USA and Germany – Learning From Each Other

Despite the tensions of the last several years, the Transatlantic relationship between the United States and Germany perseveres. Much credit is due to Chancellor Merkel, a steadying force in the relationship as US administrations and their respective priorities have come and gone over the last two decades.

Both the US and Germany recognize in each other a likeminded ally. The US is the largest export market for German manufacturers outside of Europe, and as a result the economic relationship is incredibly interlinked. The Trump administration tried to use that economic connectivity as leverage, but was unsuccessful.

As the Biden administration has realized, cooperation will yield better results for everyone. Both sides should prefer honey over vinegar. The quick work of the German government with the Biden administration to de-escalate trade tensions this year is especially important for maintaining the relationship. We are in the midst of a brief window of calmness before another period of uncertainty begins as the governmental changes in Berlin will come just ahead of the potential change in legislative control in the US.

While cooperation around trade is important, we’ve seen both nations willing to make short-term concessions to achieve long-term objectives on other key issues recently. We saw this on the global minimum tax agreement, and I expect we’ll see similar cooperative efforts to counter what policymakers see as encroaching Chinese influence in Africa and Latin America.

Another key issue that both sides should align around is climate change and the need to transition to a net-zero carbon economy within the next few decades. On this topic the US has much to learn from Germany, whose policymakers recognized the potential risks and acted much earlier.

Like most landmark policies the Energiewende in Germany hasn’t gone exactly to plan, but the results are nonetheless remarkable. Between enactment in 2011, through 2018 which is the last year of available data, Germany increased the green energy contribution of the country’s energy mix from 16.7 percent to 35 percent.

Energiewende is proof that concerted, government led policy can catalyze rapid progress. I of course do acknowledge that this progress hasn’t been without externalities. Energy prices are high, and the level of coal use could jeopardize continued progress.?

However, this is where Germany can and should learn from the US. Pairing German policy and planning, with the level of innovation enabled in the US would produce better, and more rapid, results.?

I recently spent several weeks in Germany reconnecting on the ground with my network across Frankfurt, Berlin, Munich, and every city in between and there is a clear disconnect between the expertise needed to create solutions to climate change, and the funding needed to innovate at scale.

On the one hand, Germany lives up to its reputation and boasts a deep engineering expertise that can and should drive truly breakthrough innovations in the fight against climate change. From more efficient technology to utilize solar and wind energy, to carbon capture platforms, Germans are among the best equipped in the world to develop game-changing solutions.

On the other hand, there remains an inability to finance growth beyond the early venture stage. What I’ve seen and heard is that venture capital for early stage support is increasingly available, but the ability to finance and support continued growth isn’t.?

I do believe policymakers could play a role in solving this issue. While I have read the “Made in Germany” position paper, and agree we urgently need to create a better financing environment for companies in Germany that promotes innovation, I’m not confident in the proposed role of the state.

German innovators lack access to more sophisticated and scalable sources of capital - including, and ultimately a deep and liquid capital markets union. As a result, early stage innovations are often acquired, in recent years frequently by US-based SPACS or corporates.?

To better understand why Germany is in this position as an exporter of innovation, policymakers must recognize that America has two key advantages over Germany when it comes to funding.

The first edge is cultural and may seem simple - its America’s ability to embrace failure. From Presidents like Abraham Lincoln to cultural themes that icons like Bruce Springsteen champion, the inevitability of failure and the need to overcome initial setbacks is engrained in to the fabric of the American psyche.

There is more pride in trying and failing than not trying, and that’s what can make the difference when it comes to a proposition as uncertain as innovation. Germans need to move on past the stigma attached to failure in order to promote innovation. Startups are risky, but risk-takers shouldn’t be socially punished for trying.

The second lesson to take from America is the importance of an increasingly deep market for venture and high risk capital. Specialized investors are needed where banks and traditional equity markets can’t tolerate the risk.

As I mentioned, we are seeing promising developments in pockets like Berlin, and early stage funding is increasingly available. However, a lingering problem continues to be the necessary ecosystem that enables this development beyond a handful of actors.?

The current progress should be supported and encouraged, as the next step is to help attract private equity and other mid-stage investors that enable scale.

While ultimately beyond Germany’s control, further down the line, innovative firms need access to a deep and liquid capital market. The United States’ world-leading capital market drives growth and promotes innovation at a level Europe can’t compete against. Policymakers across the EU need to prioritize a common capital market.

A Capital Markets Union that reduces red tape, and ultimately reduces costs, would free the flow of capital across borders and more efficiently connect investors with those who need funding. Only large, well-functioning and integrated capital markets can provide the scale of support needed to recover from the coronavirus crisis and support Europe's green transition.

Part of cooperation is learning from one another. The United States won’t achieve the necessary carbon and greenhouse gas emission reductions without learning from Germany’s top-down approach to the sustainable transition. Likewise, Germany should recognize the strength of the US innovation framework and seek to unlock its own domestic potential.

Recognizing and adapting to these strengths and weaknesses will be key to making tangible progress on climate change.

This article originally appeared in German on the blog politische ?konomie:?https://www.blog-bpoe.com/2021/08/19/riley/