Stuck in the middle with EU

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Articles by Jamie

Jamie Dannhauser

Economist

17 October 2024

While it is no doubt a gross simplification of a much more complex reality, one can think of the now-dissolving world order as based on two strategic compromises.

On the one hand, America accepted large-scale technology transfer (aka theft) to Chinese companies in return for a steady supply of cheap manufactured products. On the other hand, Russia provided cheap and plentiful hydrocarbon energy to European industry. In exchange, European powers turned a blind eye to the cronyism and corruption of Putin’s regime, not to mention its efforts to meddle in European affairs.

No country in Europe bought into this particular element of 21st century realpolitik quite as much as Germany. At least in terms of this second compromise, Russia’s invasion of Ukraine has shattered the wandel durch handel (change through trade) dogma that drove Germany’s post-war relationship with allies and foes alike. So what follows? And with what consequences for Europe?

Beyond the relationship with Russia, it is hard to overstate how far perceptions of German economic interests have shaped the European Union. France’s military and geostrategic ambitions for Europe have been serially constrained. The tension between a France that dislikes NATO and wants a full-on EU foreign policy and military and a Germany that fully backs NATO and the US has been central to understanding much of European politics in recent decades. Europe’s monetary union was shaped in Germany’s image. The European Commission (until very recently) was the bastion of European free market thinking, a German-led bulwark against the more protectionist and nationalist instincts within the EU.

Europe’s schizophrenic relationship with China – economic necessity meets human rights abuses and climate insouciance – must also be understood in these terms. European manufacturers increasingly rely not just on Chinese final demand, but also on intricate supply chains that run through Asia. Does the EU, therefore, try and straddle a path that runs directly between the two great powers of today’s world? Accept US hegemony in full and the consequences of its grand strategic rivalry with China? Or drive full throttle towards a United States of Europe that can challenge the protagonists of the emerging bipolar order?

In coming years, Europe is in danger of being squeezed between a declining and polarised tech superpower and an autocratic but rising manufacturing powerhouse. For Germany, this is an existential crisis. Its national identity and economic supremacy stem from the prowess of its industrial base, not least its once dominant auto industry. But Germany’s manufacturing engine is spluttering, badly.

This year, 4 million vehicles will roll off production lines in Germany, about the same as last year. Before the pandemic, the figure averaged 5.5 million vehicles. Production volumes have now run well below this level for six successive years. Across the entire industrial sector, new order volumes are running about 5% below their 2019 level, itself about 5% off the 2018 cyclical peak. The figures for output and production look even worse.

Much of this weakness appears structural. China’s balance sheet recession has some way still to run. Muscular economic nationalism is supported on both sides of the political aisle in Washington. Cheap and plentiful hydrocarbon energy from Russia is a thing of the past. Xi’s strategic vision for China sees it eating the lunch of European carmakers. And to the extent that ‘change through trade’ was once the orthodoxy of the European Commission, it is no longer. Mario Draghi’s recent report for European Commission President Ursula von der Leyen makes that plain.

No other major European power has as much to lose from the emerging bipolar world as Germany. Its response to these dangers will have profound ramifications, not just for German economic performance but for the political economy of Europe in the years ahead.

#inflation, #Cold War II

Articles by Jamie

Jamie Dannhauser

Economist

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Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

T +44 (0)20 7963 8123

Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

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