What are the most powerful economies in the world? China and the United States. What are the most innovative economies? China and the United States. It's not a coincidence. China's way to where they are present led through dramatic innovation. It has always been said that communist countries are incapable to make economical growth, that five-year planning is wrong. Well, it depends on how you plan.

The Soviets were terrible at it. Their five-year plans amounted to "more steel". The Chinese have never acted like this. They did not choose winners in the sense of “this is the company we give money”. Rather, they said: “We have uncommon earth metals and we can produce magnets from them. So the car manufacture makes sense due to the fact that it gives us an integrated supply chain. We can make the military, due to the fact that it besides needs specified materials. Of course, we request to invest in mobile communications and digital technologies." This alone gave them sectoral specializations. Initially, the government spent immense money, but did not subsidize individual industries.

On the contrary, he forced them to fight.

And there were many losers, but there were besides winners. The competition was very fierce and ultra-competitive organizations were formed in this system. It was a immense success.

Do you think it can be repeated? China – as an authoritarian state – is rather a unique example.

There are different ways to accomplish this. possibly besides European. It is crucial to remember that just due to the fact that individual succeeded does not mean that we would have succeeded, too, if we had done precisely the same thing. There was a time erstwhile they said, "Let us all be like Germany." There was a time erstwhile they said, "Let's be like Japan." Nobody says that anymore.

And the United States? I do not think that many Germans emigrate to the United States due to the quality of life, even though the country is developing very quickly.

There are those who do this, especially those in high-tech sectors and professors. But if you are German, you value your roots, stability, friends and a certain peace of life, you may not make a fortune, but you have a home, rather good schools for children – if you have them, due to the fact that present most Germans don't have children – you don't worry about besides many things and you can be rather happy here.

The creation of a European capital marketplace seems to be the only recipe you propose in the book.

We have banks and banks are good for manufacture due to the fact that manufacture has safety and can take credit. Startups have no collateral, so they don't get credit. And credit is not what the starters need. They request equity and services.

If you're moving a startup, you request a manager, individual who knows marketing, business development, due to the fact that startup founders aren't usually business experts. Therefore, the planet of venture capital and private equity offers more than just money: it offers knowledge, experience and capital – but in the form of shares, or "good money". And that's what the capital marketplace does.

When Europeans talk about the capital market, everyone agrees with me. But what they mean, as Friedrich Merz late said, is, "Let's connect the stock exchanges." That's not what I mean. America has the fresh York Stock Exchange, NASDAQ, Chicago Options Exchange – competing stock exchanges. The fact that Euronext and Deutsche Börse compete with each another is not a problem. I'm talking about redirecting savings to more productive ventures. And that means destroying banks.

Very schumpeter...

You gotta "kill" banks. Of course, erstwhile I say that, banks are not thrilled. possibly if I were to say "more power for Brussels", it would be different, unfortunately I seldom meet anyone truly curious in solving problems in Brussels. I always discovered that even if they agreed with me, it was yet about them. During the debates on the euro area crisis or banking union, I frequently heard: “Yes, banking supervision is great, we can place it here at the ECB [European Central Bank]”. And then there's a fresh department. Someone's becoming his boss, someone's managing director. Their first thought is always how it will strengthen my institution.

Europe presently has a problem with the misallocation of capital on a virtually industrial scale – almost all money goes to industrial companies. The Capital Markets Union would aim to redirect these funds to innovative companies.

Returning to Germany, 1 of the problems is that the German political strategy is highly susceptible to business demands. And since this relation works rather well, there is no incentive to change the economy. Politics is changing – to reconcile everything.

The government, manufacture and trade unions are in this together. Business representatives do not request lower taxes, deregulation or freedom. They request subsidies. Help. Nobody talks about capital markets. You will not hear from any industrial representative: "Let us redirect German savings to more productive investments, let us make a productivity growth agenda". There is besides no organization to support it, even among the liberals. alternatively of getting out of this, we're trying to make the strategy work. We're working a small harder, lowering wages to keep a car factory. It's a self-sacrifice attitude. Cars will be produced in 10 years, but the question is not whether but whether they should.

The most crucial industries in Germany – cars, chemistry, steel – were based on medium-level technology. Digital technologies were not a business, alternatively a military domain. Then came the Internet: games, entertainment, Hollywood. The German industrial establishment laughed at it. Xiaomi is 1 of the large car manufacturers today. They defeated the Porsche at Nürburgring. In his first car. The telephone company makes a car and wins with Porsche.

It's beautiful humiliating.

And it came from areas that Germany did not even consider. Huawei besides makes cars. I don't know if they're gonna win this race, but why shouldn't they try? The technology in the car is the same technology: software, chips, operating system. They didn't know each another on the axles, so they bought them. Germany buys software.

If Germany does not change the economical model, can they win in Europe?

You could say: Germany is the center, we go where they are. But it's not in anyone's business. If the Germans do not diversify, others must. And there's nothing against them.

France has already done that for Macron. Its economy is more dynamic. If Germany has a possible increase of 0.5%, France has 1.1-1.2%. That's better. Germany, with luck – 0.7-0.8%. Spain has good data, but the trend is bad. In Italy – a tragedy. Conclusion: diversification, deregulation.

So what should Poland do?

Reduce dependence on Germany. grow your own industries. make areas of excellence. To innovate. You have a large market, your own currency. There's nothing to prevent you from having a functioning capital market. You will not make Google, due to the fact that it takes scale, but Poland may be a better place for technological start-ups.

It's better to allocate tiny capital alternatively than wrongly allocate large capital. Germany could be in a much better position if we were to channel savings to fresh industries. It's a solution, but politically, Germany won't do it. We're not flexible enough, and that's the second best strategy. Poland is like this, Germany – no.

Small countries can make even without innovation and nevertheless accomplish decent results if they can adapt.

Reacting first.

It is called the “presence of the second movement” [second mover advantage]. You will not make an AI, but you can implement it and increase productivity. Nothing stands in the way. The benefits of prosperity come not from export, but from import, due to the fact that it allows us to buy things that we cannot produce ourselves.

AI has large possible unless the EU blocks it. If she starts, people will ask if it's worth staying in. present I would say yes, due to the fact that most of the AI problems lie at national level. But part of the regulation is very harmful. And it was the Germans who pushed them.

We gotta end here. I hope your informing will save Germany from getting active in its own past success.

The fact is, my book has been a large success in Britain. Even bigger in Poland, bigger than anywhere else. immense in Spain. In Germany – a complete flap.

The Germans are bad at criticism?

I besides think she appeared besides late after the election. People wouldn't hear about it. But all these problems will come back. They're coming back.

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Wolfgang Münchau – an economical analyst, writer and publicist focusing on the European economy and the European Union. From 2003 to 2020 he was associated with the Financial Times. Co-founder and manager of the information and analytical service Eurointelligence and commentator of the weekly "New Statesman".