Germans See Affluence Ahead – WSJ

It’s more than war. Covid rates are spiking again. Global financial markets are melting down. The worst inflation since the establishment of the Federal Republic of Germany is eroding the savings of the thrifty middle class.

The medium-term outlook is also concerning. Manufacturing remains a key source of German prosperity, with world-class chemical, automotive, machinery and electrical-equipment industries making Germany the third most important trading country in the world and helping to ensure stable employment and high wages. But that economic model is threatened today. Because electric vehicles require fewer human workers than conventional ones, the automobile industry looks likely to shed workers even if German car firms retain their global leadership in the new era. Environmental activists want Germany to accelerate the move to net-zero emissions even if that imposes higher costs on industry. The chemical industry is particularly vulnerable to higher energy prices, and observers expect substantial shifts in chemical production to cheaper locations like the energy-rich United States.

Then there is China. Selling luxury cars and capital goods like machine tools to a rapidly growing China had long been the centerpiece of Germany’s trade strategy. But China’s growth has slowed dramatically since the start of the pandemic, and

Xi Jinping

wants China to replace Germany as the world’s leading source of sophisticated manufactured goods.

Yet on my journey, I found that Germany’s mood is anything but despairing. One might almost call it smug. From solar entrepreneurs and civil-society activists in Bavaria to bureaucrats and politicians in Berlin, a lot of influential Germans think the country is entering a new era of affluence at home and influence abroad.

When they look east, Germans acknowledge they got

Vladimir Putin

badly wrong and that their trust in Russia as a reliable source of cheap energy was misplaced. But they’ve noticed something else. Mr. Putin is losing the war, and the consequences will cripple Russia for years. Germans increasingly think that Russia will emerge as a weaker power, and that Moscow’s hopes for economic recovery will depend more than ever on its access to Western capital. Between the reconstruction of Ukraine and the need to rebuild a war-devastated Russian economy, there is no shortage of opportunity to Germany’s east.

Many of the Germans I spoke with were surprisingly optimistic about the economy. In the short term, they note, past frugality means that Berlin has plenty of money to throw at the energy crisis. Germany can outbid Asian and other buyers to assure adequate supplies of liquefied natural gas for the next year or two even as the government protects vulnerable households from skyrocketing energy bills through subsidies and price controls. In the longer term, they argue that while China is a fearsome competitor, the German Mittelstand, the small and medium-size engineering and manufacturing firms that provide German industry with much of its innovative capability, has faced down serious competition before.

Beyond that, many Germans are confident that the shift away from fossil fuels will strengthen their country’s position in the long run. Hydrogen, I kept hearing, is the answer to German prayers. Hydrogen can replace fossil fuels for a range of industrial processes, and hydrogen generated by variable renewable energy sources like wind and solar can ensure a stable energy supply on days when the sun doesn’t shine and the wind doesn’t blow. There are many engineering problems to be solved along the way, but that kind of engineering is, I was told, exactly what Germans do best—and requires the kind of close public and private-sector cooperation at which Germany has historically excelled.

Germany’s self-confidence has deep roots. Emerging from the moral and physical devastation left by World War II, Germany built a world-class economy and stable democracy in the 1950s and 1960s. It overcame the inflation and the energy shocks of the 1970s, integrated East Germany, and has played a critical role in the development of the European Union, which Germans, not without evidence, consider the most effective international partnership in the history of the world.

Germany’s optimism may be misplaced, but for now at least the German establishment thinks its system is working, and voters seem to agree. For American policy makers, the consequences are profound, and largely benign. The most important fact about Europe isn’t that Mr. Putin wants to destroy the existing European order. It is that Germany wants to uphold it and that, with the help of its trans-Atlantic ally, it is determined to do so.