Economist to Intel: “Grateful that the problems have emerged now”

Capital: Mr. Gropp, Intel’s billion-dollar investment in Magdeburg has been put on hold. Are you sad?
REINT GROPP: No, quite the opposite. We can almost be thankful that Intel’s problems have already surfaced – before the really large sums were paid. Imagine if the factory was already half finished and we had already paid five or ten billion euros. That shows that the state is playing the lottery with taxpayers’ money. He makes business decisions, but he is notoriously bad at making them. He’s just not good at it. The danger is that you’re backing a horse that’s lame as hell.

The subsidy was also intended to promote the development of our own chip industry. Despite this, you were against it from the start. Why?
You have to honestly ask yourself whether you can really achieve geostrategic independence with such subsidies. And as far as I understand, this simply cannot be achieved with a chip factory in Magdeburg or even in Dresden, because a lot of intermediate products still have to be imported from China and Taiwan. It is impossible to shift the entire chip supply chain to Europe or even to Germany. This means that we are spending a lot of money to shift geostrategic dependence from one level to another, but we are not eliminating it. Last but not least, subsidizing production contradicts our comparative advantage.

How come?
We can be competitive in the development of chips, even compared to the Americans and Chinese – but not in production, just as we were not able to with solar cells. Our wages are simply too high. If we really want to subsidize, we should invest ten billion in research into AI chips, perhaps in a huge research center in Magdeburg. Although due to the existing companies and infrastructure, such a research center would probably be better off in Dresden. In Magdeburg, it would be better to support the existing research in medical technology.

The hope when supporting new companies like Intel is that this will also stimulate economic growth. Is that realistic?
Sven Schulze, Saxony-Anhalt’s Minister of Economic Affairs, assumed that every euro of subsidy for Intel would bring in five to six times as much for the region. However, the evidence from similar cases is extremely mixed. In Israel, for example, it worked, where it turned out to be about one and a half times as much. But in Ireland, nothing at all happened. Why? It works when there is an existing ecosystem and local companies in the field that are already there. That is the case in Dresden, where the Robotron combine used to exist. But Magdeburg has no tradition of electronics manufacturing – it has strengths in other areas, such as medical technology. Given the shortage of skilled workers, such a settlement can even have negative externalities for other, possibly more promising companies that cannot keep up with the subsidized company, cannot find workers and may not even be founded or cannot grow.

Is it true that such individual subsidies are increasing?
Yes, a bit of innocence has been lost. In the EU, we have always had aid rules that made such subsidies impossible. In the wake of the corona crisis, these were watered down – and in the case of the pandemic, quite rightly so. But it has brought about a kind of change in the state’s mentality. They now believe they can intervene in the economy in a dirigistic manner: you should survive, you are an important sector, you get money – and you don’t. This hubris of the state, of knowing who should survive and who shouldn’t, hasn’t existed for a long time. And I think it will turn out to be fundamentally wrong, as it has in the past.

Are we dealing with a different understanding of the state?
I am increasingly perceiving a rule-based idea of ​​an all-knowing state that actually wants to control everything. In normal, prosperous times, this can work well and not be so dramatic. But at the moment it is actually having an impact on economic development.

You mean the bureaucratic burden?
Bureaucracy may not be the right word, but we have a tendency towards very complex, very detailed rules. This is definitely a German phenomenon – and it can result in bureaucracy. Small companies in particular can be really discouraged by the effort involved. I see this as an important reason for our weak start-up sector and why start-ups do not grow as quickly as in other countries. We still have very few unicorns in Germany, i.e. young companies with a market value of over 1 billion euros.

Is that the only reason?
No, there is also a long-term structural explanation: we in Germany are not good at dealing with radical change. There is little of this Schumpeter-style creative destruction, there are very few new companies entering the market and still relatively few companies leaving. In disruptive times, this is an important factor – more important than in a Merkel-style period, when everything just keeps developing. That is why the German economy is not particularly well positioned for the current, rapidly changing world.

How much blame does the traffic light coalition bear for the current weak growth?
We have a very weak federal government – weak in the sense of being very divided and very unstrategic – and that acts as a factor of uncertainty. Under Merkel, problems were not really solved either, but she at least exuded a certain calm, a certain security. At the moment, the government is doing the exact opposite: heat pumps here, industrial electricity prices there, and so on. Things like that are really poisonous for economic development – if I don’t know what’s going to happen, I don’t invest or consume. These are uncertain times anyway. But the traffic light coalition has managed to amplify this uncertainty even further.

The government actually wanted to do something for the economy; there were growth packages, a Germany timetable and the like.
Yes, but especially with the Chancellor, I have the impression that it is essentially a policy of announcements: a turning point here, a turning point there – and then a mouse is born. The margins are improving somewhat, but it is certainly not a turning point. The three parties are caught up in their diverging goals and in the existing complexity that we now have. I can find little that is really positive about what has been done in recent years.

Really nothing?
Okay, the quick response to the energy crisis caused by Russia’s attack on Ukraine was successful. But without an acute crisis, it is incredibly difficult, if not impossible, for the German government to actually implement serious changes.

How much hope do you have that things will improve in the last year of your government?
I would like the election results from Thuringia and Saxony to serve as a signal that this disunity, this patchwork, this incoherence is being noticed. People basically didn’t care what they voted for, just not one of the traffic light parties. They even voted for a party that has only existed since January and has a four-page election manifesto! So it would be good to use the year to pull ourselves together and do better.

Reint E. Gropp has been President of the Leibniz Institute for Economic Research in Halle since 2014 and holds a chair in economics at the Otto von Guericke University Magdeburg