The American Void

Time for Germany to Learn to Lead

By Christiane Hoffmann

Washington's move to abandon its global leadership role marks the end of Germany's foreign policy innocence. Berlin will soon be faced with difficult choices that could dent its moral standing.

It is often a single sentence that goes down in history, one that epitomizes an idea, a movement, an era or a personality. Two sentences from Angela Merkel come to mind. One, focused on domestic politics, was an entreaty: "We can do it." It was a pledge and a plea to all Germans in the face of the huge influx of Syrian refugees who entered Germany in 2015.

The other, focused on foreign policy, was earthshaking. "The times in which we could completely depend on others are, to a certain extent, over," Merkel said on May 28 during an appearance in Munich. She did everything she could to make the sentence seem as offhand and trivial as possible. She wasn't speaking in front of the Brandenburg Gate in Berlin -- she was at a festival in Munich, the smell of beer hanging in the air. She hemmed and hawed, she relativized, toned down her language and spoke of "others," even though it was clear that she was referring to the United States.

Still, the sheer impact of her words was undeniable. The German chancellor had essentially announced the end of an alliance that had guaranteed Germany's security for half a century and shaped its politics and values. When she made the statement in May, Germany was in the middle of an election campaign, which informed the manner in which it was interpreted and discounted. Even today, its radicality has been largely ignored -- perhaps because to do otherwise would be too painful or unsettling. Germans prefer to avoid such introspection. The U.S. remains our most important partner, government officials are fond of saying, and the NATO alliance is still intact. That may be true. But for how much longer?

Germany has been busy with its own affairs since May, when its election campaign started in earnest ahead of a September vote that has yet to produce a new government. But once Berlin again has a governing coalition capable of conducting international affairs, it will face circumstances that have changed dramatically. The liberal world order that the United States spent seven decades building is disintegrating. The U.S., meanwhile, is withdrawing from the global stage on three different fronts: militarily, morally and a key leader of the international community. It is withdrawing from its role as a reliable guarantor of European security, as a shaper of global policy and as the leading power of the free West. What does a future hold without the U.S. at the helm? What does a future hold when the most important constant of German foreign policy is no longer there? What will a future look like if all countries seek to emulate "America First?"

For Germany, it means the end of what has essentially been a sheltered foreign policy, one in which others have often made the most difficult decisions for us. In recent years, Germany has shown a greater willingness to take on the responsibility commensurate with a country that is the most economically powerful and populous in Europe. Thus far, however, Germany has preferred reaction over (pro)action, as seen in Ukraine and the euro crisis.

For years, Germany was able to get away with a foreign policy that didn't call for it to assume much responsibility. West German sovereignty was limited and German reserve was understandable for historical reasons. The divided country was also too small to play a role in international politics. Looking ahead, though, Germany will have to lead. But where to? The most radical consequence of the new state of global affairs is that Germans now have to become clear about what it is that they want. That may sound banal, but it isn't.

Germany's global abstinence has permitted it to have the luxury of basing its foreign policy largely on values, while others took care of the realpolitik dirty work. Merkel's refugee policies, which placed humanitarian principles over the cohesion of the European Union, is only the most radical example of this German tradition. The new global situation will also mean a departure from the good Germany. When principles collide with pragmatism, when values clash with interests, Berlin will be forced to make difficult decisions. But how far should we go? What means are we prepared to employ in order to defend Europe, to bring the Middle East closer to peace or to stabilize Africa?


German foreign policy experts are still debating how radically the estrangement between the U.S. and Europe has become. Atlanticists are calling for optimism, even though Trump, so far, has served to affirm the worries of the pessimists. They continue to cling to the illusion that, Trump aside, trans-Atlantic relations are actually still entirely intact. They see the U.S. president as a painful, but temporary illness. They believe that once America returns to health, the status quo will return to trans-Atlantic relations.

The problem with that view, however, is that America's retreat from its role as a shaper of global politics began before Trump -- and it won't end with his departure, either. German Foreign Minister Sigmar Gabriel went even further in reiterating Merkel's beer-tent sentiments in an important foreign policy speech a few weeks ago in which he stated that Germany might also have to get by without America if need be.


What does it mean when the U.S. abandons its global leadership role? The idea that Germany might assume that role was nonsense from the beginning. The notion that the German chancellor would step in as the leader of the free world and that Germany, as actor and philanthropist Richard Gere put it, would be the "wise, stable, forward-thinking moral country on the planet" was the desperate hope of a handful of American romantics. They flattered Germany and fueled the naïve illusion that values can be upheld without having to defend them.

Germany may view itself as a major moral power, but politically and economically, we're not nearly strong enough -- and militarily, we possess only moderately equipped armed forces without any nuclear deterrent.

Furthermore, Germany's inability to form a governing coalition this fall and winter has shown that Berlin is not immune to the crisis of liberal democracy. Germany cannot rescue the West but, together with France, it could do a lot more in Europe and its backyard than it has previously done. Four years ago, Joachim Gauck and Frank-Walter Steinmeier, Germany's president and foreign minister at the time, both called for such a focus four years ago, saying that Germany must act "earlier, more decisively and more substantially."


In his works, the German historian Heinrich August Winkler has described the triumph of the West, its values and its ideas. But even he has been at a loss since America ceased upholding these values. His most recent book, "Is the West Crumbling?" can't even answer the question it asks. Winkler has become a chronicler of an historical even that he is no longer able to interpret.

The crisis of the West is particularly painful for Germany. The country's long journey to the West described by Winkler ended as the West's decline began, like some train that has arrived at a station that has just been decommissioned.

As the West's position of power eroded, it's claims of moral leadership only grew louder. This divergence was particularly apparent to those watching from outside of Europe. There, the West had long since been viewed as presumptuous and arrogant. It was a tone they didn't care for, and they reacted with rejection and defiance.

Authoritarian systems have now entered into open rivalry with the West, pitting their models against ours. The narrative -- disseminated by China, above all -- is one of efficient, benevolent half-dictators who promise prosperity and progress in contrast to cumbersome, inefficient and crisis-plagued democracies.


Europe must stand up for its values. To that end, it would be helpful if it changed its attitude and tone and shed its arrogance, shifting away from gestures of finger-pointing and rebuke. Europe must allow its virtues to speak for themselves. It has to stand its ground in the competition with other societal models. With Emmanuel Macron at the helm of France, we now have an opportunity to make Europe attractive again.

One of the favorite bits of wisdom adhered to by Merkelism is that politics begins with observing reality. But that's not so easy these days. Germany's foreign policy lacks a strategic approach that describes, analyzes and shows possibilities. So long as the most critical coordinates had already been set, Germany didn't have to think so critically. Others used to do this for us, but those times have passed. A few years back, the Foreign Ministry set in motion a review process and the Defense Ministry also began working on a new policy "white book." That's all fine and good, but it doesn't go far enough. Germany needs more foreign policy minds who in turn have greater influence. The smartest thinkers in politics should not be entering the corporate sector as many have done. They should instead be going to foundations and think tanks.

It's also no longer sufficient for each nation to plan and think for itself. If Berlin and Paris want to lead together, then they will also need to think together. The German Institute for International and Security Affairs (SWP), Germany's most important foreign policy think tank, recently proposed the creation of a joint German-French "white book." That, at least, would be a start.


Values and interests aren't mutually exclusive by default. It's in Germany's interest to promote rule of law, human rights, multilateralism and the adherence to global agreements. Even so, it can still be necessary to accept limitations to achieve foreign policy goals. German foreign policy must weigh morals and interests against each other. For example: The EU Association Agreement with Ukraine represented a sovereign decision by Kiev to link itself more closely with the European Union. But was it in the European interest given the ultimate cost -- a war in Ukraine and a row with Russia? In the end, the unwillingness to budge served neither Ukraine nor the EU.

Another example: Was it right to insist to Britain that the principle of freedom of movement was non-negotiable, thus paving the way for the Brexiteers? Surely the free movement of labor forces is a central principle of the single market. But out of fear that the principle would be abandoned, there was never even a discussion over whether a compromise could be made.

Yet another example: In the conflict over Catalonia's quest for independence, Germany and the EU have held strictly to the principle of not intervening in a member state's domestic politics. But it would indeed be in Europe's interest if Berlin or Brussels -- or whoever -- could find a way to serve as an intermediary between Madrid and Barcelona.

Part of our consideration has to be accepting things that we do not have the power to change. Germany must prepare for the fact that democratic developments are unlikely in Russia in the foreseeable future. And yet we still need policies that bind Russia and Turkey to Europe. In the Middle East, we need to come to an understanding with a Russia that has filled the void left by the U.S. And when it comes to China, we need a European policy that limit's Beijing's influence.

And, finally, there's Poland. The question could soon rise there about what's more important? That Poland remains in the European Union or that it complies completely with the principles of rule of law. It may be unrealistic to expect both. In such a situation, it might be in Germany's interest to ensure that the Eastern Europeans remain in the EU, even if they do not conform to its standards on every value.

Germany will have to endure these conflicts in the future while at the same time making decisions that could be decisive. It's a mistake that there is little in terms of honest discussion about them. We should have much sharper debates -- and they should be as pointed as they are public. Instead, however, German politics is still focused on the illusion of being a moral power. If Germany wants to lead, then it also needs to have a realistic view of the world. The era of foreign policy innocence has passed.

Painting the map green

As China gets tough on pollution, will its economy suffer?

The received wisdom was that greener growth would be slower. So far, that hasn’t happened

LEO YAO thought he had nothing to fear from the environment ministry. Before, when its inspectors visited his cutlery factory, he says, they generated “loud thunder, little rain”. After warning him to clean up, they would, at worst, impose a negligible fine. Not so this time. In August dozens of inspectors swarmed over his workshop in Tianjin, just east of Beijing, and ordered production to be halted. His doors remain shut today. If he wants to go on making knives and forks, he has been told that he must move to more modern facilities in a less populated area.

Mr Yao’s company, which at its peak employed 80 people, is just one minor casualty in China’s sweeping campaign to reduce pollution. For years the government has vowed to go green, yet made little progress. It has flinched at reining in dirty industries, wary of the mass job losses that seemed likely to ensue. But in the past few months it has taken a harder line and pressed on with pollution controls, hitting coalminers, cement-makers, paper mills, chemical factories, textile firms and more.

Tens of thousands of companies—mostly smaller ones, like Mr Yao’s—have been forced to close, according to Chen Xingdong, an economist with BNP Paribas. In the region around Beijing this winter, the government has ordered steel mills to run at half-capacity and aluminium-makers to cut output by nearly a third. Implementation, half-hearted in the past, has if anything been heavy-handed. In Hebei, a northern province, a ban on coal heating left thousands of residents shivering because the replacement, a switch to natural gas, was not yet ready.

For the wider economy, the question is how steep the cost will be. A sharp tightening of environmental rules in the world’s biggest polluter has the potential to be a shock, both to China and the global economy. Two worries are commonly heard: that it will drag down growth; and, at the same time, cause inflation as production cuts boost prices. Jiang Chao, an economist with Haitong Securities, a broker, says it could end up making for “classic stagflation”. So far, though, these worries are unfounded: growth has been solid and inflation subdued. A possible explanation is that the economic impact is lagging behind the pollution controls. Another is that, contrary to received wisdom, China may be able to raise its environmental standards without paying a high price.

One thing is clear: China’s shift on pollution is real. True, some extreme measures are temporary, especially those aimed at keeping Beijing’s sky blue this winter. But many others will be lasting. As part of a “war on pollution” declared in 2014, China has detailed targets for cleaning up its air, water and soil. On January 1st it introduced an environmental-protection tax, replacing a patchwork of pollution fees. Last month it launched a market for trading carbon emissions, which, though scaled back from early plans, will be the world’s largest. Most crucially, the environment ministry, previously a political weakling, has clout at last—as Mr Yao’s cutlery business found to its chagrin. Besides fining companies, inspectors have disciplined some 18,000 officials for laxity over pollution.

The tougher tactics have already made a big dent in specific industries. Just 60% of steel blast-furnaces are now in use, down sharply since October and near a five-year low. Thermal-power output is now actually declining year by year, evidence of weakening demand. Companies are also feeling the pinch. Schaeffler Group, a German car-parts maker, warned in September that pollution controls would knock out its supplier of needle bearings. Taiwanese chipmakers in the city of Kunshan, an electronics hub not far from Shanghai, say the abrupt tightening of water-quality rules may lead them to move.

Upward pressure on production costs has been intense. A surge in coal and steel prices has attracted most attention, as China has pushed companies to cut capacity (see chart). But similar trends affect a range of smaller industries. In July China banned imports of 24 kinds of waste such as paper and plastic; the ban came fully into effect on January 1st, but demand (and prices) for raw pulp quickly jumped. Restrictions on the chemicals industry have fuelled a 50% increase in the price of glyphosate, a popular weedkiller, over the past few months. Prices of rare-earth metals, notably two used in electric magnets, have also soared.

Yet the biggest economic surprise of China’s environmental campaign so far is not that it has had an impact; it is how muted that impact has been. Yes, industrial production has recently been weaker than forecast, but it is still expanding at more than 6% year on year. And yes, some commodity prices have shot up, but this has had very little effect on general inflation.

Three factors suggest that this benign trend may endure. First, despite the common assumption that industries such as steel or coal are vast, they in fact account for a small, shrinking share of the Chinese economy. Minsheng Securities, a broker, calculates that the full complement of industries affected by the pollution measures adds up to just 7% of total national investment.

China has reached a stage of development where manufacturing is fading in importance.

Nearly 4m people may lose jobs as a result of cuts in industrial capacity, but strong demand for labour in the services sector, from restaurants to health care, is cushioning that blow.

Second, price increases have been concentrated and show little sign of spreading widely. Prices of coal and steel, the first to heat up, are already levelling off, making the increases seem big one-off changes rather than the start of inflationary spirals. For the economy as a whole, it amounts to a redistribution of resources. Companies that use commodities as inputs face higher costs. But producers benefit. And since metals and mining companies are heavily indebted, the rebound in revenues is helping to fortify their balance-sheets and, in the process, easing Chinese financial risks.

Lastly, green restrictions can themselves generate growth and jobs. China’s drive for cleaner energy sources has gained momentum. Estimates suggest it installed nearly 55 gigawatts of solar-power capacity in 2017, more than the existing capacity of any other country at the start of the year. China accounts for about two-fifths of global production of electric cars. And in more established industries, companies feel pressure to upgrade. To stay in business, Mr Yao says he will move his cutlery factory to a new industrial park, where waste-disposal standards are higher.

If the economic downside from China’s clean-up remains relatively mild, it prompts an obvious question: why did it take the government so long to get tough on pollution? One big reason is surely the uneven distribution of pain. Smokestack industries are based in a small number of provinces such as Shandong in the east and Shanxi in the north. So long as enforcement was in local hands, officials had little incentive to act. None wanted to throttle companies in their own backyard. But from a national perspective, the economic trade-offs of greener growth ought to be easier to stomach. China will both pay a price and reap dividends.

Does Trade Fuel Inequality?


A woman does laundry on the ground near demolished residential buildings

CAMBRIDGE – Inequality has become a major political preoccupation in the advanced economies – and for good reason. In the United States, according to the recently released World Inequality Report 2018, the share of national income claimed by the top 1% of the population rose from 11% in 1980 to 20% in 2014, compared to just 13% for the entire bottom half of the population. Qualitatively similar, though less pronounced, trends characterize other major countries such as France, Germany, and the United Kingdom.

To explain the rise in inequality that began in the 1980s and has accelerated since the turn of the century, many have pointed out that indicators of globalization, such as the trade-to-GDP ratio, have also risen since 1980. But does that correlation imply a causal link between trade and inequality?

There are certainly reasons to doubt it. The global trade-to-GDP ratio peaked in 2008 at 61%, after a 35-year climb, falling back to 56% by 2016 – at precisely the time when fear of globalization reached political fever pitch.

What if we look at the world as a whole, rather than individual countries? As Columbia’s Xavier Sala-i-Martin pointed out in 2002 and 2006, even as inequality has risen in nearly every country, inequality across countries has decreased, owing largely to the success of developing countries like China and India in raising their per capita incomes since the 1980s.

Multiple factors, including urbanization, high savings rates, and improved access to education, undoubtedly underlie these countries’ impressive performance. But, if one uses geography to isolate exogenous determinants of trade, it becomes apparent that trade has been among the most powerful drivers of Asia’s economic success, and thus the convergence between the developed and developing worlds.

For someone like US President Donald Trump, this would indicate that Asia’s success has come at America’s expense. This view of trade as a zero-sum game was a feature of the mercantilist theory that reigned three centuries ago, before Adam Smith and David Ricardo made the case that trade would normally benefit both partners, by enabling each to take advantage of their comparative advantages.

But the Smith-Ricardo theory has a key limitation: it does not distinguish among a country’s citizens, and therefore cannot address the question of income distribution within a country. Given this, the Heckscher-Ohlin-Stolper-Samuelson model may be more useful, as it distinguishes between workers and owners of physical, financial, or human (skills) capital.

The HO-SS theory, which dominated international economic thinking from the 1950s through 1970s, predicted that international trade would benefit the abundant factor of production (in rich countries, the owners of capital) and hurt the scarce factor of production (in rich countries, unskilled labor). Workers could command higher wages if they did not have to compete against abundant labor in poorer countries.

Then came the post-1980 revolutions in trade theory. Paul Krugman and Elhanan Helpman introduced the previously neglected elements of imperfect competition and increasing returns to scale. Later, in 2003, Marc Melitz showed how trade could shift resources from low-productivity to high-productivity firms.

Critics of globalization latched onto these newer economic theories, claiming that they demanded a rethinking of the traditional case for free trade. It was precisely at that time, however, that the HO-SS trade theory’s prediction that free trade would hurt lower-skill workers in rich countries apparently began to materialize.

Yet not all of the HO-SS theory’s predictions have come true. As Pinelopi Goldberg and Nina Pavcnik reported in 2007, the expectation that trade would reduce inequality in the countries with the most unskilled workers, because their services are in greater demand in an integrated world market, has not been borne out. “There is overwhelming evidence,” they write, “that less-skilled workers in developing countries “are generally not better off, at least not relative to workers with higher skill or education levels.” In the same year, Branko Milanović and Lyn Squire also found that tariff reduction is associated with higher inequality in poor countries.

Ten years later, inequality continues to worsen within developing countries, including the so-called BRICS emerging economies. In Brazil, the top 1% accounts for 25% of national income. In Russia, the income share of the top 1% of the population increased from 4% in 1980 to 20% in 2015. Likewise, in India, that figure rose from 6% in 1982 to 22% in 2013. In China, it surged from 6% in 1978 to 14% in 2015. And, in South Africa, it rose from 9% in 1987 to 19% in 2012. A look at the top 10% of earners shows similar trends.

Top 10% income shares across the world, 1980–2016
Top 10% income shares across the world, 1980–2016

This does not mean that the forces described by the HO-SS theory are irrelevant. But there is clearly more to current inequality trends than trade. Technological progress – which has raised demand for skilled workers relative to unskilled workers, at a time when the supply of skilled graduates lags – seems to be a major factor everywhere. The growing tendency of many professions to produce winner-take-all outcomes may play a role as well. A lack of redistribution through taxes in a country like the US (compared to major countries in Europe) does not help matters.

Inequality is clearly a serious problem that merits political attention. But focusing on trade is not the way to resolve it.

Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

Computers are making generalists of us all

The narrow office specialist is increasingly a thing of the past

Tim Harford

A few weeks before Christmas, an impish chart appeared on the Bank of England’s unofficial blog. It compared plunging productivity with the soaring shipments of smartphones. Typical productivity growth in advanced economies had hovered steadily around 1 per cent a year for several decades, but has on average been negative since 2007. That was the year the iPhone started to ship.

Nobody really believes that the iPhone caused the productivity slowdown — a more obvious culprit would be the global financial crisis — but it is hard to find people who think that their phones are an unalloyed blessing. If in 1968 an economist or computer scientist had been told that 50 years later we would all be carrying wirelessly networked supercomputers in our pockets, he or she would have been staggered at the potential. I doubt they would have realised quite how much time we would spend liking Instagram posts, playing Pokémon Go and sending each other digital interruptions.

The costs of this distraction are starting to become apparent. I wrote recently about the research of Gloria Mark of the University of California, Irvine. Prof Mark argues that reorientating yourself after an interruption tends to take between 20 and 25 minutes. We all know how a moment’s inattention can turn into a clickhole of distractions. She also points out that once we get used to being interrupted by others, we start interrupting ourselves, twitchily checking email or social media in the hope something interesting might turn up.

Yet digital devices slow us down in subtler ways, too. Microsoft Office may be as much a drag on productivity as Candy Crush Saga. To see why, consider Adam Smith’s argument that economic progress was built on a foundation of the division of labour. His most celebrated example was a simple pin factory: “One man draws out the wire, another straights it, a third cuts it, a fourth points” and 10 men together made nearly 50,000 pins a day.

In another example — the making of a woollen coat — Smith emphasises that the division of labour allows us to use machines, even “that very simple machine, the shears with which the shepherd clips the wool”.

The shepherd has the perfect tool for a focused task. That tool needs countless other focused specialists: the bricklayer who built the foundry; the collier who mined fuel; the smith who forged the blades. It is a reinforcing spiral: the division of labour lets us build new machines, while machines work best when jobs have been divided into one small task after another.

The rise of the computer complicates this story. Computers can certainly continue the process of specialisation, parcelling out jobs into repetitive chunks, but fundamentally they are general purpose devices, and by running software such as Microsoft Office they are turning many of us into generalists.

In a modern office there are no specialist typists; we all need to be able to pick our way around a keyboard. PowerPoint has made amateur slide designers of everyone. Once a slide would be produced by a professional, because no one else had the necessary equipment or training. Now anyone can have a go — and they do.

Well-paid middle managers with no design skills take far too long to produce ugly slides that nobody wants to look at. They also file their own expenses, book their own travel and, for that matter, do their own shopping in the supermarket. On a bill-by-the-minute basis none of this makes sense.

Why do we behave like this? It is partly a matter of pride: since everyone has the tools to build a website or lay out a book, it feels a little feeble to hand the job over to a professional. And it is partly bad organisational design: sacking the administrative assistants and telling people to do their own expenses can look, superficially, like a cost saving.

But it is also that some of these jobs are a pleasant diversion from the key task at hand. Even filling out expenses may be soothing to some, and designing your own PowerPoint presentation can be quite fun for the presenter, if not for the hapless audience.

Smith worried that repetitive work would make us “as stupid and ignorant as it is possible for a human creature to become”. That risk remains. Technology can unbundle tasks, leaving human workers with grimly narrow duties.

But for other workers, general-purpose computers push back against Smith’s concern. Design a pretty graph, search the internet for cartoons for a presentation, use a price-comparison site to book some travel, craft an eloquent post on LinkedIn, and office life starts to look mildly entertaining — even if there isn’t much time left to do the jobs for which we’re paid. Setting games and social media aside, there are plenty of ways for workers to use their computers to do their jobs less efficiently while having more fun, perhaps without even meaning to.

I suspect this is but a small part of the productivity slowdown. And I feel ambivalent about it. A day full of distractions is rarely satisfying. On the other hand, I would not wish to spend each hour sharpening 5,000 pins.