{"id":34046,"title":"Germany Shows Why Europe Cannot Rely on Business-led De-risking","link":"https:\/\/bst-europe.eu\/de\/economy-security-trade\/germany-shows-why-europe-cannot-rely-on-business-led-de-risking\/","date":"23. Januar 2024","date_unix":1706018282,"date_modified_unix":1747997252,"date_iso":"2024-01-23T13:58:02+00:00","content":"

Conceived as a project to strengthen peace through economic cooperation, the European Union has faced a harsh reckoning with the rise of strategic dependencies and vulnerability to coercion as dominant concerns in international economic relations. As was the case with its reliance on Russian gas, Germany\u2019s position is particularly critical due to its exceptionally deep integration into the global economy and dense linkages with China. The country\u2019s approach thus far, however, suffers from misconceptions about the role of business in fostering resilience that the EU more broadly should beware of in fleshing out its economic security strategy. Private sector engagement is undoubtedly critical, but it will take concerted public-private initiatives rather than mainly corporate risk management to succeed. <\/em><\/p>\n

Germany’s De-Risking Delusion<\/strong><\/h2>\n

Chancellor Olaf Scholz has left no doubt whom he sees in the driver\u2019s seat in addressing his country\u2019s strategic dependencies: \u201cDe-risking is not a short-term project as it is mainly about decisions that need to be taken by companies,\u201d he argued<\/a>\u00a0in June, using the de-risking tagline also\u00a0embraced by European Commission President Ursula von der Leyen<\/a>\u00a0and now firmly established among a wide range of stakeholders.<\/p>\n

The concept\u2019s success is partly explained by its malleability \u2013 beyond indicating a more targeted approach than the dreaded \u201cdecoupling,\u201d what precisely de-risking entails remains up to interpretation. However, more and more evidence casts doubt on whether the decisions that German companies are indeed taking amount to satisfactory de-risking progress by any plausible definition.<\/p>\n

Critics of German companies\u2019 handling of China-related risks have tended to focus on outward investment flows, which reached record levels<\/a> in 2022 and have hardly subsided since. While this pattern is\u00a0strongly shaped<\/a>\u00a0by a few large firms, supply chain dependencies arguably constitute a more important issue, as they concern a much larger array of companies.<\/p>\n

In a recent\u00a0Bundesbank survey,<\/a>\u00a0almost a third of responding firms indicated reliance on critical inputs from China<\/a>, and almost 80% of these companies reported that those would be \u201cdifficult\u201d or \u201cvery difficult\u201d to replace. Only about 40% had yet taken any concrete measures, with least action among those who had indicated that reducing dependencies would be difficult.<\/p>\n

These findings are consistent with analyses by economic institute IW<\/a> of industry-relevant products with concentrated import dependencies on China, showing that these dependencies have decreased significantly over the past year for only a handful of product groups. For almost half of the relevant product groups, these dependencies have stayed the same or even increased further.<\/p>\n

Systemic Vulnerabilities, Individual Responses: The Limits of Corporate Action<\/strong><\/h2>\n

Relying on business-driven de-risking<\/a> implies a view of present dependencies as mainly a failure of corporate risk management. Foreign Minister Annalena Baerbock framed this explicitly as a \u201cmoral hazard\u201d problem when presenting the German China strategy,\u00a0admonishing firms<\/a>\u00a0not to rely on \u201cthe strong arm of the state\u201d when facing the consequences of excessive exposure.<\/p>\n

Though relevant in select cases, this framing threatens to misdirect efforts in at least two important ways. First, it ignores how corporate risk management logic, especially in highly internationalised firms, diverges from government priorities. For companies already heavily invested in China and serving local and regional markets, for instance, further localising operations can be a plausible risk mitigation measure. This goes some way toward\u00a0explaining recent investment levels<\/a>, but it does not advance Germany\u2019s economic security.<\/p>\n

Second, it overestimates most companies\u2019 ability to generate diversification options where those are missing at the systemic level. China\u2019s overwhelming dominance as a supplier of\u00a0rare earths<\/a>, for example, reflects a decades-long failure to build and maintain processing capacity at home or elsewhere in the world through targeted industrial policy.<\/p>\n

There currently simply are not many serious alternative suppliers offering, say, neodymium, a key ingredient for magnets and thus electrical motors or wind turbines. Few companies have the scale and resources to single-handedly drive upstream capacity building.<\/p>\n

Coordinated industry initiatives may be more promising but are challenging to organise. As the Bundesbank survey shows, it is, therefore, precisely in these areas where systemic supply chain dependencies are gravest that business-driven de-risking is most conspicuously lacking.<\/p>\n

Building Public-Private Partnerships for Systemic De-Risking<\/strong><\/h2>\n

Instead of counting on corporate risk management to save the day, policymakers should think more carefully about how to leverage private sector engagement for systemic de-risking efforts. This starts by identifying vulnerabilities, which often requires deep expertise on industrial ecosystems, production processes and market dynamics.<\/p>\n

Public institutions \u2013 be it at the member state or EU level \u2013 rarely possess such knowledge, making more substantial and effective private sector consultation imperative. Building on this analysis, fostering diversification options at scale and speed will likely require what University College London economist, Mariana Mazzucato has called\u00a0\u201cmission-oriented\u201d<\/a>\u00a0partnerships between public and private actors, a step change from doling out subsidies or traditional industrial development financing. Adequate structures and policies are needed to enable such ventures.<\/p>\n

Rightly, the June 2023 EU joint communication on an economic security strategy<\/a> called for a \u201cstructured dialogue with the private sector\u201d – \u00a0high up on its list of next steps. Joint or at least coordinated EU efforts clearly hold significant potential for synergies,\u00a0both in building a stronger analytical foundation and designing impactful interventions.<\/p>\n

For all the caveats mentioned, it is also reasonable to presume some shared basis with the private sector for this engagement, as the ultimate goals of de-risking are in the enlightened self-interest also of any business actor with a significant base in Europe. But it is time to throw out illusions about business-led de-risking and to engage companies in a way that can make a genuine difference.<\/p>\n

About the author<\/strong><\/p>\n

Jakob Hensing is a Research Fellow at the Global Public Policy Institute (GPPi) in Berlin.<\/p>\n

Read more on EU\u2019s China Strategy<\/strong><\/p>\n

Taiwan Election: The EU Should Help Maintain the Status Quo<\/a><\/p>\n

EU-China relations: De-risking is Key, but so is Actively Managed Cooperation<\/a><\/p>\n

Why De-risking from China May still lead to De-coupling \u2013 For Certain Key Inputs, but Also for Some Companies<\/a><\/p>\n

A Gloomy Outlook for EU-China Relations: Divergence, Distancing, Decoupling<\/a><\/p>\n

Why Germany\u2019s Newly Released China Strategy is More Than Just a China Strategy<\/a><\/p>\n","excerpt":"

Conceived as a project to strengthen peace through economic cooperation, the European Union has faced a harsh reckoning with the […]<\/p>\n","thumbnail":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2024\/01\/FDI_Studie_Titelseite.jpg","thumbnailsquare":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2024\/01\/FDI_Studie_Titelseite.jpg","authors":[{"id":34053,"name":"Jakob Hensing","link":"https:\/\/bst-europe.eu\/de\/blogger\/jakob-hensing\/"}],"categories":[{"id":596,"name":"Economic Security & Trade","link":"https:\/\/bst-europe.eu\/category\/economy-security-trade\/"}],"tags":[{"id":268,"name":"China","link":"https:\/\/bst-europe.eu\/tag\/china\/"},{"id":202,"name":"eu","link":"https:\/\/bst-europe.eu\/tag\/eu\/"},{"id":263,"name":"European Union","link":"https:\/\/bst-europe.eu\/tag\/european-union\/"}]}