NO. 05 2020 Working Papers Challenge-driven economic policy: A new framework for Germany Rainer Kattel, Mariana Mazzucato, Keno Haverkamp and Josh Ryan-Collins Impressum: Forum New Economy Working Papers ISSN 2702-3214 (electronic version) Publisher and distributor: Forum for a New Economy Neue Promenade 6, 10178 Berlin, Germany Telephone +49 (0) 30 767596913, email [email protected] Lead Editor: Thomas Fricke An electronic version of the paper may be downloaded · from the SSRN website: www.SSRN.com · from the RePEc website: www.RePEc.org · from the Forum New Economy website: https://www.newforum.org Challenge-driven economic policy: A new framework for Germany Rainer Kattel*, Mariana Mazzucato, Keno Haverkamp and Josh Ryan-Collins Institute for Innovation and Public Purpose, University College London Abstract German government is stepping into a new era with its COVID-19 recovery support measures. It is leaving behind its ordoliberal foundations which see the role of the state as making sure policy conditions enable markets to function properly. In this view, the state should fix market failures and leave the rest to industry. Already before the pandemic, Ger- man policy makers were showing increasing appetite to go beyond market-fixing and experi- ment with a more overt activist state. With the handling of COVID-19, Germany has taken another step in this direction– it is now at the forefront of taking bold policy action to reshape its economy in the face of the pandemic. Yet, this paper argues Germany’s public funding of R&D supports mostly incremental advances and its financial system is largely still funding carbon lock-in and value extraction rather than transforming the economy to deal with 21st century challenges. Germany needs to build on its recent economic policy initiatives, and successful institutions such as the KfW, and develop a bold new industrial strategy that en- compasses science, technology and innovation, financial and procurement policies. The new industrial strategy is not about ‘more state’ or ‘less state’, but a different type of state. One that is able to act as an investor of first resort, catalysing new types of growth, and in so do- ing crowd in private sector investment and innovation which represent expectations about fu- ture growth areas. This requires a new form of collaboration between state and business – more about picking the willing than picking winners. JEL codes: E50, G20, H57, L50, O30 Keywords: Germany, industrial policy, mission-oriented innovation. *Corresponding Author: Rainer Kattel, Institute for Innovation and Public Purpose (IIPP), University College London (UCL), 11 Montague Street, London, WC1B 5BP, UK. [email protected] Research for the report was supported by the New Economy Forum. We are grateful for comments and sugges- tions on an earlier draft by Heike Belitz, Peter Bofinger, Kenneth Frisse, Michael Hüther, Dalia Marin, Philipp Nießen, Christian Odendahl and Jens Südekum. 1. INTRODUCTION The COVID-19 pandemic presents a profound challenge to governments worldwide — from the provision of income support to citizens and aid to struggling companies, to strengthening frontline health services. By the summer of 2020, countries around the world had dedicated eight trillion US dollars and counting, to relief packages with fiscal support or credit and equity injections.1 The crisis has affected a number of countries disproportionally due to different degrees of preparedness, foresight and public-sector capacity to steer economic activity. Countries like the UK and the US in particular have realised how vulnerable their production and public health systems were; and how difficult it is to ramp up production and coordinate supply chains of food, medicine, ventilators, protective equipment and test kits. In these econ- omies, the pandemic has pointed to the damage done by managerial reforms in the public sec- tor, such as outsourcing, and by financialisation of the economy. These have diminished the resilience of socio-economic systems remarkably. Many corporations in the US and UK have been more occupied with financialised practices such as maximising value for shareholders than solving societal problems and prioritising their broader stakeholders.2 Germany stands in stark contrast to these experiences. Impressive infection-test capacity in Germany was made possible by the existence of public laboratories and the presence of indus- tries that could supply the required safety equipment and chemicals.3 While countries in South- east Asia learned from their relatively recent experiences of tackling SARS and were quick to respond with large-scale tracking of infections, establishing travel limitations and social dis- tancing rules;4 in Germany learning from managing floods and influenza during the last two decades led to operational emergency plans and risk analyses available since 2013 for pandem- ics and floods.5 Existing labour market support systems such as the Kurzarbeit scheme have prevented a surge in unemployment. By the end of May 2020, there were over eight million people benefitting from the Kurzarbeit scheme.6 1 IMFBlog, ‘Fiscal Policies to Contain the Damage from COVID-19’, IMF Blog (blog), 2020, https://blogs.imf.org/2020/04/15/fiscal-policies-to-contain-the-damage-from-covid-19/. 2 William Lazonick and Mariana Mazzucato, ‘The Risk-Reward Nexus in the Innovation-Inequality Relationship: Who Takes the Risks? Who Gets the Rewards?’, Industrial and Corporate Change 22, no. 4 (1 August 2013): 1093–1128, https://doi.org/10.1093/icc/dtt019. 3 Guy Chazan, ‘How Germany Got Coronavirus Right | Free to Read’, 4 June 2020, https://www.ft.com/content/cc1f650a- 91c0-4e1f-b990-ee8ceb5339ea. 4 Charlie Leadbeater, Ravi Gurumurthy, and Christopher Haley, ‘The COVID-19 Test’, nesta, 2020, https://www.nesta.org.uk/blog/covid-test/. 5 Geert Bouckaert et al., ‘European Coronationalism? A Hot Spot Governing a Pandemic Crisis’, Public Administration Re- view n/a, no. n/a (2020), https://doi.org/10.1111/puar.13242. 6 See German employment agency’s data here: https://statistik.arbeitsagentur.de/Statistikdaten/Detail/202005/arbeits- marktberichte/monatsbericht-monatsbericht/monatsbericht-d-0-202005-pdf.pdf 2 Germany is also at the forefront of taking bold policy action to reshape its economy in the aftermath of the pandemic. Other countries are lending to companies with no strings attached while Germany is proposing to take ownership stakes in ailing companies,7 an idea that seems to enjoy wide support among leading domestic economists.8 While in the 2010s, German re- sponse to the financial and fiscal crisis was largely defined by austerity9 and by supporting existing industrial practices such as scrappage support for old cars (Abwrackprämie), this time the government has taken a bolder sustainable approach in its support measures published on June 3rd, 2020.10 There seems to be much stronger appetite for bold action among coalition partners11 and the recovery plans have been received mostly positively12 or even very posi- tively by leading economists.13 Germany finds itself indeed in a peculiar situation of having gone in the last two decades from the ‘sick man of the euro’14 to Exportweltmeister to one of the exemplar countries in COVID- 19 handling and responses. And while there are signs of a changing economic consensus,15 the collective political mindset seems to be about catching up with leading economies rather than being a leading economy.16 The new industrial strategy agenda, Nationale Industriestrategie 2030,17 launched in 2019, seems already outdated by the policies tackling COVID-19. Germany is stepping into a new era. Nachfolgemodell Deutschland, the modernisation agenda of the past four decades, relied on the Ordnungspolitische Prinzipien which cast the state as guardian of framework conditions 7 Laurie Macfarlane and Simone Gasperin, ‘State Holding Companies: An Opportunity for Economic Transformation?’, Me- dium, 9 June 2020, https://medium.com/iipp-blog/state-holding-companies-an-opportunity-for-economic-transformation- 3604093bab87. 8 Peter Bofinger et al., ‘Economic Implications of the Corona Crisis and Economic Policy Measures’, Wirtschaftsdienst 100, no. 4 (1 April 2020): 259–65, https://doi.org/10.1007/s10273-020-2628-0. 9 Achim Truger, ‘Austerity in the Euro Area: The Sad State of Economic Policy in Germany and the EU’, European Journal of Economics and Economic Policies: Intervention 10, no. 2 (1 September 2013): 158–74, https://doi.org/10.4337/ejeep.2013.02.02. 10 Bundesfinanzministerium, ‘Corono-Folgen Bekämpfen, Wohlstand Sichern, Zukunftsfähigkeit Stärken. Ergebnus Koaliti- onsausschuss 3. Juni 2020’, 2020, https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Schlag- lichter/Konjunkturpaket/2020-06-03-eckpunktepapier.pdf?__blob=publicationFile&v=8. 11 Wirtschaftsforum, ‘Wege in Den Neustart – Weichen Für Die Zukunft Stellen’, Diskussionspapier (Wirtschaftsforum der SPD e.V, 2020). 12 Sebastian Dullien, ‘GroKo-Paket Bleibt Hinter Möglichkeiten Zurück’, Forum for a New Economy, 4 June 2020, https://newforum.org/the-state/groko-paket-bleibt-hinter-moeglichkeiten-zurueck/. 13 Jens Südekum, ‘Corona-Hilfen: Dieses Konjunkturpaket Hat Tatsächlich Wumms - WELT’, 2020, https://www.welt.de/debatte/kommentare/plus209085389/Corona-Hilfen-Dieses-Konjunkturpaket-hat-tatsaechlich- Wumms.html. 14 See The Economist, June 3rd, 1999, https://www.economist.com/special/1999/06/03/the-sick-man-of-the-euro. 15 Caroline de Gruyter, ‘[Column] Hawks to Doves? Germany’s