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GERMANY IS A DRIVER OF INNOVATION
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n the circular economy, energy conservation is implicit in the closing of the material resource loop – and critical to a new economy that can help Germany hit net zero. A Germany initiative shows in detail how Germany can adopt a no-waste economy that saves material resources, cuts emissions, and decreases energy consumption.
Over the last few years, this concept of a Circular Economy has gained momentum internationally. The European Union and various member states have developed strategic plans for a transition towards a resource-efficient
economic framework according to the principles of a Circular Economy. Also, countries outside Europe follow this guiding principle, such as China, Japan or Canada.
In Germany, however, there is still no overarching strategy how a Circular Economy can be achieved although Germany considerably shaped the debate at the international level. Germany is a driver of innovation and -with its technical infrastructure- is excellently positioned to drive this change. On the political side there are already various strategies, platforms and initiatives that address elements of the Circular Economy narrative. Those are, however, not yet aligned to one overall strategy. The Circular Economy Initiative Deutschland opens a science-based discourse about the potentials of a Circular Economy in Germany and develops a Circular Economy Roadmap for Germany.
The Circular Economy Initiative Deutschland (CEID) is a grouping of three German ministries, 24 businesses, and 22 research institutions, as well as civil society organizations: an illustration of the way that the private sector, the state, and research institutions can work together on the major climate issues of the day. The two-year project’s Circular Economy Roadmap
for Germany isn’t a theoretical justification or explanation of the circular economy but rather a systematic, nutsand-bolts strategy outlining the steps Germany must take to transition to a circular economy by 2030.
According to the report, Germany is in pole position to not just maintain but to increase its global competitiveness as well as hit climate goals with the circular economy. The authors find that circular economy levers that extend product longevity, reduce waste, and significantly increase recycling would sink the total quantity of primary raw materials used by 2050 by 68 percent. (Globally, the extraction and processing of natural resources is the cause of 50 percent of global greenhouse gas emissions.)
In terms of battery recycling alone, for example, results from a model calculation show that by 2030, a total of 8,100 tonnes of lithium, 27,800 tonnes of cobalt and 25,700 tonnes of nickel can be recovered from vehicles on the road until 2030. This could meet 13 percent of lithium demand. By 2050, these processes could recover a total of 109,000 tonnes of lithium, 180,000 tonnes of cobalt and 576,000 tonnes of nickel.
At current raw material prices, this would correspond to a price tag of €1.2 billion by 2030 or €13.8 billion by 2050. CO2 reductions could thus amount to approximately 36 million tonnes by 2030 – the equivalent of taking more than 7 million cars off the road. By 2050, battery refurbishment could generate savings of around €5.3 billion and 282 petajoules of energy demand. This corresponds to 31.4 million tonnes of CO2 equivalents, or the equivalent of taking more than six million cars off the road.
Alone, the use of recycled raw materials could save German industry around €32 billion, to say nothing of the emissions savings of materials not used in manufacturing and construction. Unfortunately, the report does not contain an estimate of the number of jobs that will be created in waste management, collection, transport, and processing. But the current size of this industry in Germany – a not insignificant 310,000 workers – indicates how labor intensive the industry it is and the potential for expansion.
The way forward does not depend on new technology but rather, foremost, a legal framework that puts waste prevention – rather than recycling – front and center. Laws like the EU’s best practice eco-design and energy labelling directives extend product life (and cut energy use) by defining design requirements and standards. Eco-design sets legal minimum efficiency requirements so that the worst energy-guzzling appliances are banned from the European market; energy labels direct consumers to the best appliances. By 2020, energy labels and eco-design were estimated to bring energy savings in the EU worth 165 Mtoe (million tonnes of oil equivalent) every year. This equals roughly 9 percent of the EU’s total energy consumption and a reduction of 7 percent in carbon emissions.
FOCUS
TRADITION OF FAMILY BUSINESS
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hey are of utmost importance for the German economy, standing for innovation, quality and long-term-vision: Germany´s family-enterprises. The Germans call it the “Mittelstand” – and the unique structure of Germany’s strong sector of family-owned companies has become a synonym for technological strength, innovation and entrepreneurial spirit all over the world. In fact, the Mittelstand not only accounts for the overwhelming majority of all businesses in Germany (over 3 million), it also provides some 60 percent of all jobs and over 80 percent of all apprenticeships.
Depending on its specific definition, the family-owned companies range all the way from small craft workshops to hidden champions worth up to a bil-
lion euros. Their range expands from wellknown companies as Volkswagen or Bosch to players that are worth billions as Henkel, Merck or Dr. Oetker, and often includes Hidden Champions as Brose, Eberspächer or Harting. Small and medium-sized firms have deservedly been described as the backbone of the German economy. They are a driving force behind growth and employment. The central feature of the German family business is the amalgamation of strategic and operative levels, of ownership and entrepreneurship. The family is the owner as well as the manager of the company. Thus specific conflicts which regularly arise in anonymous business partnerships
between the supervisory board responsible for the strategic orientation (principals) and the directors (agents) who run the day-to-day business activities disappear. Not only do families provide capital for the company. They also provide manpower.
Therefore discrepancies between management and workforce are usually less significant. Company owners assume a duty of care for their personnel similar to the way parents do for their children. In family businesses responsibility and liability, direction and execution, and supervision and correction lie in the hands of few. This is an enormous advantage as it expands time horizons, reduces distances, increases flexibility and creates awareness for the big picture.
The danger that managers pursue their own interests rather than those of the firm does simply not exist. However, the damage is significantly bigger should individual family members lose sight of the company and primarily care for the needs of their own ego, begin to fight other members of the family or present themselves publicly for their own cause. In that case values otherwise inherent to the family business like indigenousness, authenticity and as a result trust may be jeopardised. The exceptional advantages of family businesses are also the biggest risks. Amalgamation of strategic and operative levels and the blending of owner and manager interests within a family may quickly turn into a business catastrophe. Exactly because of the dangers of an unsuitable division of responsibility within the family the best solution may be to keep these levels separate.
Many (larger) family businesses have become public or limited liability companies. The highest grossing German family firms, Metro and BMW, are public companies, Robert Bosch and the Schwarz Group limited liability companies. The company continues to belong to the family or a family trust and managers are employed for the day-to-day business. The family, often sole and usually dominant shareholder, focusses on setting the strategic direction. The family itself or the appointed supervisory board merely stipulates long-term goals. How these should be aimed for is up to externally appointed directors whose salary is partly made dependent on their achievement.
The separation between ownership and day-to-day business allows family businesses to put the management in the hands of specialists with much experience in project development, product and process innovation, personnel, marketing, but also finance, insurance and – with growing importance – the communication with the critical public eye. The employment of management does not exclude the possibility to allocate individual func-
tions to family members who then as chairman of the board, manager or consultant participate in the daily business. This, however, requires clear arrangements on leadership and assignment with the management external to the family.
Another solution often chosen by smaller family businesses is the appointment of advisory boards. Committees that comprise experts from outside shall give advice to the family. This is sought to provide impulses for innovation, ideas for future business areas, help in the recruitment of management and the embedding of networks. The problem with advisory boards lies in their non-binding nature. Because consultants are not directly liable, they cannot be equally made responsible for the quality of their advice as managers. The janus-headed nature shows that family businesses can be both: A vital asset that an economy should always strive to make the most of, but also a burden, if mismanagement, inability or simply human shortcomings lead to the ruin of a previously thriving family enterprise and endanger thousands of jobs, as was the case with the company Karstadt. Family businesses become guarantors for economic stability, sustainable responsibility and future-oriented actions where the closeness within a family has a positive effect. It is thought in generations and acted with longevity, particularly where the professional qualification and social competencies of the family members correspond with the manifold management and leadership responsibilities and duties.
This cannot be taken for granted in a global and thereby growingly complex economy. Accordingly, the continued qualification of family members needs to be in a wide area of subjects. Like in many other aspects of life the law of specialization equally applies to the management of a firm. A respected owner is not necessarily a successful entrepreneur, a good investor not necessarily a smart innovator. To own a firm does not necessarily amount to knowing how to manage and motivate people, to initiate new projects and make them succeed, to market products and gain customers. This is particularly valid where children inherit the business of their parents. A key issue is therefore the timely succession plan. It influences the course of a business long before the actual changeover and a lot sooner than is expected by most family businesses. This is very much the case for the thousands of retail trades, bakeries, grocery stores or corner shops. All of them ensure the daily encounter with the family business. Almost all restaurants and manufacturing businesses are family enterprises (which is why the advent of fastfood chains was a cultural drift not only in terms of cuisine but also of structure). But also global market leaders for machines, equipment, instruments and vehicles have been in the hands of a single family for generations. Banks and offices have been led by the same family for centuries.
ECONOMY MITTELSTAND ECONOMY AND PANDEMIC
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he European Systemic Risk Board, a key financial watchdog, has issued a dire prediction. It warned of the danger of a “tsunami of insolvencies” across the eurozone when COVID-19 life-support schemes for business are terminated.
Since Germany, Europe’s economic superpower, took a severe hit in the first quarter of 2021, with output shrinking by 1.7%, attention is turning to the fate of that country’s small and midsize businesses, known as “mittelstands.” Widely regarded as the backbone of the German economy, they account for more than half the country’s gross domestic product and employ around 60% of workers. Mittelstands are often family businesses with strong local roots that are not listed on a stock exchange and therefore not subject to the same short-term pressures as quoted companies. Unlike their American counterparts, these companies have often been handed down through many generations. Many Germans believe they are superior to the American “boom or bust” corporate model.
During the pandemic, Mittelstand policy is above all a policy of acute crisis management for the Mittelstand economy. It should mitigate the acute effects on businesses and entrepreneurs in order to limit the extent of the economic and societal damage. However, it is difficult to estimate and quantify the extent to which the Mittelstand sector will be affected, especially since the scope of the threat to their existence changes over time. For example, in the early summer of 2020, the pandemic and the anti-pandemic measures already exerted downstream ef-
fects on other sectors of the economy that were not initially affected. Mittelstand policy during the pandemic is therefore also a policy of ongoing and short-term changes, including the termination as well as the demand-oriented introduction of new measures. This also includes examining whether and to what extent Mittelstand policy needs to take corrective action because other pandemic-related policies and measures threaten to disadvantage Mittelstand businesses or specific sectors. However, Mittelstand policy must not lose sight of the time “afterwards”, even if the acute problems of Mittelstand businesses predominate and an end to the pandemic is not in view. Already during the pandemic, future-oriented Mittelstand policy should look for tools to support Mittelstand businesses on their way out of the crisis and enable them to shape their longerterm business development.
The (global) economy does not stand still during the Covid-19 pandemic but may develop in completely new directions as a result of changes in consumer preferences and behaviour. Therefore, the market opportunities and competitiveness of compa-
nies will be based in part on different or newly prioritised factors after the pandemic. Thus, Mittelstand policy finds itself in a trade-off between safeguarding enterprises’ survival and being open to structural change. While crisis management policy is geared towards safeguarding the companies’ existence and mitigating the direct negative effects of the pandemic, future-oriented Mittelstand policy should enable Mittelstand enterprises of all sizes and from all sectors to once again bear the entrepreneurial risk themselves and to shape their own corporate development. It lays the foundation for the future strategic orientation and development of the Mittelstand.
On the way out of the crisis, the strengthening of competitiveness and innovation capacities, as well as the management of structural change, are of particular importance for the Mittelstand. The enterprises should be able to start or continue a sustainable corporate development based on renewal. Those economic sectors where the pandemic has accelerated structural change (e.g. trade) should be enabled to manage it (better). In this way, the Mittelstand economy can be strengthened even more to overcome potential future crises. The Economic Stimulus And Future Package launched in summer 2020 is already partly geared towards sustainable economic development based on 13 modernisation. A number of the measures fundamentally support the competitiveness and revitalisation of the Mittelstand and, indirectly, the structural change in affected sectors. • The expanded depreciation options for digital economic goods and the possibilities for supporting Mittelstand companies in their digital transformation facilitate the continuation of the crisis-induced digitalisation drive in Mittelstand companies. • The “Social Guarantee 2021” which prevents social security contributions to rise above 40% strengthens the international competitiveness of Mittelstand businesses. Here policymakers should consider extending this guarantee beyond 2021. This would be important because one can expect that both the public health insurance and the oldage pension insurance will face considerable additional burdens as a result of the Covid-19 pandemic. Thus, without a prolonged social guarantee, an increase in contribution rates is to be expected. • The tax regulations regarding degressive depreciation and the extension of the loss carry-back (see chapter 4.3) protect the liquidity of companies and provide incentives for investments, which are becoming more important on the way out of the crisis. In a such way, investments that have been postponed can be resumed more quickly.
Important for the revival of the Mittelstand economy are the financial reserves and the equity base of the enterprises. At present, one cannot conclusively assess the extent to which the equity ratios of the Mittelstand – which were quite good at the begin-
ning of the crisis – have diminished during the pandemic. Survey results at least suggest that the current pandemic could end the upward trend in Mittelstand equity ratios. There are also isolated indications that the self-employed are drawing on their old-age provision. Should the meltdown of equity capital in the Mittelstand continue, additional – possibly temporary – equity capital assistance could provide a remedy and support the Mittelstand in building up equity capital again. Strengthening or reviving the innovation capacities of the Mittelstand economy also plays an important role on the way out of the crisis. Incentives to stimulate innovation activity are offered by the increase in the funding limit of the R&D tax allowance from two to four million euros, which was enacted retroactively from July 2020 to June 2026 in the Second Corona Tax Assistance Act. This primarily addresses those enterprises that already conduct R&D. These are mainly the 14 larger Mittelstand companies. Consequently, in its latest annual report, the Expert Commission on Research and Innovation criticises the lack of consideration given to SMEs. In addition, a large part of innovation activity in Mittelstand takes place outside of R&D. If innovation activity drops sharply for a longer time, the future development and competitiveness of Mittelstand companies are at great risk. Indeed, the uncertainties during the pandemic are likely to lead to a decline in long-term innovation spending in Mittelstand enterprises.
According to the Mannheim Innovation Panel, SMEs were already assuming significantly declining innovation expenditure in spring 2020 (2020: minus 9% and 2021: minus 5%), while large enterprises expected stable innovation budgets for 2020 and even a slight increase for 2021. Enterprises whose innovation activity is impaired cite above all financing constraints as a reason for this (79 % of manufacturing, 64 % ICT, cf. ZEW 2021a). On the other hand, the crisis also acts as a catalyst for innovations such as process or business model innovations. At present, it is not foreseeable whether these pandemic-driven innovations may serve only as temporary crisis emergency solutions or whether they form a sustainable basis for the companies’ future development. This leads to the question of which further measures might be adequate to stimulate innovation dynamics in the Mittelstand. The Future Package places one focus on forward-looking technologies such as climate technologies and artificial intelligence, and in this context also offers support to Mittelstand companies for their use. However, it is equally important that Mittelstand enterprises can already participate in the development and marketing of future technologies. These can form the basis for new start-ups as well as for the necessary strategic reorientation of existing businesses in the aftermath of the pandemic.
TRADITION
CLASSICAL MUSIC
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erman classical music has enjoyed a reign of a several hundred years, beginning in the 16th century and kept alive to the present day. But it was the composers of old – in particular, the “three Bs – who arguably put the country on the musical map.
Considered one of the most important composers of all time, Johann Sebastian Bach is best known for his contributions to Baroque, a style of music that features ornate compositions formed around strong tonal chord progressions. Though his music was mostly written for organ, he also wrote pieces for the harpsichord and clavichord, along with sonatas and suites for orchestral and chamber groups, and even pieces that were meant to be performed by choral groups.
The Romantic era of Classical music also gave birth to handful of famous Germans, most notably Ludwig van Beethoven, whose nine symphonies are considered by many to be his greatest works. Another important Romantic composer of this time was Richard Wagner, who wrote operas.
Rounding out the trio of German Bs is pianist Johannes Brahms, a traditionalist and perfectionist who utilized counterpoint heavily in his compositions.
