Handelsblatt Exclusive

Trade, but Not at any Cost

Sigmar gabriel, Marko Priske for HB
Handelsblatt met Sigmar Gabriel as the vice chancellor traveled to Wolfsburg.
  • Why it matters

    Why it matters

    German Economics Minister Sigmar Gabriel has a tough balancing act in supporting the U.S.-E.U. free trade deal that much of the German public and his own Social Democrats oppose.

  • Facts

    Facts

    • U.S. President Obama and German Chancellor Merkel were to speak in favor of the trans-Atlantic pact at the opening of the Hanover industrial trade fair Sunday.
    • Mr. Gabriel’s own support for the TTIP agreement with the United States is opposed by many of his fellow Social Democrats.
    • Mr. Gabriel also explains why Germany’s goal should be to have the world’s best digital infrastructure by 2025.
  • Audio

    Audio

  • Pdf

Few other politicians in Europe are walking a finer line than Sigmar Gabriel. And perhaps no other issue holds as many minefields for him as the trans-Atlantic free-trade pact between the United States and the 28-nation European Union.

The vice chancellor in a coalition government with German Chancellor Angela Merkel, Mr. Gabriel is also the country’s economy and energy minister. Added to those twin roles, he’s the head of the center-left Social Democrats.

In an exclusive interview with Handelsblatt, Mr. Gabriel said that failing to agree a trans-Atlantic pact with the United States would represent a missed opportunity for Europe to play a role in setting the standards for global trade.

But, in a nod to the opponents within his own political ranks, Mr. Gabriel warns that he’s not afraid to let the negotiations fail if the United States doesn’t compromise and meet the Continent’s demand on some thorny issues – whether on public arbitration courts for settling investor disputes or greater E.U. access to public contracts in the United States.

The interview was conducted on the eve of the world’s largest industrial trade fair in Hanover, where Mr. Gabriel said he’s also pushing German businesses and his own government to step up their efforts to digitalize German industry. He calls the task of creating the world’s best digital infrastructure a “man-to-the-moon project” for Europe’s largest economy, but one that is sorely needed if Germany wants to remain the world’s export powerhouse for years to come.

Also in Hanover on Sunday, U.S. President Barack Obama opened the trade fair together with Chancellor Angela Merkel. Both offered a final plea for the U.S.-E.U. free trade pact to become a reality, in spite of the anti-trade sentiment that has swept both sides of the Atlantic.

Mr. Obama and U.S. negotiators have their own demands of the Europeans if the trade talks, which will go into their 13th round at a meeting in New York on Monday, are to really be completed.

The following is the Handelsblatt’s full interview with Germany’s vice chancellor.

 

Handelsblatt: Digitalization is changing society and the economy. How well prepared is Germany for the changes?

Sigmar Gabriel: Many things have been launched in recent years, from programs to promote digitalization in the Mittelstand [the mid-sized companies that form the backbone of the German economy] to the General Data Protection Regulation in Europe. But there is still more to be done.

What exactly?

We need greater data security and a new understanding of data privacy. And we mustn’t forget investments in education and a shared understanding of the goals and contents of digital education. Most of all, our goal must be to have the world’s best digital infrastructure, complete with gigabit networks, by 2025 at the latest.

That’s a project that will cost billions. Where will the money come from?

It will be even more expensive if we continue to lag behind with these developments. Creating the world’s best digital infrastructure is a “man-to-the-moon project.” But it would also get young people enthusiastic about Europe again, and it would show that we are working on the future here. What we need now is courage, not timidity. Most of the funding would come from the private economy. But the government needs to move things forward with good regulation.

Our notion of data privacy needs to change. The classic data privacy concept calls for the minimization of data, which is essentially the opposite of a Big Data business model.

Such ambitious goals have surfaced again and again in Europe, and yet the United States is dominant when it comes to digitization. So how is Europe supposed to achieve the next quantum leap now?

It isn’t the biggest but the fastest one who prevails, especially in the digital world. And competition begins all over again every day. We should stop spending the money from the Juncker fund for odds and ends. We need a major, ambitious project to promote Europe’s competitiveness. We expanded our railway networks 100 years and our airports 50 years ago. Those should be our benchmarks.

Are regulators and competition watchdogs getting in the way?

We would certainly have problems building a European aircraft-manufacturing group like Airbus today. The competition commission would cite the state aid directive, and they would also argue that it is important to prevent monopolies from forming in Europe. I think that’s timid and the wrong approach. We need to allow European champions to take shape. We need to recognize the relevant market in the competition rules, because it is often global.

Even with government support?

No, that’s not what I mean. But the government cannot stand in the way of every entrepreneurial decision.

It’s interesting that a politician with the Social Democratic Party (SPD) is advocating a more laissez-faire approach to economic policy.

It has nothing to do with laissez-faire, but rather with active industrial policy. Our problem is not the size of our European players, but that the Internet giants from the United States are forcing us to become more and more dependent.

Will expansion of the digital infrastructure in Europe work without public funds?

I’m convinced that the money is already there. Instead of pumping 40 percent of E.U. funds into agricultural subsidies, it would be appropriate to invest in improving the continent’s competitiveness and make the digital revolution in Europe a reality. Europe needs to find the political strength to do so. I’m convinced that this would be more than purely a growth program.

There are regions in Europe that are cut off from economic development. Would that change through the expansion of digital infrastructure?

Yes, I’m sure it would. But this isn’t just true of the troubled regions of Southern Europe, but also for parts of Germany. First and foremost, we need the best broadband infrastructure, in places like the northern part of Dortmund or in the Marxloh neighborhood of Duisburg. In other words, in all the regions where there is high youth unemployment and weak economic development. We could say to young IT companies: go into these neighborhoods and revive them. They have low rents and high-speed Internet. We also need regional laboratories for digitization, places where we create regulatory breathing room for new data networking in energy and medicine, driverless cars and other things. This is where lawmakers should create targeted incentives for founders of companies and provide them with the necessary infrastructure.

And the best schools, too.

That’s the second major issue. The best schools should be located in the worst neighborhoods. And I’m not just talking about having the most modern buildings and the right technical equipment. They should also include the right teachers, as well as comprehensive, attractive sports and recreational opportunities. These schools must be our country’s cathedrals, not the office towers of banks. We need major investment in education. We are a country of growing inequality. We can counteract this by creating better opportunities, especially for the lower third of society. Our goal must be to become a bold, upwardly mobile society once again.

Has the German economy actually understood the challenges associated with digitization?

Yes. But in parts of the Mittelstand, many companies still rely on the success stories of the last 100 years. They invest in the further development of their successful products, and then they fail to notice that a data-based platform economy is forcing its way between product and customer. My concern is that this will result in old business models eventually going under while nothing is created to replace them.

Many business owners fear that business secrets could be revealed through data. Isn’t that understandable?

Data security is a vital condition of digitization. We should also set ourselves an ambitious goal in this respect, namely to become the world’s safest data site. That would give us a competitive edge over the United States, which is not given much credit in this regard. But our notion of data privacy needs to change. The classic data privacy concept calls for the minimization of data, which is essentially the opposite of a Big Data business model. But the goal is precisely to gain knowledge from as much data as possible and use it to develop business models. The right key word here is data sovereignty. In a transparent data market, every citizen, every consumer and every company should be able to decide what happens with his or its personal data. It should always be possible to delete or transfer data to competing companies. That’s my vision of digital emancipation. In addition, every company needs to develop the competency to use its data successfully and profitably.

 

Foreign Trade US and EU in Comparison-TTIP 01

 

The average mid-sized company in Germany certainly takes a different view of this.

That’s true. For quite a few people, the concept of the data cloud makes them think of data theft. It is vital that we attach great importance to data security. But a fundamental change in attitudes is needed in the development of data-based business models.

What contribution is the economy minister making to this change in attitudes?

We have established five competency centers to digitize the Mittelstand. It is now clear that these centers will be set up in every German state. Any business owner can go there and, together with experts, try things out that he can later implement in his company. Besides, owners of Mittelstand companies must recognize the opportunities startups provide. They can act as an outsourced research and development department. But Germany also has a need for a central service agency, a first-class think tank of digital strategy. The British are ahead of us in this regard.

Is Siemens a role model? Joe Kaeser has just opened up Siemens for startups.

It’s certainly an interesting approach. But it shouldn’t just be a question of whether or not you buy a startup. Instead, it needs to be about communication and the transfer of competency. Startups must be perceived as partners that can improve an established company’s scope of evaluation.

Doesn’t that also require better conditions for startups?

Yes, there is still much to be done. At least we have ensured, with the Investment Taxation Reform Act, that the sale of diversified holdings remains tax-free after certain holding periods. I expect that the states will follow suit. And we have also made progress in government funding of venture capital. I think the German economy should become at least as involved as my ministry and the KfW development bank.

For years, the business community has been calling for tax breaks to encourage research. Isn’t this more necessary than ever, in times of growing digitization?

We are currently in discussion with the Finance Ministry over whether fiscal support for investment and research could make sense in certain areas. This isn’t easy, because you have to avoid windfall effects. I do believe that it’s possible, however.

A number of Social Democrats are at odds over the issue of digitization. When it comes to structuring the workplace in the age of digitization, the first thing Labor Minister Andrea Nahles thinks of is to establish works councils everywhere. Is this a good fit for the startups you know?

Andrea Nahles has initiated a broad debate over Labor 4.0. I think that’s fantastic. When the Internet bubble of the year 2000 burst, people who worked in companies with works council were pleased. Collective advocacy will certainly work differently in the future. But it is, or course, an achievement that we will take with us into the new era.

Does Germany need a minister of digital affairs?

Governments need a shared understanding of how to modernize our country, socially, economically and culturally, for our digital age. The idea of delegating this to one person only results in everyone else avoiding taking responsibility.

Wasn’t the battle lost long ago? Or do you still believe that there could be a European or even a German Google one day?

I’m not pessimistic at all in this regard. When it comes to Industry 4.0, for example, German companies are at the forefront. This certainly doesn’t apply to business models that directly target the end-user. But it does apply to business-to-business solutions.

Are you saying the Americans can learn from Germany?

Yes, and the Americans think so, too! U.S. President Barack Obama has made his country’s reindustrialization a declared goal, and he has repeatedly cited Germany as a role model. Here in Germany, industry’s share of gross value added is almost twice as high as in the United States. This is precisely one of the key strengths of the German economy. And it’s also one of the reasons we regained our old strength faster than everyone else after the 2008 collapse. This is why I caution against losing sight of the strategic goal of strengthening industry once again.

What risks do you see?

With industry having a 23-percent share of gross value added, Germany is among the exceptions in the European Union. In the E.U., we are still far away from a 20-percent share. I strongly advocate changing this. Those who call for a 20-percent reduction in greenhouse gas emissions must also define a 20-percent industrial share of gross value added as a binding objective.

What has to happen to ensure that Germany is still an industrialized country in 2030?

We have to fight to preserve closed supply chains. These supply chains begin with energy-intensive basic industry and end in the high-tech sectors. In Germany, all the links in this chain are very effectively connected to one another. But if one link breaks away, the entire model unravels.

How can this be prevented?

I strongly believe that we should abide by our ambitious national climate protection goals. But if the steel or chemical industry is contending with competitors that have no or significantly smaller climate protection requirements to comply with, it can’t be sustained in the long term. The result would be that jobs are lost in Germany and production takes place in other parts of the world, under conditions that are deeply harmful to the climate. That doesn’t do anyone any good. We need to be very cautious in this regard. Once industry has left the country, it won’t come back. That’s why I am strictly opposed to imposing new restrictions on the top 10 percent of industry.

But aren’t we really talking about a structural change that sectors such as the steel industry simply have to confront?

The German steel industry is highly modern and very efficient – and it has a future. It underwent a structural transformation long ago. If we continue to impose burdens on the steel industry, companies that are much less efficient and far worse environmentally will survive in the end.

What could the consolidation of the steel industry look like?

I’m certainly not about to comment on the plans of individual companies. I do have a concern, however: If we now talk about a “German solution” to this issue, the consolidation will only take place in Germany, which will cost us jobs and economic clout. I want the world’s most efficient locations, and the ones that are most likely to protect the climate, to emerge strengthened from the consolidation. Those with the best locations, not those that pay the highest dumping subsidies, should prevail. That has to be the decisive criterion. And if that’s the case, German steel sites will stand a good chance.

How do you intend to prevent global competitors from exploiting the cost benefits they have as a result of more lax efforts to protect the climate?

At the world climate summit in Paris, governments agreed to binding targets to reduce their CO2 emissions. We should think about how we treat countries that do not adhere to the binding requirements.

That’s likely to contradict WTO rules.

In the case of environmental and health standards, is it indeed possible to introduce such regulations.

Speaking of trade policy, don’t you believe that the TTIP negotiations will succeed?

Those who want standards for globalization shouldn’t believe that these standards will appear out of nowhere. We need to take matters into our own hands. TTIP gives us an opportunity to do so. I would very much welcome it if Americans and Europeans took advantage of this opportunity. The Trans-Pacific Partnership Agreement (TPP) concluded by the Americans and the Asians shows how bad the standards countries agree to can be when Europe isn’t involved. We need to prove that this can be done much more effectively. CETA, the agreement between the European Union and Canada, is a good model, and one that we should use a guideline with TTIP. That’s my benchmark.

I hear a lot of skepticism from the Americans.

What distinguishes CETA from other trade agreements?

There are no private arbitration panels, but rather an arbitration court with two entities. The agreement states that public services that are privatized can be nationalized again. That regulation is left up to the contracting parties. That social and cultural standards are not affected. And, most of all, that the rights of parliaments cannot be limited. It’s become a truly effective agreement.

How has the United States reacted to your proposal to install public instead of private arbitration boards?

I hear a lot of skepticism from the Americans. I will not agree to a treaty that calls for private arbitration panels.

What do you not like about the Americans’ list of demands?

The Americans want to retain their “buy American” idea. We can’t accept that. The Americans don’t want to open up their public bidding process to European companies. To me, this is precisely the opposite of free trade. If the Americans cling to this position, we won’t need a free trade agreement, and TTIP will fail…

Do you see a risk that the Europeans and Americans will eventually agree to a “TTIP light,” one that excludes the contentious issues?

I don’t think that’s a good idea. My goal is not to avoid the worst. I want a good agreement, not an agreement at all costs.

Does U.S. President Barack Obama bring new momentum to the TTIP negotiations?

Mr. Obama and the chancellor are not conducting the negotiations… It would be more important to see some progress in the negotiations with the European Commission. Just look at the American election campaign. Both Hillary Clinton and Donald Trump have made remarks that are very hostile to trade. That concerns me.

Why is the Mittelstand so skeptical?

We need to emphasize the benefits for the Mittelstand more effectively. Big companies have no problem with all the bureaucracy involved in European and American regulations. They have entire departments filled with lawyers who handle these things. A Mittelstand company can benefit from an agreement that achieves mutual recognition of regulation and reduces bureaucratic effort.

As a proponent of the agreement, you have encountered hostility within your own party. Wouldn’t a failure of the agreement work out well for you, since the issue would then be off the table?

I have been campaigning for the agreement for months, despite all the resistance within our own ranks. Because I don’t believe that it’s a good idea for Europe to be forced to conform to the poor standards of others in a few years. And because world trade needs and will get rules. It’s better for us to be involved in the process than for others to make decisions for us. But unfortunately those involved in the negotiations keep telling me that they are not making any progress. And it isn’t the European Commission’s fault.

What would a failure of TTIP mean?

It would feel like a validation of anti-American sentiments, and not just in Germany. It’s not as if there is any other country in the world that we Europeans are closer to. That rubs me the wrong way. Of course, a failure of TTIP would not spell disaster for the German economy. Still, we would miss out on a chance for Europe and the United States to set global economic standards.

Experts fear a relapse into re-nationalization?

It’s an illusion to believe that it’s possible to exist with a re-nationalized economy in a globalized world. We don’t need a new Biedermeier period. We do need more international cooperation. All I can say to the TTIP opponents is this: We can’t prevent globalization, just as we can’t prevent tomorrow’s weather. But we can make sure we have the right clothing. The goal of globalization is not wealth for a few, but justice for all. This still sounds like an unattainable vision today, but human progress has always begun this way.

But aren’t many citizens afraid of free trade and digitization? Of a world that no longer seems to have a place for them as individuals?

Citizens remember the experience that liberalized markets have always gone hand-in-hand with a lowering of social standards. Many see the United States as the place where this development comes from. Just look at the financial markets. But the solution is not that we can do everything on our own. We need to do the right thing.

How do you intend to explain this to the many parts of the SPD that are opposed to TTIP?

Well, it isn’t as if there were no support for it at all. SPD-led administrations like the ones in the states of Hamburg and North Rhine-Westphalia, which need open markets for their industry, support the plan. But they are also right in saying that it won’t work without social standards.

 

21 p21 German Foreign Trade with the United States-01

 

Given the SPD’s low approval ratings, wouldn’t you need more support from the leaders of these two states, Olaf Scholz in Hamburg and Hannelore Kraft in North Rhine-Westphalia?

I can’t complain about a lack of support.

Why do you think the party is struggling with approval ratings of around 20 percent?

Many decent Social Democrats think that we’re doing the right thing. We have achieved our government projects, such as the minimum wage and retirement at 63. But the low approval ratings must be the chairman’s fault.

But you are holding up to this pressure?

Yes. The social democratic movement is struggling with a declining faith in collective advocacy in an individualized society. In the first industrial revolution, the debate revolved around expanding the social welfare state. This is not the case in the second industrial revolution, which is today, because a strong national, social welfare state alone can no longer control global capitalism. This doesn’t mean that the social welfare state is incapacitated. It’s just that we have weakened it more and more in the last 25 years. A strong and capable government, one that invests in education as well as internal security, is indispensable today. This is because many people justifiably have a deep-seated need for greater social and cultural certainty. But we need strong Europe for that. Both are our issues.

You’re not likely to be able to fix that by the next general election.

Name me a party in Germany that stands for democratic cohesion as much as the SPD. The SPD is the only party that attempts to bring together economic success, security in social terms and environmental sense. All other parties succumb to the temptation to focus on only one thing at a time. But that’s bound to fail in a modern society. The SPD has never abandoned its claim to shape social policy, not in good and not in bad times. And we’re sticking to that.

Is that why you’re opening up the debate on pensions?

At its core, it’s a debate about values. Is work and achievement worth anything in our society? After all, a decent pension is nothing but the result of a lifetime of achievement. In one of the richest countries on earth, a person who has worked for 45 years, or even longer in some cases, should be able to retire without pension cuts.

Is combating poverty in old age your main concern?

My concern is proper compensation for the work people have done. My concern is appreciation for work that people have performed. There has been much talk about lower pensions lately. Fine. But we’re also talking about perfectly normal pensions. I can’t send someone who has worked for 40 years into retirement with only 40 percent of his salary, but we’re moving in that direction. There’s more at stake than the pension level. The question is whether politicians are perceived as cynical.

Is pension policy an opportunity to reduce the influence of the Alternative for Germany?

The pension issue is closely tied to the low-interest phase in Europe. It undermines pretty much everything we have said about private pension plans in recent years. It also destroys the basic notion we have received from our parents, namely that we should save for a rainy day. People say to me: “First you introduced the euro, and then everything became more expensive. Than you reduced pension levels and told people to contribute to private pension plans. Meanwhile, hundreds of billions were spent on ailing banks. And now all of this has led to nothing.” It comes as no surprise that people perceive the reduction in pension levels, together with the low interest-rate policy, as cynical. That’s what right-wing populists are exploiting throughout Europe.

Is European Central Bank President Mario Draghi primarily responsible for this policy?

No. I think it’s fundamentally wrong to hold Mr. Draghi responsible. The root of the problem lies in the weak growth we’ve had since 2008, which is crippling Europe. The real question in Europe should be how we combine growth and structural reforms. The European left believes it’s merely a question of investments. The conservatives believe it’s all about austerity. We need to combine these two things. It isn’t just about spending money. It’s also about investing intelligently, in education, research and the digital world. That’s our future.

Does the ECB policy pose a threat to social cohesion?

The actions of the ECB are a consequence of misguided policy in the euro zone. This misguided policy is dangerous in the long run.

 

Sven Afhuppe is Handelsblatt’s editor in chief. Thomas Ludwig leads Handelsblatt’s political coverage from Berlin. Klaus Stratmann writes about the energy sector. To contact the authors: afhuppe@handelsblatt.com, ludwig@handelsblatt.comstratmann@handelsblatt.com

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