Wim Naudé: The twilight of German innovation

Suppose you walk through a typical German city nowadays. In that case, you will see shiny cars made by Mercedes-Benz or Audi on its streets. When you enter one of the landmark shops, such as Galeria Kaufhof, you will be able to buy pharmaceutical products made by Bayer, lens wipes for your glasses by Carl Zeiss, and tools and electronics by Bosch and Siemens, amongst others. Surrounded by these well-known global brands, you would probably never think that you are not in a dynamic 21st-century economy but in a business museum. But that is what the High Streets and shopping arcades of Germany have come to resemble - museums and shrines to an era of bygone innovativeness. Because all of these brands are more than a century old: Siemens was established in 1847, Bayer in 1863, Galeria Kaufhof in 1879, Bosch in 1886, Audi in 1909 and Mercedez-Benz in 1926. So, one could go on. As authors Erixon and Weigl have pointed out, “In Germany's DAX 30 index of leading companies, only two were founded after the 1970s." 

Indeed, modern Germany was created at the end of the 19th century during fifty years which was one of the most remarkable periods of innovation ever in world history. Consider, for instance, that in the short space of time between roughly 1850 and the 1920s, the following entrepreneurs/innovators created the following inventions: Albert Ballin,  who established the shipping liner and created the world's largest shipping company by 1900; Karl Benz who invented the 4-stroke automobile engine; Melitta Bentz who invented the coffee filter; Robert Bosch, the spark plug; Gottlieb Daimler, the internal combustion engine and the motorcycle; Rudolf Diesel, the diesel engine; Alfred Einhorn, novocaine; Adolf Fick, contact lenses;  Carl Gassner, the dry cell battery; Hans Geiger, the Geiger counter; Heinrich Hertz, the antenna; Fritz Hofmann,  synthetic rubber; Felix Hoffmann, aspirin; Christian Hülsmeyer, the radar; Alfred Krupp, no-weld railway tyres; Julius Pohlig, the cable car; Wilhelm Röntgen, X-rays; Werner von Siemens, the needle telegraph;  and Carl Zeiß, lens manufacturing. The number of world-leading scientists that were active in Germany between 1870 and 1939 include Albert Einstein, Max Planck, Werner Heisenberg, Max Born, Fritz Haber, Otto Hahn,  and Lise Meitner. They have us synthetic fertilizers with which to feed the world and nuclear technology with which to destroy it.

The First and Second World Wars ended this innovation and science miracle. Rising from the ashes of the Second World War, not only were German cities built very much where they had historically been according to ancient city plans, but the economy was resurrected around the businesses that grew out of this innovative period. This resurrection process has been described as an "economic miracle" - 1950 - 1970 saw the fastest economic and productivity growth in the country's history: average annual GDP per capita growth amounted to 5%. However, after the 1980s, economic and productivity growth slowly stagnated. Economic growth in Germany declined to an average of 2% between 1975 and 1990 and further to 1% between 1990 and 2010. Germany was even labelled the 'Sick Man of Europe' during the latter period by The Economist.

And the innovation performance of the late 19th century was never equalled. For example, if one counts the number of inventions and discoveries in Germany over a broad range of fields - including fashion, tourism, appliances and animals in the period 1870 to 1945, and contrasts this with the 1946 to 2020 period, one would see that in virtually all fields Germany was more innovative between 1870 and 1945. The total number of inventions and discoveries from 1946 to 2020 was only 27% of the innovations and discoveries from 1870 to 1945. Only in electronics, sports, toys, and computing did Germany do better or do something similar in the latter period. Patenting by German firms and innovators peaked in the 1970s and has since slowly declined. Not only did the number of patents decline, but the quality as measured by citations to German innovations vs USA innovations: a 2017 study found that already in the 1980s, German patent citations were on average 14% lower than those from the USA, dropping even further to being respectively 30% and 41% lower in the 1990s and 2000s.

Moreover, the top 20 nanotechnology patent applicants have not included a single German firm since 1970. Between 1994 and 2005, Germany registered only 0.11 patents per million inhabitants in cutting-edge biotechnology at the European Patent Office—compared to 6.0 in the UK and 18 in the USA. Between 1901 and 1956, the German university system won 38 Nobel Prizes—and only four between 1956 and 2005.

With the innovativeness of the German economy declining, it has increasingly relied on export competitiveness to maintain some economic growth and maintained this through macro-economic policies, essentially through the Euro, which offers the country a devalued currency (compared to the situation under the Mark). This has been called the "Bazaar economy." It also helped that German firms could, since the 1990s, increasingly offshore production to countries with cheap labour (e.g. China) and that it could access cheap Russian oil and gas to keep its energy bill affordable. In the absence of innovation to provide a competitive edge, the dependence on these growth mechanisms became deeply entrenched. Hence, once globalization started to slow down, once Russian energy became problematic, and with rising interest rates (and inflation) following decades of money printing (aka quantitative easing) by the European Central Bank (ECB), the German economy was in trouble. In 2022, the country suffered its first trade deficit in 30 years. Inflation hit a post-war high of 7,9%. Forests were being cleared to make way for coal mining, and farmers protested on the streets. The Deutsche Bahn, with a 30 billion Euro debt, has been described as permanently in crisis. Articles about the country's de-industrialization started to appear with frequency. Within 24 hours in October 2022, four historical German manufacturing firms declared bankruptcy: Wolff Hoch-und Ingenieurbau, Bodeta, Borgers, and Kappus. In 2023, the 600-year-old Eisenwerk Erla metalworking company went bankrupt and Volkswagen (established in 1937) announced the closure of three factories. Not surprisingly, in November 2024, the German coalition government collapsed.

The causes of Germany's innovation decline are complex - akin to "death by a thousand cuts." It includes the decline in population growth and an ageing population; the lack of tangible incentives for innovation given access to cheap money from the ECB and cheap (er) labour abroad;  "defensive" innovation by incumbent big firms that stifle competition and innovative start-up; poor fiscal spending choices, and degradation of the social welfare system. What should also not be forgotten is that after the Second World War, Germany became a vassal of the USA. Yanis Varoufakis relates a conversation with a former  USA Chief of Staff of NATO’s forces in Europe, who, when asked what is the point of NATO, replied, " It’s three-fold" [...]  "First, to keep us in Europe. Second, to keep the Russians out. Third, to keep Germany down."