What happens after the collapse of Germany’s industrial model?
Kaput. It may not be one of those grand compound Germanic words, but it is the caustic assessment of Wolfgang Münchau, a long-time writer for The Financial Times whose recent book on Germany’s economic woes spares no quarter. Deutschland still hasn’t recovered from Covid-19 and it shrank 0.2% in the last quarter, according to economic surveys published this week. Down is the new up, which is just one reason why the Bundestag passed the first motion in its postwar history with the support of the far-right Alternative für Deutschland this week.
Münchau summarizes the sordid tale in broad strokes. A key issue for him is the country’s complete lack of investment in digitalization. Instead of funding the computer revolution, Germany’s leaders devoted ever more resources on deepening its industrial base. He blames a crony banking system controlled by state and federal politicians who steered loans and funding to favored businesses over disruptive players that might have ultimately protected German jobs.
I’ve witnessed this under-investment firsthand during two trips to Berlin, both in the context of hosting the European edition of TechCrunch Disrupt. It was major news that TechCrunch was moving the conference from London to Berlin in the wake of Brexit, and an optimistic sign that Berlin might just emerge as the anointed hub of European startups despite ferocious competition. Paris was chic but expensive, and dogged by deep malaise after five years of François Hollande. Stockholm laid a claim with Klarna and Spotify, while Zurich had its own moment during the height of the crypto bubble. Yet, it was Berlin that kept drawing founders back — at least, for a time.
My trips were back in 2018-2019, that halcyon pre-Covid era when European capitals were liberating and Berlin retained an astonishing level of diversity and affordability for a top economy’s political capital. Compared to the grandeur and beauty of Vienna though, decay lurked in all of Berlin’s shadows. It’s a paralyzed city still riven by the Cold War, struggling to weave a tattered town into a coherent design for urban life. I came to learn that such observations were much in line with other entrepreneurs.
Frustrations over the city didn’t stop there. As threads of impassioned comments from founders attest, launching and running a startup in Germany is damn near impossible. Incorporating and opening a bank account can involve weeks of processes, as can securing internet access. Then there’s the conservative venture capital culture that repeatedly waylays startups seeking fast growth over avoiding failure. Even still, founders hoped that Germany’s industrial titans would be their savior, only to find out that their pusillanimity meant that they often held out for years to sign partnerships and commit to sales — long past the runway of even the most well-funded startup.
TechCrunch Disrupt Berlin really could have been called TechCrunch Status Quo, the German business environment was that hostile to innovation.
Perhaps the greatest shock for founders though was the lack of local talent. The country’s university system has hemorrhaged entrepreneurs for generations, as top engineers and scientists head to the United Kingdom or the U.S. in search of greater freedom and economic returns. Then there’s the rest of the workforce. For all of the positives of Germany’s apprenticeship model, it’s a system that looks backwards, not forwards. There are no apprenticeships in prompt engineering, CUDA coding or LLM optimization, since apprenticeships are only set up in retrospect — you can’t apprentice if there is no master. That makes much of the digital revolution inimical to the German labor model.
Münchau glosses this history quickly, but here’s the rub: the miracle of the Rhine continued unabated for most of the 2000s and 2010s. Germany’s exports were legion, and they were growing rapidly to power the rise of China. China was industrializing at a ferocious pace, and Chinese companies needed what Germany was offering in everything from chemicals to machine tools. It was a partnership that would create abundant wealth that Germany desperately needed after reunification. Who needs digital when analog is selling so well?
That is, until the past two years. Volkswagen is in dire straits following plummeting sales in China, its largest export market. Chinese electric vehicles (like those in our Riskgaming scenario “Powering Up”) are increasingly undercutting Germany’s auto sales globally, including at home in the European Union. Then there’s the cutthroat competition across industrials, where high energy prices and wages have conspired to make the Federal Republic uncompetitive with cheaper and oftentimes better Chinese alternatives. What was once a miracle has turned into a nightmare — and there are no easy solutions going forward.
Münchau argues that the challenge for German leaders was one of “ontological uncertainty,” borrowed via Adam Tooze from a 2005 Santa Fe Institute paper which explored different types of uncertainty. The authors of the paper describe the concept as "Sometimes the entity structure of actors’ worlds change so rapidly that the actors cannot generate stable ontological categories valid for the time periods in which the actions they are about to undertake will continue to generate effects.” In other words, how to think about the world is changing so rapidly that we can’t grasp the novel patterns we are seeing.
For all of Münchau’s directness in Kaput, I deeply protest this excuse. A lack of digitalization in the 1970s is understandable; after all, computers and their utility were not fully appreciated by everyone the moment they arrived (for some empathy, consider today’s debates around artificial intelligence to see how hard it can be to answer questions about what the future might hold). Yet, Germany didn’t just fail to digitize during the 1970s, but also in the 1980s and essentially all the way up to the present day. At some point, we are way beyond whatever ‘ontological uncertainty’ existed at the beginning of the innovation.
The same lack of foresight plays out with China. Alongside the United States and much of the industrialized world, Germany supported China’s bid to join the World Trade Organization in 2001, hoping that the rising power would buttress key global economic institutions. Yet, concerns about China’s aggressiveness have been a mainstay of political debate for decades. Germany only started to revise its pro-trade approach in the last few years, and even then, has remained hampered by its deep revenue dependency on China.
That leads to Germany’s worst modern economic strategy: its deep ties with Russia in pursuit of cheap energy from the east. Münchau writes, “Until the Nord Stream sabotage, the gas pipelines had been the one thing that still connected Germany and Russia. With the pipelines no longer operational, the delusions ended. Psychologists talk about the five phases of mourning, the first of which is denial, followed by anger. The denial went on for a long time. The anger was brutal.” Worse, Germany shuttered its nuclear power plants in 2023, exacerbating its self-induced and self-deluded energy crisis. Even with a rapid rollout of liquid natural gas facilities in the Baltic Sea, its energy costs still average three to four times pre-Ukraine War norms.
Digitalization, Chinese manufacturing and Russian gas — what were German leaders thinking? When were they (and voters!) going to discover that the world had changed and that it’s time to radically learn, radically adapt and immediately take action to protect the wealth and industry that Germany has shrewdly cultivated? Apparently, never.
Such are the issues at the center of Germany’s elections next month, where no party has clear answers. The far right, center right, center left and far left are all angling for dominance, but none of the leading candidates and programs offer the disruption required to strengthen one of the most important bulwarks of the West.
When everything falters, there are two courses. One is to double-down, the other is to throw out the rulebook. Germans — some of the heaviest players of tabletop board games in the world — aren’t ones to throw out their rulebooks. Yet, nothing short of a complete overhaul is necessary. The one profound positive: Germany’s lack of investment in digitalization and infrastructure more broadly due to its proscribed fiscal spending means that the country has plenty of debt capacity compared to its peers. Can it manage resources and place the right tokens in the right slots to maximize its scores in the decades ahead? I’d take a bet on the gamers, even if it takes a couple of turns.
Podcast: Can you (or DOGE) product manage the government?
There’s a growing movement to apply the best practices of technology to the U.S. government. Whether it’s Elon Musk and DOGE (the so-called Department of Government Efficiency) or the myriad of chief technology and data officers across all levels of government, the hope is that technology can enhance productivity and minimize errors, offering a better experience with government for all Americans.
Few people have the wealth of experience on this front than our guest today, Christine Keung. She has a tech industry background from Dropbox and her current role as a partner at J2 Ventures, but also a lengthy tenure across party lines, from working in China with Ambassador Max Baucus, to becoming the Chief Data Officer of San Jose, California, to helping launch the Paycheck Protection Program at the Small Business Administration.
She joins me and Laurence Pevsner to talk about her recent experience playing Powering Up, her experiences in government and the challenges of modernization, and then finally, we turn to DeepSeek and the U.S.-China competition that has splashed across the front pages the past week.
🔊 Listen to “Can you (or DOGE) product manage the government?”
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- There are heightened political tensions in Taiwan, where president Lai Ching-te of the Democratic Progressive Party faces a recalcitrant Kuomintang and Taiwan People’s Party majority in the Legislative Yuan. That’s leading to a constitutional crisis according to Kharis Templeman of the Hoover Institution at Stanford. “What may be less obvious is that the current confrontation is a foreseeable consequence of Taiwan's constitutional framework, which despite going through several rounds of reforms is still an awkward mash-up of presidential and parliamentary features that isn't well-designed to handle periods of divided government.”
- Finally, one of my favorite authors William Deresiewicz writes on “How Art Lost Its Way.” “I have no doubt that there is still strenuous art being made, and that it is being received with attention and written about with intelligence. But almost all of that activity, as far as I can tell, is happening in coteries, in social niches and geographic pockets: poets doing readings for other poets, art that isn’t seen outside of Bushwick, critics writing for specialized websites or personal Substacks. What’s gone missing, in a society that long ago excused itself from seriousness, is a broader sense that art is urgent business, that your life, in some sense, depends on it.”
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.
