A modern economy must be green and hot

Andrew Tarrant interviews SPD minister Matthias Machnig on German lessons for the UK's industrial policy

George Osborne has talked of the “march of the makers”. Vince Cable says Britain faces the economic equivalent of war. Ed Miliband urges support for “producers” over “predators”. In the wake of this gathering consensus that Britain needs an industrial policy, we decided to ask a German practitioner: how do they do it?

Matthias Machnig is the minister for economics for Thuringia, one of the regional states which makes up the Federal Republic of Germany. He is an expert in both industrial and environmental policy. He argues that industrial policy is of greater strategic importance than it has ever been. He also argues that it cannot be a policy on its own but must be integrated with environmental policy. His view is that “...there is no contradiction between environment and economy and any belief that there is represents a very old way of thinking. You cannot achieve a green society without an economy which supports this and you cannot have an economy that performs in the long run if it is not green”.

Machnig is a politician to whom it is worth listening, not just because of his expertise but also because of his reputation as a political weather-maker. In the previous German Federal Government he was Staatssekretar (state secretary) at the Environment Ministry. This is a powerful role which combines the functions of civil service head of department and a ministerial position. While in this position he authored the main centre-left party’s “Green Industrial Policy”. He is also the German political equivalent of Peter Mandelson. He masterminded the Social Democratic Party of Germany’s electoral victories in 1998 and 2002 and was awarded the sobriquets of “Machinist der Macht” (engineer of power) - and the more familiar to us in the Mandelson context – “Prinz der Dunkelheit” (Prince of Darkness) by the German media.

Machnig contrasts the new green industrial policy with traditional industrial policy: “Traditional industrial policy was essentially about managing labour costs, ensuring credit was available for smaller companies, encouraging research and development and building infrastructure. These things are still as important as ever.  But a Green Industrial Policy must focus on ensuring the development of more efficient production processes – ones which create far more with far less resources. It is already the case that the raw material inputs for the average German manufacturing firm represent twice as much of its cost base compared to labour – 43% to 22% - and the cost of raw materials will continue to rise. We cannot compete with China and India on labour costs but we can and are more than competing with them on the efficiency of our production processes. And of course an industrial policy which does not contribute to bringing climate change under control is not sustainable in the long-term.”

His view is that the state plays a critical role in setting the frameworks and rules to which private industry then responds. “Twenty years ago German industry was hostile to environmental rules. Industrialists would tell us that environmental regulations were the completion of the Morgenthau plan by other means! [The Morgenthau plan was a policy adopted by the American government during the Second World War to deindustrialise Germany after the war. It was never implemented.] Now, many parts of industry recognise that binding green targets, for example on emissions, make German industry more internationally competitive. German firms such as Siemens are now getting double-digit returns on their greentech investments. The important thing is that green policy needs to be intelligent. By this I mean that environmental regulations must set targets which are challenging but feasible and of course deciding this requires technically and commercially literate debate between government, industry groups, finance, unions and consumer groups.”     

To the question as to why we need an industrial policy, the minister replied: “Let me be frank, the idea, widely accepted in UK and US governments during the boom years, that we could just rely on services to generate employment was complete rubbish. Anyone could look at the average profit rates for the banking sector and see that it was implausible that it could be sustainable. In any event, a service-based model generates a minority of good jobs in the financial sector and then a long-tail of poorly-paid jobs. Manufacturing might be a bit more boring on the profits-side but it is solid and steady and it creates a lot more well-paid jobs. In reality, a lot of the more solid services jobs are also dependent on manufacturing too. This is why we say that an economy must have a solid hot core. In Germany 20% of GDP is generated by manufacturing but we know that another 25-30% is generated by services that support the manufacturing effort.”

Machnig says that the research they undertook at the Ministry of Environment emphasised the market opportunities available in producing products that assist in delivering environmental protection. “In 2005, the global greentech market was already worth £1,000 billion. In 2020 this will be worth twice as much. By tightening our environmental protection, we created a market for German manufacturing industry and this has been a springboard for tackling global markets where German firms are now the market leaders. We already have 280,000 people employed in renewables in Germany.”

The minister noted that one of the advantages that Germany enjoys is that substantial sectors of its banking sector are still oriented towards supporting the real economy rather than financial speculation. “In KfW we have a state investment bank that is directed to supporting greentech and smaller companies. Last year it made loans of 28 billion euros and has 440 bn euros of assets. We also have local savings banks, the Sparkassen which are legally obliged to lend within their local economies and are the major source of loans to businesses.”

While Matthias Machnig might be less than impressed with some of Anglo-Saxon economic thinking, he is a fan of British culture. He spent the summers of his teenage years in English seaside towns – his parents having sent him here to study English. He now speaks often with American and English politicians and says “The impact of the financial crisis has meant that politicians in both America and Britain of all political complexions want to revitalise manufacturing. However, it is an open question as to whether they will succeed.  If we take the United Kingdom, the issue is not whether the components are there to create a modern industrial policy – they are: the United Kingdom has a leading position in pharmaceuticals and in aerospace, an important car industry and a great university sector. It has enormous potential in renewables. For the United Kingdom, the issue is one of ideology. If British politicians believe that industry and finance can self-organise without a genuine coordinating role for government then I think they will fail.”   

Dr Andrew Tarrant is a senior parliamentary assistant at the office of Gregg McClymont MP