Diplomacy, trade, and human civilization

When Venetian traders Marco Polo and his family travelled to China in the years following 1260 and exchanged gifts and messages from Roman Catholic Pope Gregory of Piacenza with Emperor Kubilai Khan, they conducted the first diplomatic exchange between Europeans and Kubilai Khan (Polo 1958, pp. vii– xxxix, 1– 14). Trade and diplomacy are amongst the oldest practices of how we as humans have engaged and interacted with others who are unfamiliar, who are outside our family or tribal group, who are farther away than next door. Trade and diplomacy have evolved together over thousands of years of developing human civilization. As international trade has become more important relative to overall global economic activity, a specialized focus on trade has emerged within the practice of diplomacy. Today, new technologies and new forms of trade have created a need for new approaches to diplomacy and to trade diplomacy in particular.

Over the seven decades since the end of the Second World War, the international trading system and the diplomacy that has facilitated it is widely credited with fuelling an era of unprecedented global economic growth and development. But as the foregoing chapters have suggested, both the trading system and global economic growth face new and daunting challenges. The international system has experienced significant technological transformations in how diplomacy is done, which have affected the core diplomatic processes of representation and communication, the ways in which diplomats negotiate agreements and resolve disputes and crises. The rise of digital diplomacy (see below) is a prime example.

The relative power of different types of actors in diplomacy has changed, as non-state actors such as multilateral institutions, large civil society organizations, and global firms have emerged alongside the governments of states in the diplomatic arena. Place branding, the promotion of states and regions as destinations for international trade, investment, and tourism by governments, often in partnership with private actors, has been recognized as a diplomatic activity in itself, even as migration, the cross-border movement of human labour, has become a more contentious issue with which diplomats must contend.

Tomorrow's workforce: humans and machines collaborating?

Beyond the evolution of cross-border flows of goods, services, labour, capital, data, information, and knowledge, advances in technology are changing the broader structure of the global economy and of capitalism itself. The impact of these changes is affecting the nature and structure of production and work, of what we consume, and of how a capitalist global economy mobilizes to face existential challenges like the climate crisis. Thinking about the impact of technological change on the broader global economy and on the future of capitalism is important for the argument of this book. How we think about and understand the global economy and capitalism, and our expectations for the future that are based on those understandings, affect what policies we choose and how we advocate for them. Our expectations for capitalism's future also affect how we approach and implement the diplomacy that will be required to make our future policy choices succeed.

The single greatest impact of changing technologies upon the global economy is on work, the workplace, and workers. The nature of work in the industrial world has been changing since the 1990s in ways going substantially beyond the offshoring of jobs and tasks owing to the emergence of global value chains under Globalization 2.0. The domestic transformation of the workplace in industrial countries has been equally broad. Increasingly, the production model of firms employing workers for whole careers and providing advancement, benefits, and job security has been replaced by outsourcing of components and processes and the casualization of the production process through use of contract, part-time, and temporary workers (Harvey 1990, pp. 150– 55). Workers responded to this disaggregation of production processes and corporate workforces by marketing themselves and their services to prospective buyers in a newly defined ‘gig economy’. The emergence of the gig economy coincided with the arrival of the internet, enabling workers to connect with customers on a scale hitherto impossible. Entrepreneurs created online platforms permitting purveyors of everything from homemade crafts (Etsy) to services like ride sharing (Uber, Lyft) and food delivery from restaurants (Grubhub, Doordash) to sell to customers efficiently and safely.

Globalization and trade from cross-border sales to global value chains

A woman in Dusseldorf suffering from pain in her hip is x-rayed in a local hospital. Her x-ray is read and interpreted online by a specialist in Bangalore, who recommends her for hip replacement surgery. Prior to her surgery, her replacement hip joint is custom ‘printed’ in Dusseldorf on a 3-D printer manufactured in Toronto and operated remotely by a technician in Los Angeles. Her surgeon in Dusseldorf who installs the replacement hip, born in Damascus, received his medical training at a university in Shanghai and now works in Germany on a refugee visa.

This tale of numerous intermediate and component goods, services, labour, data, and information crossing borders in different ways to deliver a hightechnology medical service needed by one individual is not a narrative of traditional international trade, any more than the complex web of regulations and international agreements governing each element of the service delivered is a product of traditional diplomacy. Trade and the diplomacy that facilitates it are already different today in many areas. They will continue to change in the future.

As technologies have emerged and evolved over the past two and a half centuries, the way that products are designed, produced, and marketed has changed, the way that goods are bought and sold has changed. The part that international trade plays in that process has changed as well. Let us begin by examining how new technologies have changed how, and for whom, goods and services are produced. The first round of globalization, which began in the mid-nineteenth century, saw the transformation of the first industrial revolution's technologies of mass production and mechanization into a boom in international trade according to the model expected by the classical political economy theories of Adam Smith and David Ricardo. Producers increasingly produced and exported surpluses of goods (and later services) that used factors of production – labour, land, capital, knowhow – that existed in relative abundance where they were located. Hence their costs to produce these goods and services were relatively low.

The costs of inaction

A dystopian vision of the future of world foresees the devastation of the environment and economy caused by some combination of war and the climate crisis that has resulted from continued high levels of greenhouse gas emissions and rising global temperatures. At the pessimistic extreme, humans will fail to direct the technology revolution to avert or mitigate the impact of climate change sufficiently fast to prevent the onset of ecological catastrophe. In such circumstances widespread conflict and war over resources will result in the collapse of the global economy as it has become familiar since the nineteenth century, and possibly even human civilization as we think of it today. Under those conditions, trade and commerce would be subordinated entirely to the ends of those who hold political and military power in their zones of influence, and the capacity of diplomacy to limit conflict would be sharply limited.

Even if we manage to avert the worst effects of failing to address the climate crisis, the failure of our states and societies to make policy and engage in effective diplomacy will expose society to major risks resulting from our inability to manage the evolution of AI and automation and their impact on the global economy. Our failure to address the climate crisis will postpone the advent of an age of abundance, if it does not preclude it altogether. Many resources are likely to become more scarce. Agricultural output, for example, will be restricted by reduced arable land owing to adverse weather and flooding, higher feed costs for livestock, and lower seafood stocks owing to acidification and pollution of the oceans. Competition between states and between global firms for access to resources is likely to encourage governments to raise trade barriers and limit trade to within blocs dominated by single powerful states, as occurred in the 1930s. Webb (2019) argues that the global economy is already at risk of being redivided into two trading and economic spheres: the West versus China and its client states. Trade and resource wars between blocs would bear a significantly heightened risk of erupting into military conflict.

Germany's public savings banks, known as Sparkassen, present a three-fold puzzle for today's world of global capitalism. First, Sparkassen – relatively small financial institutions with comparatively few assets – are nonetheless the economic engines that drive Europe's largest economy. Sparkassen are the most important source of capital for consumers and small- and medium-sized enterprises in Germany, a country whose high-skill, export-based economy is built on small- and medium-sized enterprises. Sparkassen account for 43 per cent of all business lending (Simpson 2013), 70 per cent of lending to self-employed and trades, and more than half of all consumer lending (Deutsche Bundesbank 2020). No other advanced industrialized country in the world – let alone one with an economy as large as Germany's – relies as much on such small public institutions to fuel its economy.

A second puzzling aspect of Sparkassen is that their recent experience contradicts two key narratives in comparative political economy and international political economy: that global pressures and ascendance of neoliberal ideas will lead to the demise of Germany's unique form of capitalism and that in an era of global financial capitalism, competitive pressures force banks to grow in size and breadth (see Schmidt 2018). Smaller financial institutions lack the capital and know-how to compete; Sparkassen should be relics of the past. Yet, Sparkassen remain a central part of the German model. They embody the country's ordoliberal economic ideas and democratic principles of self-governance. In contrast to classical liberalism or neoliberalism, ordoliberals promotes a strong role for the state in the maintenance of a social market economy. However, the state is a rule-setting state (Blyth 2013: 146). Ordoliberalism views the state's role to establish a legal arena that maintains healthy competition, adheres to market principles, and lets market actors regulate themselves (Campbell & Lindberg 1990; Smyser 1993). In this sense ordoliberalism stands in contrast to libertarian or neoliberal ideas of economic freedom as unfettered competition with limited state involvement (Gook 2018).

With a firm grounding in the background and history of Germany's public savings banks, this chapter turns to the central puzzle of the book: What makes Germany's Sparkassen such an anomaly in the world of public savings banks? In other European countries as well as the United States local savings banks were either transformed, privatized, eliminated or consolidated to the point that they were no longer recognizable. This chapter presents the case for why Germany's Sparkassen’ existence and performance are surprising; why their resilience is a puzzle worth researching.

The first section discusses how during the pre-crisis period academics and practitioners predicted and, in many cases, advocated for the weakening of Germany's bank-based model of financing. This included the elimination of what were portrayed to be antiquated and obsolete public savings banks. The epigraph by a supervisory board member at the beginning of the chapter captures the sentiment. A second section discusses the external and domestic challenges faced by Sparkassen in the aftermath of the financial crisis. Drawing on banking and economic literature, the section argues that by most accounts Germany's Sparkassen should be an endangered species. A third section of the chapter turns to their performance since the financial crisis to illustrate how Sparkassen defy expectations: that despite expectations to the contrary Sparkassen remain the most profitable and the most efficient financial institutions in Germany.

Pre-financial crisis consensus: Sparkassen are past their prime

In 2004, three years before the financial crisis hit, Manfred Weber, director of the Association of German Banks – the largest trade group for Germany's 2,500 credit institutions – pleaded for the privatization of Germany's public savings banks, “Local governments’ bank accounts are empty as they face large deficits. City and county officials are right to ask whether they should sell their savings bank and invest the funds more prudently” (“Konsolidierung: 1000 Banken werden sterben” 2004).

What explains Sparkassen's remarkable staying power? How have these small independent credit institutions managed to weather the turbulent storms that led to the transformation, consolidation, or elimination of similar credit institutions in other countries? This chapter turns to economics to explain Sparkassen's resilience.

Much of our understanding links the success or failure of banking to the national or global economy. Greater globalization in trade and finance, for example, is often cited as a causal factor in the demise of community banks and the rise of banks so large they are too big to fail. National depressions, recessions, and economic booms are often linked to transformations in banking. In the case of Germany, the so-called “economic miracle” during the 1950s and 1960s generated significant productivity, much of it fueled by the expansion of Sparkassen lending to firms and individuals (Edwards & Fischer 1996). Since the 2007/08 financial crisis, Germany's economy went from “the sick man of Europe to Superstar” (Dustmann et al. 2014), also fueled in large part by bank loans, which originated with Sparkassen. Macroeconomic explanations, however, beg the question as to why Germany's savings banks survived even as public savings banks in other advanced industrialized countries that experienced similar economic growth did not. Macroeconomic accounts also fail to explain why, particularly in recent years, savings banks performed better than Germany's two other pillars – cooperatives and commercial banks. While all banking is affected by national and global events, for Sparkassen, local economic factors play a central role in their survival.

Given their “boring” business model – taking deposits and making loans – Sparkassen's staying power is a function of the economic value banks provide their local customers, particularly firms. This chapter explores Sparkassen's value-added to local economies and the relationship between bank performance and the financial health of a region.

I spent summers as a young child and teenager living with my grandparents in an enchanting, small town called Budingen, located an hour's drive from the metropolis of Frankfurt. Each summer, I was transported from the strip malls of southern California to the small forest-covered region of postwar West Germany. Budingen was the county seat, and my grandfather, Kurt Moosdorf, served as county executive or Landrat, for more than 25 years. As Landrat, my grandfather oversaw local government, including the economic development and public infrastructure projects that were part of Germany's postwar economic miracle.

My grandparents’ house overlooked the local Sparkasse. The Sparkasse was often the first stop my grandmother and I made each morning on our groceryshopping rounds. She would chat with the staff, check her account, or pick up a deposit receipt. It seemed normal for her to know everyone in the bank. Several decades later, I realized the reason she knew everyone at the Sparkasse was that her husband, the Landrat, was the first line of supervision and governance in Germany's public savings banks. My grandfather chaired the supervisory board of Budingen's Sparkasse for more than two decades, and it was my grandfather who oversaw the banks’ construction.

When I visited the Sparkasse in Budingen in 2018, I learned it had merged and become part of a larger county system. The building was newer, the layout was different, and ATMs dotted the lobby. The name and brand were similar though: a giant recognizable red “S” with a dot over the top. I wanted to know how this institution, which had played such a central role in my grandfather's life and the life of Germany, had evolved and developed. It seemed to be thriving and I wondered why. How could a small local financial institution, governed and overseen by local politicians no less, survive global capitalism and privatization? What was going on?

Politics is another driver for this book. Three recent global challenges underscore Sparkassen's significance. The first is the Great Recession of 2007/08. For more than 200 years, Sparkassen have been at the centre of Germany's model of capitalism.

One of the mysteries of Germany's public savings banks is how they manage to navigate domestic and global forces that brought down similar credit institutions in other countries. Public institutions generally and public banks in particular, have been under attack since the 1980s when conservative governments passed a wave of neoliberal reforms (Brown 2015; Scherrer 2017). Public savings banks across European countries – Italy, Spain, Britain, France – disappeared, consolidated, or transformed into private entities that are mostly indistinguishable from private banks. In most cases, domestic legislation changed the banking landscape in ways that undermined public savings banks’ business model. In France, for example, a 1999 law transformed savings banks into a legal form of private cooperative banks (Polster 2005). In Italy, a series of reforms in the 1990s privatized public banks and eliminated their regional requirements (Carletti et al. 2005). And in Spain, legislation in the 1980s and 1990s led to partial privatization and the elimination of the regional principle.

In Germany, private bank leaders make little secret of their feelings toward public savings banks. It is a mixture of envy and contempt (Schulz 2010). When respondents from private banks including the Bundesverband der deutschen Banken (BdB), the trade association that represents private banks, were asked what enables Sparkassen to be successful, they offered the following list of grievances: 1) Sparkassen control the retail banking market and make it difficult for private banks to compete, “They are in every city and county. The cost of entering those markets is enormous”; 2) their public identity gives Sparkassen an unfair advantage, “They’re operating at a loss in a number of places. A private bank couldn't do that”; 3) the S-Group network enables Sparkassen to be both small and local, and large and national at the same time, “They wouldn't stand a chance on their own”; and 4) their institutional protection scheme gives Sparkassen an unfair regulatory advantage in complying with the Capital Regulatory Directive (CRD).

Interest in public banks is ascendant. The global recession in 2007/8 and the economic crises triggered by the coronavirus pandemic underscore the vulnerabilities of our financial systems and the role public banks play in bolstering and stabilizing economies. The policy scholar, John Kingdon (2011), argues in his seminal book Agendas, Alternatives, and Public Policies that major policy shifts occur when a problem stream, policy stream and political stream merge. Moreover, the merger does not occur by chance or naturally but is the result of three factors: (1) consistent and sustained action by advocates; (2) a triggering event; and (3) policy entrepreneurs capable of using the crisis to bring the streams together. Throughout Europe and Latin America public banks are playing a central role in governments’ response to the economic impact of Covid-19 (IMF 2020; European Association of Public Banks 2020). Public banking advocates are pressing the case globally for the importance of public banking and political opportunities are opening up that had once been improbable. Drawing on Kingdon's insights, public banking's role in national economies is likely to grow particularly in countries that have traditionally resisted the idea like the United States. An understanding of public savings banks – how they operate and thrive – is now more important than ever.

A simple puzzle prompted this book. Sparkassen were established over two centuries ago to provide the poor and working-class with access to credit. Public savings banks populated nearly every European country, guaranteeing governments, firms, and citizens a stable source of credit and a safe place to deposit their savings. Yet, public savings banks have gone the way of the Dodo, morphing into enterprises that resemble commercial banks or disappearing entirely. The Great Recession of 2007/08 accelerated the process. Large multinational banks used their enormous public bailouts to expand market share, increase their size, and drive community banks and public savings banks out of the market. In Germany, this seemingly inexorable march toward greater consolidation of the banking sector appears to have been halted or slowed.

During a period of record-low interest rates and rising regulatory burdens, Germany's small, independent, local public savings banks remain a robust part of Germany's financial landscape. They are the primary bank for half of all German consumers, have 94 million accounts, are the main bank for 40 per cent of all German businesses, and account for 70 per cent of all lending to small and medium-sized enterprises (SMEs).