The speech, given at the Lithuanian Confederation of Industrialists conference by Joscha Ritz, Senior Manager in Brussels office of BDI/BDA The German Business Representation.
BDI is an umbrella association of German industry, so our members are from 39 sectors of German industry, such as automobile, machinery, electronics, chemicals, and so on. German industry faces times of extraordinary uncertainty at the moment.
In Germany, the conversion of the drive technology in automobile sector is a great challenge and burdens production. In Europe, we have the challenge of disorderly Brexit. Internationally, we have trade disputes between the United States of America (USA) and China. As a result, there is a huge risk of global recession at the moment. Global economic growth will drop at nearly three per cent this year. Global trade is likely to increase only marginally, and global industrial production will only increase by one per cent at most. The slowdown in economic global growth and investment activity will impair German economic development quite a bit not only this year but, actually, for quite some years to come. German investments goods were and to a certain extent still are in high demand in emerging countries, undergoing industrialisation. But a foreign trade engine has started suffering.
Let me give you just some fresh figures from Germany: in the second quarter of 2019 real gross domestic product fell by 0.1 per cent in Germany compared to the previous quarter. We have negative net exports, slowing down GDP (gross domestic product) growth. Since the second quarter of 2018 already, domestic and foreign amount of products is declining, and, as a result, industrial production is down for the fourth consecutive quarter. Also, the business climate index for manufacturing is very worrying, it is now at the lowest level in 10 years. Therefore, BDI, my organisation expects only up to 0,5 per cent GDP growth this year, and we are not optimistic for the future. Especially because the USA continues preferring an escalating trade disputes over trying to find and negotiate the solution. To conclude on this, the current global growth outlook is a big challenge for Germany and also for Europe.
In our view, it is also an opportunity to change the direction of economic policymaking. So we, as BDI, strongly welcome that we focus on industrial policy, in Berlin, Brussels, and also here, in Vilnius.
In Germany, the minister of the economy, Mister Altmaier, is working on a comprehensive industry strategy 2030. It should be released in coming weeks. In February, the minister presented the first draft of it. It rightly focuses on the rise of protectionism, and related distortions in global trade and investment activity. It contains several very important measures, from our perspective. Let me give you just one example: we share the minister’s analyses that competition policy should be reviewed. We are convinced that the European Union (EU) competition regime, as generally proven, has been very successful for the last 60 years.
However, the openly protectionist industrial policy approach, chosen by some countries, poses new challenges on the EU competition regime. So, what we would like to see, for example, is that European commissionship would encourage cooperation between companies. Competition legislation at this very moment does not clearly define the limits of collaboration between companies or joint research project, which is very important in times of Industry 4.0. Companies, which, for example, want to develop new digital projects using a common platform, need to have great legal certainty, that that’s ok.
Most importantly, however, any national approach, be it German, be it also between Germany and France, all of this needs to be embedded in a truly common European industrial policy. That’s why we are very much looking forward to the discussion with the next European Commission on the industrial strategy 2030. So what do we think about the priorities of such a strategy, what should the next European institutions should focus on? From our perspective, Europe needs a much more visionary industrial policy, which is basically focusing on three disruptive changes which are happening at the moment and which cannot be dealt just by one company or several companies within a value chain. And these three truly disruptive changes, from our perspective, are; first, climate change, second, China, third, digitalisation.
Let me start with the first disruptive change, which requires such an ambitious approach of industrial policy, climate change. To achieve German and European climate targets, energy and emission-intensive industries need to become much more climate-friendly or even climate-neutral, of course, without losing competitiveness. So success will very much depend on keeping climate costs as low as possible, compared to our main competitors outside Europe.
Let me focus, for a second, on a country that I know best, Germany. Since the German government decided in 2016 to reduce national greenhouse gas emissions by 80 to 95 per cent until 2050, the long-term climate strategy is in the centre of our debate in Germany. My organisation BDI has contributed to this debate with the comprehensive climate study called “Climate path for Germany”. Its conclusions are very simple and clear: Germany is able to unilaterally reach the eighty per cent goal with existing technologies and without a negative impact on GDP. However, several preconditions need to be fulfilled, if other major economies do not follow our path.
However, greenhouse gas reduction beyond 80 per cent are extremely difficult to achieve without great changes in Germany. We would need also radical behavioural changes, for example, concerning meat production, meat consumption as well, mobility, and so on and so forth. And what’s for sure, both pathways of the 80 per cent reduction and the 95 per cent reduction in Germany require an enormous amount of investments, in a range of 1.5 to 2.3 trillion euros, in Germany alone until 2050.
So what does all of this mean for European climate policy? The commission president-elect Ursula von der Leyen, who you know quite well, wants to achieve greenhouse gas neutrality by 2050. Greenhouse gas neutrality means different efforts and also impacts for each country, depending on its energy mix, on its industrial structure. Germany still has 38 per cent of coal electricity. In February we had a national commission that decided that Germany should phase out coal until 2038 at the latest. So we have coal to phase out, and at the same time, let’s not forget about this, we also have nuclear energy to phase out in Germany until 2022.
This means enormous challenges for supply security and electricity costs in Germany. Therefore, accompanying measures or limiting power prices are necessary to keep the energy-intensive industry competitive in Germany. In some Eastern European and also southern European countries the conditions are even more challenging. Countries also lack the resources to realize such a new transition. So we, as German industry, are deeply convinced that there is a need for strong financial transfers from North to East, to South, in order to facilitate the transition of EU member states. And we are convinced that the current funds are not sufficient. Therefore, climate policy, from our perspective, nowadays is very much industrial policy.
Let me turn to the second disruptive change which requires strong industrial policy response, which is China. In the beginning of this year, BDI published a policy paper on China. Its conclusion is very clear: from our perspective, China is no longer developing towards an open market economy. So Europe is in the midst of systemic competition, between China’s state-controlled hybrid economy and European model of open market economy. Let me be very clear, China remains a very important partner for German industry. Just to drop a few figures, we have around eighty billion of direct investments in China, we have more than 5000 German companies at the moment active in China, and as you all know China is a very interesting place also for research and development, just think about artificial intelligence (AI) and so on and so forth.
Nevertheless, from BDI perspective, four paths require further discussion at the national level, but also in Brussels. First, Europe needs to strengthen its own competitiveness based in China. For example, China is very good at forcing big industrial corporations. We do not want the European Commission or the German government to force big companies. However, what we would like to see is that if companies want to merge, that European commission takes a greater account of global competition and of the competition that will happen not within two to three years, but maybe within ten to fifteen years. It is very challenging, but, I think, it is necessary to also face a competition coming from China.
Secondly, EU member states should ensure a strong united Europe. For example, we are very much in favour of using the traditional German-Chinese government consultation, not just to give the German message to Beijing, but to give a truly European message to Beijing. So we all need to change. Thirdly, EU institutions should establish effective economic policy instruments, also to face the competition from state-owned enterprises and from subsidized enterprises from China. And fourth, Europe should strengthen cooperation with like-minded partners. I am thinking, for example, about cooperation with Japan and the US on the reforms. Therefore, foreign economic policy, like climate policy, is very much industrial policy for us at this very moment.
And let me finally focus on the third disruptive change, which requires a strong industrial policy and strong strategy for 2030: digitalisation. So, digitalisation, and most importantly Industry 4.0, profoundly change the industrial process. For industrialised countries, such as Germany or Lithuania, it’s of utmost importance to ensure industrial competitiveness in a more and more digital environment. There is a lot of competition coming from American and Chinese companies at the moment. And the successful digitalisation of industry requires technical infrastructure, a competitive regulatory framework, a lot of public investments into research development, creation of new standards. All of this can hardly be handled by just one company or a bunch of companies. Companies need the state for this.
Let me focus on just one technology, which will be key for Industry 4.0 to succeed in the future, Brussels already alluded to this, artificial intelligence. From our perspective, AI has great potential. A recent study from our Ministry of Economic Affairs shows that it could add two per cent to gross value creation until 2035, and most of the contribution would come from industry. It’s great potential within the industry. What is the place for Europe in all of this? From our perspective, Europe should not try to copy the US, should not try to become the champion of AI in marketing, and so on and so forth. We should also not try to copy China and become the master of AI in security, for example. From our perspective, we should focus on where we are strong, which is industrial artificial intelligence.
Just to begin with example from Germany: in automotive industry Volkswagen, for example, already uses AI quite well when it comes to detecting mistakes in the production process, that the human eye is not capable of seeing. So it’s happening. From our perspective, there are two measures which are especially important at the moment. There are much more, but let me focus on two. First, we should all focus our public investments much more on AI, that’s also very much true for the European budget. We need experts in AI in order to master the transition. And second, we already talked about it as well, we need to take SME’s along. You know, I come from a country where most of all, companies are small and medium-sized enterprises. 70 per cent of them are sitting in very rural areas, far away from the cities. That means quite a huge challenge for digitalisation in general, infrastructure etc, but also for AI. These companies can not afford to have an AI expert, so we need AI trainers to help SME’s going through this transition, and we also need network, so that SME’s can tackle the challenge. Therefore, shaping digitalisation from our perspective is also very much industrial policy for 2030.
To conclude, the global economic outlook is very very challenging. The slowdown of economic growth, investment activity means also slowdown in economic development in Germany, I’m afraid, for the years to come. And I am also afraid, that the rest of Europe will not escape from this situation. So we very much welcome the renewed focus on industrial policy in Berlin, Brussels, and here. We are deeply convinced, that we need much more visionary industrial policy, focusing on these three disruptive changes that companies can not handle on their own: climate change, China, digitalisation.