Wolfgang Münchau: Will Germany be next?

Hello, and welcome back to UnHerd. For the past two weeks, understandably, all of the focus has been on Donald Trump and that seismic election result. We will be talking a lot about that in the weeks to come. However, there's another story that has been unfolding closer to home here in the UK, and that is Germany.

Because, in case you haven't noticed, they are facing something approaching an economic crisis. Their government is falling apart; there are general elections scheduled for February. Meanwhile, at the heart of Europe, Germany is looking like it has its own big problems, which could have enormously profound consequences for the continent of Europe, for the UK, and even for the US. Well, happily, there is someone who understands it better than anyone else. His name is Wolfgang Munchau. He has been on the show before, and he has a new book, *Kaput*, coming out, which tells the story of how Germany found itself in this unenviable position. He's here in the studio.

Welcome, Wolfgang. Hello, Freddie. We have so much to cover today. I think for our audience, the most useful place to start might be for you to give us your version of the history of how, in recent decades, Germany found itself at this moment of crisis. It seems like the entire model for that country — the very foundation of its success and the reason it has been viewed as an incredibly strong cornerstone of European power — suddenly looks like it's not working anymore. How should we understand that story?

The best way to understand the story is to view it as a long history, as only people began to take note of it in the last year or so. In fact, some individuals only became aware of it in the last month. The decline of the German economy became evident in the statistics around 2017-2018. Interestingly, this occurred shortly after the British referendum, which was indeed a factor—not the main cause, but one of the triggers of the industrial decline.

I would say the main origins date back to the days of Gerhard Schröder, when he was Chancellor in the early 2000s, and the long reign of Angela Merkel. What happened to Germany was that the country had, ever since the Second World War, specialized in industry. This was a very successful strategy, and I do not criticize it. The fact that they did this allowed them to build a model very much based on a modern industrial economy with great specialization in cars, mechanical engineering, and chemistry.

And they were world leaders in many of these sub-segments of these areas. Yes, we were all jealous of it. It was discussed in every newspaper column for 25 years. Ah, the German industrial model, why can't we have that? That's right.

That was the envy of the world. The whole country was geared towards this, not just the industry. You had research institutes—both theoretical and practical—that were linked between universities, corporations, and pure science. The government also played a role through funding, utilizing special banks; there was a government-owned bank that financed much of this research.

So an example of that would be what? Near Stuttgart, where the Mercedes factories are, there would be research institutes looking at, I don't know, engine design or something. It wasn't in Stuttgart; it was in Aachen, which is a different place. But ultimately, that's exactly what happened. There was an institute for the development of diesel engines.

These were highly specialized institutes that would be funded by industry, and they worked together. However, what Germany was never good at, or at least not good at since the 1980s, was the idea of moving outside of this network. Germany was quite adept at this. In my book, I write the story of Aldi, the supermarket chain that is now so prominent in the UK. After all, you actually come from the town where the Aldi founder lived.

Absolutely. What's he called? Well, Aldi is short for Albrecht. It was Albrecht Discount. One of the brothers, Karl Albrecht, who lived in the town where I lived, became Germany's richest man.

And he, you know, was secretive. We didn't know where he lived. He was, you know, a ghost in our city. Everyone tried to figure out where he lived, but with no success, I hasten to add.

And by the time he died, I think he was very old. About 10 years ago, he had never met a German chancellor. So this was an entrepreneur, old-fashioned. He didn't need politics for this. This was classic. He and his brother had an idea.

They inherited basically a supermarket, or rather a corner store, from their family, and then they developed it into probably one of the world's largest retail chains with a whole new idea. This was a business concept that caught on and made a lot of money for this family. The 1950s, 1960s, and 1970s were an entrepreneurial era. However, it eventually flipped and became very much focused on industry. The emphasis shifted to picking winners, not so much because the government was selecting them, but because the government supported the system.

And it did well. There was engineering, and the system kept on giving. It was essentially the investment invention of the motor car in the 19th century. They were still making a lot of money until very few years ago. That changed with the advent of technological advancements.

And I think this is probably the single most important thing that happened. They underestimated it. It was a consensus system, so everybody kind of agreed on something. And they underestimated the digital world. They underestimated the electric car.

The chairman of BW, one of the patriarchs, was part of the Porsche family, which is linked to Volkswagen. He used to say, "There is no space for electric cars in my garage." There was an arrogance about anything that was not what they invented. They didn't invest, whereas China did, and Tesla did; they didn't invest.

And they're still struggling with software, which is where the future money will come from. They're struggling with batteries and small cars. They have now realized that they are facing a crisis and want to close down factories for the first time ever. This is symptomatic of what's happening in the economy.

A hugely successful company that has essentially misread the world is now suddenly realizing, "Oh my God, the Chinese are not only cheaper." They always thought that the Chinese were cheap, but they are actually better. That's something they hadn't been able to comprehend. So, I suppose that is the first and most impactful reason: the entire German economy, and even the country itself, is geared towards a certain type of industry based around chemicals, which is no longer powering the biggest companies in the world. As a result, it is kind of losing out and has failed to adapt; it has failed to rethink things. You talk a lot in the book also about energy.

Tell us what went wrong with German energy. Now, the energy history is a really sad one. Germany was a leading country in nuclear research. It had more nuclear chemists and nuclear physicists than many other countries. I think today there are only about three or four nuclear chemists left in the entire university sector.

The nuclear industry gave rise to a protest movement in the 1970s, as it did in many other countries. It was the 1960s protest movement that a large portion of it merged into the environmental group, which later became the Green Party. Their historic mission was to eliminate nuclear power.

And then eventually, the Greens became part of governments, specifically coalition governments. In the early 2000s, they got the government to agree to a total phase-out of nuclear power, but not until 2030. So we would still have it under that agreement. It was Angela Merkel, however, who unilaterally decided to bring this date forward after the Fukushima incident in Japan. At the time, the last six power stations were still accounting for 15% of the energy supply, which is almost as much in percentage as in the United States, where it's 20%.

So, Germany was still nuclear-powered three years ago when this current coalition came to power. However, due to the agreements they had in the coalition and the political gridlock, they could not simply change their planned course of action. As a result, they switched off the nuclear power stations according to the established schedule. This was not an arbitrary decision; there was a specific plan in place for this transition.

That was the Merkel schedule she had brought forward. It was the day. But this, I've just got to stop and emphasize this, because this must now rank among one of the biggest acts of self-harm that a modern economy has done. The German economy, the government decided to completely remove their very strong nuclear sector, possibly the strongest in the world at some point, and instead become 100% reliant on imported gas from basically Russia, which, as we've seen in the last few years, was a very vulnerable place to put themselves. So that single decision, which I guess Angela Merkel is partly responsible for, but previous chancellors as well, must be responsible for a big chunk of the current crisis.

Because if they had a thriving alternative power source, it would be feeding the industrial base and helping to ease this problem. It would also aid in the development of an industry they aimed to enter but failed to do so, which is artificial intelligence, as that requires a lot of cheap power. The idea that Merkel had, along with the political generation of the last decade, was that the country would make a strong transition to renewable energies, with gas serving as the backdrop or backstop for this transition to address intermittency issues. Thus, you would have a strong supply of gas-fired power stations alongside renewables, and those two sources would be the main focus. What happened, obviously, was that this plan was highly dependent on the Russian gas pipelines supplying cheap, abundant gas indefinitely.

That illusion in Germany ended only when Putin invaded Ukraine. It had ended elsewhere in Europe much earlier. I remember writing about this in 2015, around the time when Putin invaded Crimea in 2014. It was already clear that this was becoming unsustainable, and people raised the issue with Germany at the time. However, Germany was resistant.

It resisted this in an extreme way. It was a matter of national interest, regardless of what the U.S. said, what France said, or what Poland said. One of the characters who was warning about this way back then was Donald Trump. At least there are videos that are very popular among his supporters of him addressing this head-on, while the German delegation, I think it might even have been at the UN, was pretty much sniggering and thinking, "Who is this?"

Indeed, it's hard for many people to accept that, on this issue, Trump was right and the German consensus was wrong. The sniggering German diplomats were quite reflective of a national consensus, and everyone agreed with this policy. What did they think would happen? What was this amazing new energy source that was supposed to be flourishing by now?

Well, the idea was that gas is relatively cheap. They thought the supply was secure, and they believed that most of the energy would, over a longer period of time, shift to renewables, which would be even cheaper and more secure. So, the concept was this sort of duality. That hasn't happened.

It hasn't happened. Well, the renewables are up at 50% of the total supply, so that part went according to plan. The problem is that Germany needs a strong backup, and gas is an expensive backup because Germany now buys the gas on world markets. Am I right that a big part of the political unrest comes down to that decision and the sense that sort of idealistic, left-leaning progressives with ideas of reducing carbon footprints and all the rest of it have landed?

Landed in Germany in this pickle, and that it's actually self-destructive? I would not classify it so simply in terms of left and right. There's certainly what you mentioned. There was this idea, but parts of the left are not green.

For example, Scholz is not particularly green. He is more committed to the industrial sector. So, you have a coalition of people who want, if you listen to the Greens, they also want industrial policies. They want green industry and green power, but they are all tied to the industrial model.

I think the real difference in German politics is between those—who still represent a majority—clinging to the industrial models, which include both a left-wing component and a right-wing component, and those who believe we need to break free from these dependencies, hedge our bets a little, and allow other sectors to develop. There is significant unhappiness in Germany’s startup scene due to all the bureaucracy that has been created and the associated costs. It has become really difficult for startup companies in Germany today compared to 20 or 30 years ago. This has turned into a very hostile environment.

And the way this government and others increased minimum wages, how they increased pension contributions, and the massive bureaucracy that was created in Germany, but also in the EU, very much at Germany's behest, has now basically turned Germany and the EU into a very hostile environment for entrepreneurs. So we have the failure to innovate or move on from a particular type of industry. We have terrible decisions around energy. And I guess a third factor must be the retreat of globalization. The good years, when Germany was booming, were really dependent on a kind of happy globalized trading environment, with China buying their cars and energy coming from Russia and everything.

Everything was kind of hunky-dory, but as soon as that shifted, Germany found itself pretty vulnerable. Absolutely, there's a bit more to that story. German industry experienced a similar crisis in the early 2000s, and a number of factors helped save it, with globalization being one of them. It was especially the globalization of supply chains.

Just in time, supply chain management provided significant productivity gains for them. Additionally, Philip, of course, implemented various competitiveness reforms. The government managed to suppress any negative effects during that time, which was positive for companies. Perhaps the biggest factor that prolonged the industrial illusion of success was the euro crisis, which resulted in a devaluation of the euro without generating inflation. As a result, Germany gained a 10-20% trade advantage because its neighboring countries fell into crisis.

They had a fixed exchange rate within the Eurozone. We had Yanis Varoufakis here earlier in the week. He was the Greek finance minister at that time. A lot of those countries are very unhappy about that. Exactly.

I'm sure he will probably feel vindicated in many of the things he said at the time about the German model, which I always agreed with him on that point—an unsustainable model that had to end. It was always based on, and if you look at the macroeconomics behind it, it generated huge surpluses. Now, it's fine for a small economy like Ireland or Iceland to create huge surpluses; the rest of the world is pretty much the entire world. But if you are the world's third-largest economy in dollar terms, as Germany is now, then running huge surpluses affects the rest of the world.

It affects Europe. It affects everybody. And there needs to be somebody to absorb those surpluses. Someone has to have a deficit. Somebody has to have a deficit.

Something that is not generally reflected in the German discussion is that they see surpluses as a sign of success, almost like a sports league table, which they lead. This perception adds to their vulnerability because a surplus means you are dependent on others. Thus, what started as a string of good luck has turned into a string of really bad luck. So, big picture, Germany now finds itself in an economic crisis. Is that fair to say?

I wouldn't call it a crisis; I think it's a slump. It's a structural slump. You know, it's not dramatic in the sense that suddenly something happens, but it's a slow period of relative decline compared to others. You see it in trains.

It's like letting the air out of a tire. Yes, that's what it is. You see it in trains, for example. Trains are late and overcrowded. We have witnessed a change from a very good railway system to one that, in many respects, I think is now worse than what we have in the UK.

Wow, that is bad. That's quite something. And I mean, France still maintained one of the world's best railway networks. I mean, this is a complete gap. France at least managed to invest in the public sector.

And this is another thing that happened with Germany. The way they imposed austerity, which is one of the reasons why their current account surplus is so large, meant that the state also did not generate deficits; it instead generated surpluses. They achieved this by not investing. So, they followed a fiscal rule by avoiding investment. You can see this in the rail system and in the market.

Bridges have collapsed and been closed down. You can also see it in their lack of investment in digital infrastructure. This is where the future comes in, which is why this situation has been so toxic. If I'm a voter in Germany, whether in the East, which has been particularly affected by some of these industrial problems, or frankly anywhere else, I would be concerned.

I'm right to feel pretty angry with the kind of ruling elites, if you want to call them that, of previous decades. By their account, they received a lot of accolades, and many people wrote favorable books about them, but in reality, they didn't make very good decisions and have left Germany in a very difficult position. So, how much of the current political turmoil, including votes for the Alternative for Germany (AfD) and the Sarah Wagenknecht party, should be attributed to this economic set of problems? Oh, that's almost entirely due to this economic set of problems. I would probably add that the unification was essentially mismanaged, but again, that's related to this issue. West Germany tried to force East Germany into its economic model rather than allowing East Germany to develop its own, which was ultimately a failure, and it didn't work in the West either.

It's now failing in West Germany. It always failed in East Germany. And the gap was never closed. The income gap was never closed. But there's one thing we haven't yet talked about, which is immigration, because a lot of people watching will be thinking, "Why are they not mentioning that?"

I mean, when you read about the AfD's program, a lot of their energy and popularity come from the fact that they are against the levels of immigration. Do you also consider the huge acceptance of over a million refugees in 2015, which Angela Merkel was at the forefront of? Do you count that as a mistake? Do you think immigration has just made things worse? How does that rank in your view?

Do you think? I don't think it ranks as high, personally, because the reason it became so important was that immigration was, I mean, it was badly managed. Certainly, Merkel's eagerness to let them in did not correspond to any decisions to actually manage the inflows with the same sort of eagerness. Again, they had constraints, fiscal constraints, and they sat inside some money, but it wasn't a particularly smartly managed process. However, if you look at the votes for the far right, those votes come from industrial towns, dilapidated rural areas, and basically from areas that were left behind by the modern world, where the changes brought about by immigration became most visible.

So these communities are less economically secure than they were before. I believe this would have been a very different experience had Germany experienced three or four percent growth as it had in previous years. People would feel differently about their situation if that growth had still taken place in those communities. However, those who are wealthy, with large houses in big towns, might not feel the impact as significantly.

While having many newly arrived refugees moved into your poor neighborhood massively affects your day-to-day life, I've got to pick you up on one thing, though, Wolfgang. I know we've talked about this before, but I'm 100% sure viewers will be raising an eyebrow. When you say "far right," and I know you use that phrase confidently throughout your book to describe the AfD, how do you defend that? Because to us, sitting here in the UK where we have a party like Reform UK with Nigel Farage, which I definitely don't think is far right.

It seems very similar to the Alternative for Germany (AfD). They both have some strange characters in them, and there will be some people who have histories with unsavory parties— all sorts of things like that. But, big picture, they are just part of the democratic process, aren't they? Are they really far-right? Yes, they are far-right.

This is not a matter of being particularly emotive about it. I am even advocating that the center-right build coalitions with them. I am against all forms of firewalling and stigmatization. I believe they should be brought into government. So this is not about name-calling or anything like that.

They are far-right because they take an extreme position. This is not a reform in the UK. I think we had this conversation a year ago. I thought you might have moved on it somewhat. No, no.

I mean, they do have a tolerance. They're not Nazis, but they do tolerate Nazis. One of their most well-known leaders in one of the states is a man who has been convicted by the courts for using Nazi slogans, which is not allowed under German law. These guys are not your average right-wingers.

They talk about, you know, they’re not just discussing cutting immigration. Some of these individuals have been participating in discussions about what they call "remigration," with an "r," where they actually consider not only what Donald Trump is saying about removing immigrants but even immigrants who have acquired German citizenship. So, you’re looking at a complex situation. If it were a different immigration policy, I’d say that’s fine. If you say illegal immigrants should leave, that’s fine. This is not a problem that Germany is facing, unlike the United States, which has issues with illegal immigrants.

You can change the policy, but getting people who are legally in Germany out is, you know, a breach. A lot of what they are proposing is a violation of the German Constitution. But are they really proposing forced repatriation of German citizens with foreign heritage? No, the party does not officially endorse that, which is where the federal party has distanced itself from these individuals. However, the federal party has also not completely distanced itself, as these individuals still play an important role within the party.

I mean, they have the means to exclude those characters. It’s very difficult for anyone to form coalitions with them in states where the party is as extreme as they are. They aren’t similarly extreme in all the states, and I believe they will eventually be brought into government. At the moment, by keeping them out, the same centrist parties will always form the same coalitions. It’s just a game of, you know, if you think of four parties and three coalition partners, it’s like a game of musical chairs with three chairs and four participants.

And it will always be that if you keep them, unless you include them, the same applies to the left. I personally have always felt it was right for the center-left, the SPD, to form coalitions with the Greens or the far-left. And then we call it the far-left. It's not like I'm accusing them of being communist or anything, but they are significantly more to the left than the SPD. The same applies to the right.

Okay, so let's put that argument aside for now. We can revisit it in a year when you come back to discuss what has happened since. We're now up to date, right? We have Germany facing a series of very difficult structural problems, with a lot of people feeling less rich and less successful than they would like to be or than they used to be. There is a groundswell of support for what you call far-right parties, and others refer to as populist parties, such as the Alternative for Germany (AfD) and the Sarah Wagenknecht party.

What happens next? The government coalition has fallen apart, and a general election has been called for the end of February. What's your prediction? Could Germany experience a populist wave similar to what the United States and many other countries have seen?

Could we see a populist wave just like the United States has seen in so many other countries? Could we see a populist government in Germany? After February? Not in February, but I would expect this to happen four years later. The way it has worked now, the AfD is significantly stronger than it was at the last election.

In the last election, they received around 10%. They may get around 17% to 20%, which would make them stronger. There's this new party. Does that potentially make them the largest party in February? No, no, no.

The CDU will be stronger. There's this new party. Does that make them the largest party potentially in February? No. Do you think they will?

No, the CDU will be larger. The CDU, Merkel's old party, led by Friedrich Merz, is polling between 30% and 36%. So they are well in the lead. However, they could collapse. I mean, Merz is a character who has a tendency to say things spontaneously that he sometimes regrets.

It could, you know, last time. We remember the last election four years ago; the CDU had a candidate who collapsed. I mean, he was making jokes at a ceremony for flood victims, and people thought this was completely unacceptable. But Friedrich Merz, who is in charge of that center-right party, the CDU, has actually been quite clever, hasn’t he? Because he has learned from the success of the AfD and has sharpened his rhetoric about immigration and those kinds of topics. So, tell us about that.

He's taken over their subjects, and he's been very clever indeed. He's taken over their subjects on immigration, so he's certainly sharpened that position. But also, he's signaling to the left that he's open to reform of the fiscal rules. That was actually a shock for the little people.

FTP because they thought they wanted to leave the coalition, or they left the coalition over the principle of allowing a fiscal expansion. Now, the CDU, which has always considered itself their natural partner, is also turning on them on this point. It’s quite an interesting subtext. However, the CDU is sort of opening up and already preparing for another coalition. And that raises the question: with whom?

They have choices, basically two choices, essentially. But not with the AfD? Not with the AfD. Is that ruled out? That's ruled out.

For this time, yes. The CDU has put forth a sort of agreement. This is more than just a "read my lips" situation. This is essentially a party decision, almost like a written contract. So, this is an omertà — a complete ban on collaborating with the EFT?

Absolutely. That is true for the entire party. They cannot form coalitions at any level, whether local or state. Do you think that's a bad idea? I think it's a bad idea.

Because it will just lead to fanning the flames and increased popularity for the far-right party. I mean, it does seem pretty obvious, doesn't it? It seems more obvious from abroad than from inside Germany. Very few people inside Germany would agree with me on that. However, the prevailing view within Germany is that the party is so horrible that we must completely distance ourselves from them.

And then, therefore, we just form the same kind of coalitions again and again. A lot of people, especially in the media, will support the idea of grand coalitions. They had three grand coalitions under Merkel. It was those grand coalitions that made the deal with Russia, established the dependency on China, maintained the large counter-current surpluses, and failed to put the economy on a broader base. So that's where we come back to the story.

It's the same kind of policies. So, Merz is talking about an absolute majority. Now, they are ahead in the polls compared to everybody else, but they're still a long way from achieving an absolute majority. An absolute majority, depending on the country, has a representation threshold that must be met.

So, an absolute majority doesn't mean 50%. Normally, I'd say 44% is a number that, based on current polling, would give you an absolute majority. They are still about 10% away from this. Now, the little FDP, the party from Christian Lindner, would be a natural coalition partner because they share a center-right, pro-business mindset. But we have to be careful when we say "pro-business."

Pro-business in Germany often means pro-large companies. This is not what I mean by a pro-business mindset, but we have to be careful when we say "pro-business." The real debate is somewhat different, but there is certainly a common mindset that connects them.

But together, even if the FTP manages to get through the threshold, they are polling sort of close to the threshold, about 5%. The fact that they left the coalition has increased their popularity somewhat, as getting out of this unpopular coalition makes them look good in comparison to the others, who look so bad. However, it's not clear that they will succeed.

But if they make it, even then there would be enough of a majority for the two parties. So Merz will actually have to form a coalition with either the Social Democrats on the left or the Greens. And that means the same policies again. Your prediction, then, is pretty bleak because what you're forecasting is not a populist revolution, which some people might think would be an interesting and important development. What you're forecasting is basically more of the same, where you have a center-right party that is talking the talk of the AfD, but will, in reality, have to be in coalition with a distinct group of parties, which will lead to more of a sclerotic lack of decision-making.

Absolutely. In 2029, I would expect that if this is indeed similar to, say, the CDU forming a coalition with the Greens or the SPD, none of the problems will be addressed because they will have the same fiscal constraints as the current coalition. They will encounter the same disputes, such as the SPD wanting to secure higher social standards. One of the things they aimed to do, which they couldn't accomplish, but which they would almost certainly want to pursue in the coalition, is to ensure that any public sector bidding is only accessible to companies with trade union representation. Not every country or company is part of that trade union network.

So they essentially want to exclude any competition from the cartel. This is why people on the political right often feel exasperated with Europe in general; it seems like the instinct is always for more regulation, which makes life more difficult for businesses, with a greater emphasis on trade unions. This approach is the opposite of the desires expressed by figures like Elon Musk and Javier Milei, who advocate for cutting regulation and reducing spending. However, you don't even have to reference Trump and Milei; you can also cite Biden.

Even the United States under the Democrats is not like that. Biden introduced the Inflation Reduction Act, which was a very significant industrial policy—one of the few cases of a successful industrial policy program. That's something the Europeans simply cannot do because they are too bureaucratic and tend to block each other. So, if this situation worsens as you are forecasting, what happens?

The AfD then wins an absolute majority, particularly? Eventually in 2029? They will become the largest party; that would be my prediction. Then they have two choices. Well, they can still be excluded, as the Austrian Freedom Party discovered.

That's right, and I think that's what's going to happen again. The three-party coalition or the two-party coalition that will now govern will turn into a four-party coalition. The only way for the center to govern will be for everyone who is not from the AfD to form a coalition. It's similar to having a coalition in the UK between the Tories, Labour, and the Lib Dems.

And you would also rely on some nationalists from Scotland or Wales, because you didn't have a majority. That would be the situation, due to the presence of another party. It's not an impossible scenario in this country; anything can happen. However, so far, it hasn't occurred. In the United States, you do not have grand coalitions between the Republicans and the Democrats. But that's the kind of thing that happened there. During the time of Franz Josef Strauss, the Bavarian figurehead and leader of the CSU, he always said there could be no party to the right of us.

And they were conservative. They reached deep into the conservative spectrum and basically combined modernity with tradition. It was during that time when Munich, which is the only city in Germany that has some claim to be living in the 21st century, developed modern industries.

This is somewhat of an island in Germany that is connected to the modern digital world. There are venture capitalists in that area, and companies that operate in AI and other fields. It's not that Germany has nothing; they do have some advancements.

And that was the creation of a conservative party that was able to stem the tide. Now, what happened under the long-term reign of Angela Merkel—the 16 years she was in government—was that she moved the party away from that tradition toward the political center, opening up a huge gap for a party on the right, which the AfD has filled. It sounds a little bit like, even though you're calling them far-right, that you think an AfD insurgency, whether it happens in one year or five years' time, is what is needed because it's the only thing that will kind of open up this increasingly fractured and indecisive government. Be careful what you hope for because the AfD, they're not Trump. They're really very, very different.

When I refer to the traditional discourse and policy between the left and the right, both sides agree that Germany is an industrial country and can only be an industrial country. If you talk to Sarah Wagenknecht on the left, she has somewhat separated from the Left Party and created her own platform. She is anti-immigration and against the Ukraine campaign, but she is pro-worker. While being pro-worker, she supports the old industrial model.

Yeah, she wants to resurrect the old pipeline, so the gas can come back from Russia. The AfD agrees with her on that. The AfD is also back with industrial workers.

They're not about freedom. They do not advocate for entrepreneurial freedom like Trump does. This is where the German far right differs. That's why I call it the far right. This is not Trump.

A party, it's not millet. This is a very different party. They're all, you know, it's like toys from unhappy families; they're all different. And the far right, they're not. So you're saying they're more of a left-right combination, a bit maybe more like Marine Le Pen in that respect, a kind of big-state populism? I mean, we've had a long history of right-wing extremism using socialism and ideas from socialism.

They do not go to the extremes. There are many different strands. However, this is not the liberal version of the right. This is not libertarianism. These are not individuals who advocate for freedom of speech.

You will never get any one of these guys, except when they are censored, I presume. However, there are not many such cases. So be careful what you wish for.

But it's not. That's why this wouldn't help. If there were a sort of takeover by the far right, it would destroy whatever remains of entrepreneurialism, as it would likely lead to a form of state capitalism. It wouldn't even be anti-trade unions because that’s not their agenda.

You may find that a lot of the things we talked about would actually be made worse. So the question is, if you were to ask, could there be a libertarian revolution? I don't think that can happen. I believe my scenario is very much one of decline. It doesn’t always have to be a happy ending; it doesn’t always have to result in a positive outcome.

I can't exclude the fact that there may be some political developments that could address this. And you know, there may come a time when Germans say, "Look, we need to change our economic model because this doesn't work anymore." Okay, I have an idea for you, Wolfgang, because it feels like at this final part of our conversation, we need to talk about Donald Trump and Elon Musk and what is happening. We jumped ahead to February, where there will be a German election, and we were speculating about what might happen. A month before that, in January, there will be a new administration in charge of basically the free world, as they used to call it.

That could have very seismic consequences for Germany, for Europe, and for us here in this hemisphere. One possibility is that if they see Elon Musk taking a chainsaw to the size of the state and things do not break down as much as people feared, and the world carries on, there might be many people in various countries thinking, "Oh, maybe we should do that too." If their economy surges and succeeds in a Trump-Musk era, no doubt there will be individuals in the UK, in Germany, and across Europe contemplating the need to try some of that approach. I would agree that a successful Trump administration, as defined in Germany or the UK, would change some people's minds.

I'm absolutely sure about that. We see this, and people make these immediate judgments, like the appointment of Kennedy as the Health Secretary, claiming that it would be an absolute disaster or a foreseeable disaster. It may or may not be. But if it isn't, I'm asking the question: What would actually happen to our health industry if it is not a disaster? Or what would happen if Elon Musk does actually cut, even if he just cuts only $1 trillion from the public side, which seems more realistic now?

But, you know, if he cuts $1 trillion and we, you know, we are having, you know, the EU having, I mean, the EU is so absurd. It has AI regulation without AI companies. It has crypto regulation, but we don't have any crypto companies. We are regulating social media giants.

We don't have any. The EU likes to regulate to ensure those companies can't emerge, almost. Absolutely. If you're looking at the car industry, the big money in the next 20 years will be in self-driving cars. The battery problem will be solved.

This is not going to be the case. That's the big money now, and we need batteries, of course. But the big money will be in software. Unfortunately, we have the most restrictive AI regulation in the world. Therefore, the self-driving car will be impacted by this, and there will be no AI companies.

Pretty much. So the AI, the self-driving car, will not be invented by BMW and Volkswagen. And no AI companies.

It will be invented in China or in Silicon Valley, where I've taken a self-driving car. They do exist. They do exist. China's regulatory environment is freer than that in the United States.

That may change now, but the EU is going to fall behind, so that's becoming an issue. It was interesting; when I wrote the book, I could hardly find anybody agreeing with what I was writing about: the need to deregulate and the need to actually free this up.

Now I see voices on my Twitter feed of people saying, "Look, I'm an entrepreneur. I'm about to emigrate because I cannot do business in Germany." I'm noticing more and more people from the venture capital industry—as small as it is—expressing their concerns. They are saying, "Look, this can't continue. You're running into a disaster."

So, there is a beginning of something happening there, but it's not yet reflected in the political system. However, we’re almost talking ourselves into a position of hope here, Wolfgang, because you felt very much that decline was the most likely scenario. Let’s sit in this alternative scenario for a while longer: an incoming Trump-Musk administration. I call it that because Musk is such a central figure, even though he’s not the vice president, obviously. If the Trump-Vance-Musk administration accomplishes even a third of the things they are saying they will do, and if it is not as much of a disaster as many people are predicting, it does feel like Europe will notice it. There will be populist parties that will seek to copy them. The German public and the media, in particular, have completely misjudged the entire Trump phenomenon.

The German media had quite a funny week, filled with numerous articles about what happened in his trial. They had been writing about how Trump was finished and would be going to jail. As a result, they had to explain to their readers why he was actually the president and not in jail. The German media had been covering Trump's legal challenges as if they were certain he would lose. Absolutely. I also remember they did something similar during the Brexit referendum, covering the demonstrations in great detail.

So, it seems to suggest that because so many people turned out—I'm not sure how many, but there were a very large number of demonstrations in London against Brexit—it was portrayed as representative, and that was emphasized in the media. When Brexit happened, they were completely shocked. There was a poll before the vote. It sounds like they need some new media startups in Germany as well. I would assume, having been involved in one, that there isn't enough plurality of views. The debate is mostly between an old left and an old right.

And, you know, again, don't compare the right in Germany with that of the United States. There are very few libertarians, and as they are, this is just about how do we save Volkswagen. This is not about, you know, I have yet to find someone saying, "Let's, you know, why don't we open up to AI?" We need nuclear power for that.

We need a completely different industrial or, you know, a completely different regulatory environment for that. You don't hear that. You only hear about bureaucracies because it's bad for farmers and it's bad for companies, but it's only for existing companies. It's not, you know, an entrepreneurial drive that exists. And that's why I remain skeptical.

Before the U.S. elections, 80% of Germans thought Harris would win. I mean, people could think that, but it’s just that 80% of them believed this. It was partly due to the information they received. They are living in a completely different information environment.

And that's why I'm not entirely sure that if Trump were to succeed in a different context—say, in not generating a crisis, leading to a rising stock market and good economic performance—it would actually be perceived as a success. People in Germany would likely not interpret this as a sign of success, especially when considering factors like social cohesion and workers' rights. They might say that these aspects are lacking in America, and they would probably report on issues like deportations. There are still many ways to view this differently. An objective judgment is hard to achieve; while some may perceive it as successful, others may not. So, would Germany see this as successful?

The millet; it was so funny to see millet going to Berlin and shaking hands with Olaf Scholz. You could not think of two politicians at that moment who are more different in their character and political views. They're both Western, but within our sphere, they are so different from each other. I don't think there is space in Germany for a millet-type character. Germany would probably benefit from this. It would be good for Germany, but it has a constitution that, you know, basically prevents the rebuilding of nuclear power.

It will take 15 years to build a power station because of provisions in the constitutions and the legal system that create obstacles. These are not just bureaucratic issues that can be easily resolved through legislation. I feel like we've entertained a more optimistic scenario in which the new American administration performs well, leading to a desire to emulate that success in Europe, resulting in a freeing up of regulations and the birth of a blissful new era of entrepreneurship. You think that's unlikely; I guess I do too. Let's set that aside.

And unfortunately for our listeners and viewers, let's end with perhaps a more plausible, pessimistic scenario. Sketch out for us what happens if your first prediction is correct: more poor decisions continue, and the economy continues to struggle further and further. America may succeed or perhaps not, but if China continues to grow, while Europe is squeezed and forgotten in the middle, unable to find an economic solution that satisfies its voters, we will then see more and more discontented voters reaching for increasingly implausible populist parties. What does that future look like? How bad could it get?

Germany is a rich country, a very, very rich country. Therefore, it can be irresponsible for a very long time. We often assume that this situation has to end next year, but it doesn't have to. It can continue for another 10 years.

And if it continues for ten years, the rail system may have been fixed by then. They may have done something, and they may repair a few things. However, there will still be good companies, and not all of them will decline; some of these companies will do well. They may be fortunate that someone in the world needs what they do, leading to a sudden mini-boom in this area. Macroeconomics can always produce a boom. There can always be low interest rates, which can create another housing boom, and that can stimulate some economic activity.

So, economies don't decline in a straight line; they decline in cycles. However, the average is low. The average is low, expectations are lower, and income expectations will also be lower. People will be more cautious; they will go on holiday less often. We know what happens in economies like this. People will still exist; they'll still be driving cars and will go on holiday from time to time, but not as often as they did before.

That can continue on. But what happens politically in that scenario? It becomes very fragmented. As you described, you will have the same governments, with people accusing each other and mostly engaging in blame-gaming, as everyone points fingers rather than trying to solve the problem. Additionally, you will continuously have implausible populists. We have yet to see a plausible populist emerge.

Trump was a plausible populist, and I think there's a difference between perceptions of him now and in the past. He now looks credible because he's been elected twice. A lot of people said he was implausible in 2016. Yes, exactly. But, you know, he had a good economy in 2016. I mean, this was not a poor situation. You could argue that he was not very well prepared for the role.

It was a very chaotic reign. He's a lot better prepared now, so this is going to be very different. I think for the Europeans, this will be a very different experience than last time. Let's end by coming even closer to home here in London and talking about the UK.

This is where you live as well. Obviously, the UK has exited the European Union. Given what you’re saying about Germany and the European Union, do you now think that Brexit was a good idea? The irony is that a lot of what went wrong in the EU occurred after Britain left. There was always a balance between liberal countries and less liberal countries within the EU.

The North and the South, to put it crudely, with Germany being on the northern side and France being on the southern side, were never that fixed in their alliances. The UK was a hugely important balancing factor in the EU. By leaving the EU, the EU became less liberal. The liberal states, mostly from Northern and Northeastern Europe, became a minority. So the modern EU is very much dominated by France.

And that wasn't the case before. Germany is kind of retreating into its own, so is that a yes or a no? That's the situation. Does it justify Brexit? You want to get me to say that it justifies Brexit?

I have no strong view, but I'm wondering. I didn't have a strong view at the time either. I did not have British citizenship then, so I stayed outside. I basically observed this like a science experiment. I would think that today it would make no sense for the UK to rejoin the EU, given the state of the EU.

But can we go further than that and say, given the world as you've just described it, the UK's only hope, really, is to lean into its American relationship and try to ride that more entrepreneurial wave instead of attempting to rejoin the overly regulated union? The way for the UK to prosper is to depart from EU regulation. I always said Brexit only makes sense if you actually decouple. It doesn't make sense otherwise. Otherwise, you might as well stay in.

To decouple from and certainly not follow up on the anti-digital jihad of the EU and the anti-tech legislation, we should carve out niches in the tech area, which the UK is well-positioned to do. It has excellent universities and the City of London as a functioning capital market. The UK can achieve this independently; it doesn't need the US for that. Therefore, I believe it is a mistake to think, "Oh, let's have a free trade treaty with Trump."

I don't think that's going to happen. Friedrich Merz also thinks he can get a free trade treaty with Donald Trump. I think we've been through this before. Trump's interest at the moment is a different one. He's not a free trader.

We know that he wants to impose tariffs. He doesn't want to impose tariffs solely to rebalance the trade balance; he wants jobs. He wants to bring industrial jobs back. It's a very basic issue, even if he understands that.

Bad for economic growth; he's not stupid, but he's not prioritizing economic growth. He's prioritizing much more concrete steps for his electorate. These are jobs—jobs on the ground—in certain areas in the United States that have been lost. Therefore, that might just well succeed. In this narrow term, it may well succeed.

A trade agreement with the UK or the EU would actually not fit into this picture. I think another reason for the idea of tariffs is to use international trade as a tool for hard diplomacy. Basically, he will tell people, "Yes, you can get past our wall of tariffs if you agree with us on everything else we're doing, sign up to rejecting Chinese goods, and do whatever else he wants us to do." He may find that he can persuade some countries, with Germany and the UK possibly on that list. So, yes, you can bypass the tariffs, but you've got to be a 100% ally.

We're not interested in anything else, and that's the problem for Germany. Germany cannot say yes to that because I think that's what Friedrich Merz in Germany will find out. Germany is too interwoven with Chinese supply chains.

I mean, the German industry is still investing in China, whereas everyone else is treating China the same way they treated Russia. If the U.S. were to do exactly what you're suggesting, which I think is a very realistic scenario, the U.S. will demand that Germany complies with American policies regarding China. It will demand that Germany decouples from China. That will be very, very difficult for Germany to do, as it would cause significant chaos for German companies.

The system that Germany created is absolutely reliant. It's not just about the sales to China; a lot of intermediate inputs come from supply chains in which China is central. Those Volkswagen cars are not only sold back into China, but they are also partially made with Chinese goods. There are cars that are actually made in China and re-imported to the EU.

Now that the EU has imposed tariffs, one of the companies paying those tariffs is Volkswagen for importing China-made cars into the EU. To really complicate matters, Elon Musk can also be considered a Chinese industrialist in the sense that much of Tesla is reliant on China. Therefore, he himself cannot decouple from China. How this situation will play out is, I must admit, above my pay grade. A policy to decouple from China is not going to work.

And I don't think it's going to happen. I would also assume that Trump, you know, based on what we know about him, what people say, and how people act are often different from the stated preferences as opposed to the revealed preferences. Trump doesn't like wars. Trump doesn't like conflict. He does focus on his transactional goals, and he wants to achieve them.

But he has so far shown no appetite for engaging in major ground wars. On the contrary, his goal is more to end wars. I don't think he will end the Ukraine war in 24 hours, as he says, but I believe he will make a serious attempt to do so. I think he might be popular in Germany, particularly in some regions.

And people would then say this is better. It is better to do that, as it might change views. I agree with you that the political environment is highly dynamic. Stuff could happen, new parties could emerge, and new ways could shift. But, you know, it's like in any political system. In France, we've seen Macron come up out of nowhere.

So France was open to this new idea. Germany was open on the right and the left, but not in the center. It's going to be difficult to establish a party in the center with a different political narrative. The system is highly protective of existing parties and, for example, on the funding side, it doesn't allow for easy entry. It's challenging to get a party up and running in Germany's political center that could actually compete with other parties.

There have been some successful local attempts; there are free voters, but they're mostly sectarian. They follow certain interests, but they're not the kind of big-picture issues we've discussed, such as a complete shift in the economic model. I think we're still far away from that. Wolfgang, we could go on all day. It's been absolutely fascinating. The next test of your predictive power—I must say you predicted the emergence of a Sarawagen-Konnect party the last time you were on this show, or maybe the time before, very accurately, and that did happen.

Your prediction for February, then, is a win by the CDU, but they will have to be in coalition with some quite unhelpful people. This will likely lead to not much in terms of radical new directions for Germany. That's right; it will be another coalition of the left. Well, we will get you on to discuss it.

Wolfgang, thank you so much for your time. Thank you, Freddy. That was Wolfgang Zhang Munchao, a bit of a friend of the show at this point. We've had him on a few times, and every time he comes on, he correctly predicts something new. There's no one whose views on Germany and the reality of Europe I would rate more highly.

So that bit of a tour d'horizon of all the issues facing Germany and what might happen next was absolutely fascinating. Thanks to him, and thanks to you for tuning in and staying with us this long. If you did, this was unheard of. Thank you.