«EU INDUSTRIAL POLICY: ASSESSMENT OF RECENT DEVELOPMENTS AND RECOMMENDATIONS FOR FUTURE POLICIES STUDY Abstract Following disregard in the 1980s, ...»
The special division of power in Germany is based on a cooperative form of Federalism. This is very much driven by the philosophy that a bottom-up approach to many of the schemes under the horizontal initiatives gets the incentives right. One example is finance for SMEs where there are considerable differences across states in Germany (Buigues and Sekkat, 2009). This state-level system for horizontal support to enterprise is amongst Europe’s oldest in the realm of industrial policy. In many ways it replaces the need for local landdevelopment schemes except in the case of the new Länder in East Germany (see below).
The second issue is Germany’s green party politics and the push for sustainable solutions via policies such as industrial policy. Germany was at the forefront of thinking when in 2011 it took the final decision to dismantle its nuclear-powered parts of the energy sector and
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instead placed a high priority on sustainable solutions based on natural and everlasting energy resources such as water, wind and sun (Ren21, 2013). Since 1997 the red-green coalition has pushed for an ambitious renewable scheme whereby Germany is expected to run on 50% renewable energy by 2050 (Lauber and Mez, 2004).
The third issue is German unification and the break that unification caused with some of Germany’s established traditions in the area of industrial policy. German unification is of interest to anyone in understanding the clashes, differences and potentials that exists also in the greater scheme of European unification today. In principle Germany is a miniexperiment for understanding the long term benefits of having East and West work together in a greater industrial plan. One of the big problems has been that West German institutions are often not transferable in any direct way to the East (Wiesenthal, 2003). At the same time East and West Germany are also different. In particular it is labour rather than capital mobility that has been the main driving force behind the unification adventure, which had very high initial adjustment costs but today must be considered a tremendous success.
However, in some respects there are also losers, e.g. the new Länder in East Germany have been left behind and are today somehow caught between the traditional German Länder system and Poland’s move to market economy. The new Länder now take an approach to land development that is in fact closer to the Polish than the traditional German state level model. Other losers include the old plants (that were located in the new Länder in East Germany), with this also followed a massive migration of the most skilled human capital from East to West.
Principal measures and arrangements Most of Germany’s current measures on industrial policy fall under the horizontal approach at the decentralised or state level (Buigues and Sekkat, 2009). Recent figures from the Ministry of Finance (2014) suggest that this is continuing, however, with a stronger weight on tax breaks over time and especially tax breaks that actually relieve businesses from paying electricity duty. A new budget rule that was made binding in 2011 puts a ceiling on new borrowing for subsidies at 0.35% of GDP (Ministry of Finance, 2014). Together the implementation of the budget rule and the increasing duties on energy explain the large shift towards tax breaks in the German system. In the overall subsidy structure the most recent figures show that two-thirds of all public support is via tax breaks and only one third via subsidies that are actually paid out (Ministry of Finance, 2014). It is also estimated that tax breaks make up around 5%-6% of the total tax base in Germany.
At the heart of this approach is a three-legged system of rendering support to all firms regardless of the industry, size or background in terms of alleviating their constraints in factor markets for capital (first leg) and skills (second leg). The third leg aims to overcome barriers to private R&D spending mainly through state provided subsidies for innovative activities. Often these schemes have a particular aim of fostering R&D with start-ups and hence provide for venture capital. In practice these support systems make up a rather small amount of the total budget – e.g. in the region of maximum 2%-3% of all public support tax breaks (Ministry of Finance, 2014). Funds are channelled via Germany’s twotiered banking structure where local co-operative banks play a central role in lending to SMEs under the support schemes (Deeg, 1998). However, as previously mentioned, in the reporting from the Ministry of Finance these horizontal policies only take up a minor part of the total budget for ‘Trade and Industry’. It is interesting to note that a relevant share of tax breaks go towards alleviating energy duties levied by the state. Hence, the energy policy directly or indirectly absorbs the majority share of the German budget for industrial policy. A significant part of the budget also goes towards the German Länder Thanks to the PE 536.320 89 EU Industrial Policy: Assessment of Recent Developments and Recommendations for Future Policies effective reunification policies combined with EU Structural Funds, the East German Länder have an entirely different economic basis than they had 22 years ago, where SMEs now dominate the economic landscape (Ministry of Interior, 2012). However, some regions have had very high adjustment costs, which is why there is a need for continued support and new measures and policy experiments such as developing clusters (Dohse, 2007).
Example of a relevant policy initiative One of Germany’s main strategies in the area of incentivising the production and usage of renewable energy equipment is the focus on solar panels. In principle this is a strategy that aims to create a so-called lead market (Von Hippel, 1986, Beise, 2004) for an emerging technology where there are identified bottlenecks in the system for technology development, adoption and exploitation. The main barriers to technology development are the economies of time, whereby subsidising an infant industry can become efficient because of learning and externalities. The main barrier for adoption is systemic and can only typically be alleviated by the state supplying new institutional solutions that can secure the transition from one type of technology to another. Finally, the main barrier to exploitation lies more in the commercial perspective of the private investor who needs to see a business case before exploiting the technology in commercial terms, e.g. it could be households that go from being only users to both users and producers of energy in the renewable energy system. In the latter perspective it is often necessary also to offer a support price leading to excess profits before all the combined bottlenecks are overcome and a de facto market-based system will take off. The German renewables system aims to alleviate all three bottlenecks and is arguably modelled very much according to the experiences of the Danish windmill industry, which came prior to the development of solar panels as a commercial and viable technology (Hansen et al., 2003).
In the solar panels sector, producers have been subsidised via the Länder-based horizontal support system, a system for buying up and distributing solar-based energy has been established, and a market support price is offered to supply potential investors with a relatively lucrative business case (Gawel and Purkus, 2013). However, weak points are the facts that Germany is not the optimum location for exploiting the solar panel option in renewables from a production efficiency viewpoint and other very strong producers have been fast to emerge and take over most of global production in a very short space of time.
For example, over a five-year period China moved from producing almost no solar panels for export, to serving 80% of the world market for solar panels (Ren21, 2014, www.ft.com/globaleconomy.).
However, solar panels have features that other types of renewable energy sources do not have, because the panels can be exploited for both consumption and commercial purposes by individual households. Therefore, solar panels offer entirely different types of business models for future electricity consumption. Furthermore, the acceleration in all the aforementioned relationships (development, adoption and exploitation) makes Germany the lead market in all aspects except production (which has been taken by China, see Ren21, 2014). Some estimates suggest that solar panels are about to take off as 100% market viable and may lead to supplying 30% of energy consumption in Germany within the next two years. Added to that is the very sizeable reduction in cost (mainly due to subsidized production from outside the EU), which now promises to make the technology more viable overall than initially anticipated (Schleicher-Tappeser, 2012). In 2014 renewables were estimated to supply Germany with 24% of its energy needs, the majority derived from windmills and solar panels (Ren21, 2014).
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