Improving Resilience in Times of Multiple Crisis

The colloquial and economic use of terms with regard to the COVID-19 pandemic match very closely: The rapid spread of the COVID-19 virus as well as the subsequent consequences caused a “shock”. The pandemic represents an exogenous and unexpected natural disaster influencing almost every economic area and affecting the entire global economy. It is also a kind of a stress test of resilience in its essence. The pandemic uncovered an enormous vulnerability in many different areas and relentlessly revealed lacks in preparation and risk protection. Important supply chains broke, and bottlenecks are still noticeable. The Corona virus paralyzed the entire world and showed the fragility of the system of global labour division. Interestingly, some areas have, however, proven to be remarkably flexible and were quickly re-established after a short period of adjustment time.

Most likely, an overall assessment would show that German industry and labour market have proven to be a reasonably resilient economy in times of the pandemic. Manufacturing output slumped 31.5% from February 2020 (a six-month high) to April 2020 alone—and had already recovered 87%, or 27.3 percentage points, of that by the end of the year. Employment subject to social security contributions fell by 1.2% from February to May 2020, but had already reached a new high peak by May 2022 (Destatis 2022). Before the Russian war of aggression against Ukraine, it seemed foreseeable that Germany could return to pre-pandemic levels and to approach the previous growth curve. Most other economies have reached pre-crisis levels more quickly, but usually at the cost of higher infection and death rates. How resilient this is compared to other strategies needs to be weighed. In price-adjusted terms, global trade volumes already exceeded pre-crisis levels again in October 2020, and global container throughput even reached pre-crisis levels as early as the summer—at least in the interim (Baur and Flach 2022). Government support is likely to have prevented major distortions. Moreover, financial aid for the economy and short-time working allowances significantly increased government debt. However, the crisis also revealed various weaknesses and problems.

The impact of the various closures and disrupted supply chains caused a shock to businesses that was felt keenly even in situations where there was no large financial loss. Without preparation, several activities had to be transferred to a digital format, enterprises had to develop protective measures and to reorganize working processes within short time. Suddenly, several activities had to be transferred to a digital format, enterprises had to develop protective measures and to reorganize working processes within short time. The vulnerability experienced as an actor in a globalized and extremely labour divided economy must be used as a trigger for future long-term changes beyond the pandemic (Pinkwart and Pannes 2022). In the area of politics and administration, the pandemic has made clear the countries’ need for modernization and revealed a remarkable lack of resilience. Manually maintained health data sent by fax has become a symbol of our outdated administration. The German state and especially the German health system were poorly prepared for a pandemic (Gleißner and Follert 2022). This was also the case for the entire EU. It was caused by a lack of adequate crisis awareness and by a distribution of responsibilities which was unclear or unnecessarily complicated.

Considering that resilience, as initially described, is not only about coping with a virulent event but also about strengthening the future “bounce back capabilities”, learning from experiences that can be used as material for risk prevention become of fundamental importance. Even if the Corona pandemic reaches an endemic stage, another virus will probably become relevant by zoonotic transmission, or a more dangerous variant can occur from a known virus. Moreover, other disasters that are beyond human influence, such as natural disasters or terrorist attacks on infrastructure of systemic importance have to be included in risk analysis and in robust planning.

For years, the German energy policy has been committed to switching from fossil and conventional energy sources to wind, solar and other renewables for power generation. To compensate for the loss of secured power during the transition, gas was chosen as a temporary solution. In addition, the use of gas promised less greenhouse gas emissions and was classified by the EU-Commission as sustainable energy form. At the same time, the number of gas supplying sources decreased due to the drying out of German and Dutch gas sources and the conscious decision not to open up new gas or shale gas sources in own or neighbouring regions and due to the decision not to build own LNG terminals. However, the issue of LNG-terminals has always been a key issue in German energy policy for a long time. The German Monopoly Commission (Monopolkommission 2002) referred to LNG-terminals as a back-stop technology to secure supply security at a time when the German government decided to outsource supply security to a highly concentrated private gas industry (Hellwig, 2022a and 2022b; Gehrig and Stenbacka 2022). With the liberalization of the gas market and the frequent realignment of the German energy policy the gas demand steadily increased and with it also the energy dependency of Russia grew. Moreover, the interconnection at the latest was extended to property rights of pipelines and storage infrastructure. Facing the significant political tensions after the annexation of Crimea in 2014 and the imposed sanctions, a supply of Russian gas could not have been regarded as really secured. In response to the Luekex 18 exercise, the responsible office published a report in 2019 (Federal Office for Civil Protection and Disaster 2019). The Federal Council also called on the German government to increase the resilience of the energy system, especially in the gas sector, by taking specific precautionary measures (Federal Council 2019). Even though the government experienced a crisis situation, no adequate measures were taken to enable a flexible and robust response in case of a real crisis (less preparation). The same applies to the preparation of the technical requirements for a possible announcement of an emergency level by the network agency.

As a result, the German energy system, and thus the entire national economy, was massively disrupted by the outbreak of the Russian war against Ukraine in 2022. By this, the process of responding started time-delayed in the light of the war from a resilience configuration “at high risk”. This is characterised by improvisation and in some case also rigid adaptation. Actions in such a situation are highly prone to explosively increasing prices and shortcomings as they are discussed for example by Hellwig (2022a). The short-term replacement of Russian gas for ongoing processes and the storage through liquid gas imports confront gas wholesalers as well as industries with extreme price jumps. It is of utmost importance for the federal government to procure sufficient substitutes for Russian gas and to diversify the sources in the short and medium term to restore the security of energy supply and to recover economy. Therefore, the federal government supports the energy sector when it comes to contract negotiations with important liquid gas suppliers by organising global energy purchasing tours. In parallel, new regulations for fast development of the LNG terminals and their connection to the national gas network were introduced at accelerated proceeding. This is in contrast to other measures, like the reactivation of conventional power plants (nuclear and coal) that already have been shut down or are scheduled to be closed or the governmental allowance to produce the industrial heat temporarily by a fuel switch gas to oil and coal. However, it is assumed, that these measures will contribute to secure the energy supply and to mitigate the price explosion (Pinkwart 2022). Due to this rigidity, the reallocation of resources towards overcoming the shock started with delay (Grimm 2022).

The high share of Russian gas in the German energy demand also aggravated the cluster risk for energy wholesalers such as Uniper. Uniper purchases more than half of its gas stocks from Russia on the basis of long-term contracts (systemic risk). The urgent demand makes it necessary to stabilize the energy supply and to limit the energy price explosion, whatever is necessary. This is accompanied by a huge financial burden: 8 months after the outbreak of the war, the government launched a stabilization fund with a volume of up to 200 billion euros. An independent ‘gas-commission’ of experts draw up proposals on how households and companies could be most effectively relieved from this fund of the dramatically increased energy costs. The primary goals are to expand the gas supply, to reduce its demand and to broaden sources of gas supply.

In reaction to the acute lack of gas and the enormous increase in energy costs, there exist various market and political incentives to strongly expand renewable energies on-shore and off-shore and to globally promote the production of hydrogen (re-orientation). It shows some similarities with the concept of ambidexterity, which is recommended to stabilize a fundamental transformation process by balancing the exploitation of current conventional resources and technologies and the exploration and implementation of radical new ones (Tushman and O’Reilly 1996). An accelerated expansion of the transmission grids at macro and micro levels is planned to provide renewable energy from all parts of Europe in a more efficient and secured way and should now be implemented without delay. At the same time, a stronger decentralization of the energy supply in the respective residential and commercial areas together with digital tools, such as smart metering and energy sharing, will help to transform energy on side and to store it in a more flexible manner. Thereby, possible energy forms are energies obtained by heat pumps, photovoltaic, wind or hydrogen. Natural stabilizers evolve which can be further strengthened by hydropower and biomass. For the nationwide allocation of electricity and heat there exist large grids making available renewable energies as well as supplementary conventional energies throughout the EU. It is of central significance for the robustness of the entire energy system that this transformation proceeds more ‘resilience focused’ at rapid speed (Hanselka 2022; Bichler et al. 2022).

Free trade is subject to many (new) restrictions in today’s networked world. Even before the pandemic, nationalism and protectionism were on the rise again in many regions of the world. The interruption of supply chains resulting from the Corona pandemic caused further disruption of trade flows. In addition, trade is also under moral pressure. The western world is questioning trade with authoritarian, non-democratic regimes. In the struggle for political and economic strength, further protectionist approaches are tested. Additionally, changes in economic size are becoming apparent: EU’s weight in the global economy is diminishing.² A swan song to globalization is often sung. However, due to a lack of alternatives the end of globalization is neither proven nor promising. The discussion about “deglobalization” shows, however, that old certainties are critically scrutinized. If something new emerges from this, it will be fruitful. The term “deglobalization” is used to describe trends away from global free trade (Stiglitz 2021). In order to present the facets and background of the current phase of deglobalization, Stiglitz gives his impressions of this year’s World Economic Forum. They range from regulatory market restrictions (e.g. USA especially in the Trump era) to plans of increasing autonomy by strengthening the “internal” economic cycle (China). Supply chain diversification—in terms of the basal security logic of redundancy (Brunnermeier 2021)—is an essential resilience strategy that can reduce the risks of disaster-related, political and economic shocks to industries and companies.

Two perspectives can be distinguished: The first is the argumentation of free trade as such, including the ethical questions of system competition. The second is the question of one-sided dependencies that arise within free trade. The positive mechanisms of free trade in a globalized world are still valid. David Ricardo already highlighted these positive mechanisms in the 19th century, (Ricardo 1817). Trade is beneficial to the economy as a whole because the advantages of specialization and division of labour can be better utilized as “gains from trade”. In general, both parties benefit from the advantages of the division of labour. It becomes evident by the fact that transactions between individuals or nations are undertaken on a voluntary basis.³ Free trade makes it possible and even necessary for an economy to specialise in the production of certain goods. By exploiting economies of scale, specialization can offer additional advantages. See (Porter 1990) for the self-reinforcing role of economies of scale in industry clusters. Welfare gains can be achieved through specialization in a world based on the division of labour—each economy focuses on what it does best.

Russia’s brutal war of aggression against Ukraine raises ethical issues and questions about resilience.⁴ Germany’s dependency on Russia became dramatically visible, even though German-Russian economic relations have already suffered noticeably as a result of the Crimea conflict in 2014 and the subsequent sanctions.⁵ Above all, Russia played an extraordinarily important role as a major supplier of energy and raw material for Germany and the EU. In 2021, still 27% of German primary energy consumption was covered with gas. Of those 27% (Federal Environment Agency 2022), 55% was Russian gas (bdew 2022).

Since February 2022, politics and society have been confronted with the question of how Germany admitted self-critically that the “energy partnership” was more of an “energy dependency” (FAZ 2018), the negative effects of which Germany had been clearly warned of for some time. The fact that Russia had always kept its delivery obligations created a misleading feeling of deceptive security (FAZ 2014). The growing dependency turned out to be a mistake which was recognized far too late. This is weakening German and European resilience. Are similar mistakes being made in trade relations with China? As the questions of peace and respect for human rights of the trading partners gain importance from a resilience perspective, a respective dependency analysis is required from this.

China’s economic rise shows the efficiency of market economy mechanisms. Within a few years, China advanced to become a global player. However, the economic promises of the huge market cannot hide the fact that neither market economy nor democracy are part of the Chinese state system. The case of Hong Kong, the behaviour towards Taiwan, the brutal action against the ethnic group of the Uyghurs or the hard enforcement of the No-Covid-Strategy in Shanghai speak a clear language. The Chinese leadership clearly proclaims its will to secure a position of supremacy in the world. The “market” in which we trade with China is a politically driven economy with strong market elements.

Dependencies as a threat to resilience exist in particular with China. There are enormous risks in system rivalry, because the framework conditions can quickly change to the disadvantage of foreign investors and trading partners when it seems to be politically opportune. The dependency in sensitive areas of high technology and infrastructure is also worrying. If there are critical dependencies in the EU, they often exist with China (European Commission 2021). It is true that many of the raw material or products with a currently high import share are also available within the EU or could be manufactured here. So far, extraction has not been economically viable. However, this calculation is likely to change in future. In addition, exploiting domestic potential helps us to do without raw material that are extracted under unacceptable environmental and social conditions.

To “save the honour” of trade, it must be said, that international division of labour remains indispensable as a source of prosperity. Furthermore, trade increases the likelihood of a state’s peacefulness (Weede 2021): War between two countries becomes less likely the more they trade with each other, the higher the mutual foreign investments are and the better it is generally determined in terms of economic freedom. Cooperation in the sense of an exchange of goods thus increases the probability of peace. In this sense, the old formula “change through trade” has proven itself without being able to derive an automatism from it.

Natural sciences and economics clearly show that global climate neutrality is a common interest of the world community. However, because climate protection measures (currently) cause costs that tend to lead to a competitive disadvantage to a company, a pioneering role for individual states is not rational per se—this is especially true for poor and economically less developed states. Therefore, climate protection measures also influence trade. There is a threat of an imbalance between those states that want to implement the goal of climate neutrality in a binding manner by the middle of this century and take corresponding measures, and those that are not (yet) prepared to do so. Instruments such as the “Carbon Border Adjustment Mechanism” or “Carbon Contracts for Difference” discussed in the European Union are intended to ensure fair competition. However, they involve considerable measurement and monitoring efforts, are open to attack under trade law and mostly ignore exports.

With the beginning of the 80’s a new approach named “Supply Chain” found its way into the economy. Areas, such as procurement, production and distribution that in companies previously had been managed separately were interlinked and networked across the board from the customer’s point of view. Supply chain was defined as: “the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer” (Martin 1992). Since the 1990s the discipline of Supply Chain Management (SCM) was developed very dynamically in research and practice. Due to rapid developments in information technology and to the new wave of “business process reengineering” (Davenport and Short 1990; Fiedler et al. 1995), open markets and a massive drop in freight rates product flows from the production of raw material all the way through to the final consumer and could be optimized in a global context. For achieving more efficiency and higher speed, the integration of main elements of logistics, operations management and marketing into cross-functional inter-organizational processes was extended (Christopher and Peck 2004). Beside (further) improvements in efficiency it was possible to adapt new developments in the marketplace and to change customer requirements (Christopher and Peck 2004). SCM opened up the opportunity of leveraging synergies from the integration and management of internal and external company processes (Lambert and Cooper 2000).

Particularly in the state sector, a lack of resilience was lamented during the Corona pandemic. In the health sector, for example, the lack of FFP2 masks was seen as evidence of deficiencies. Providers in the health sector are usually organized under private law, although they are closely regulated by the state. In fact, security of supply is a dimension of resilience. For example, stock-keeping can ensure, at least temporarily, that the population can be adequately supplied with food, energy and medicine in a crisis. The reflex to call for stock-keeping is obvious. It is therefore not surprising that Germany has a Federal Grain Reserve (“Bundesreserve Getreide”) and a Civil Emergency Reserve (“Zivile Notfallreserve”). At considerable cost, almost one million tonnes of grain and lentils are stored for emergencies (Rudloff 2022). A smallpox reserve (“Pockenreserve”) of 100 million vaccine doses is also being stored since the early 2000s. However, the food reserve could only supply a small part of the population for a short period of time—a switch to ready-made food was rejected with reference to its high costs (German Federal Parliament 2020). Especially after the experiences in the Corona pandemic, the question remains whether a complex “vaccination through” would actually be logistically feasible in a sufficiently short time in the event of a terrorist attack on Germany with smallpox viruses. This, and also the fact that the emergency reserves have never been needed show that the government measures to ensure supply security in the event of a disaster at least have a symbolic character.

The EU provides another example of the quest for security of supply. In the past, it has expended considerable effort to become independent of food imports from abroad and to achieve strategic autonomy. In the process, the European Common Agricultural Policy, introduced in 1962, pursued a price support policy in the following years to achieve its goal (German Federal Parliament 2020). As soon as a certain market price was undercut, the EU bought agricultural products to stabilize the price. This policy was quite effective: The EU changed from a net importer to a net exporter of food in the 1970s and 1980s. The guaranteed intervention price made it attractive for producers to increase supply. As a consequence, it led to the well-known “butter mountains” and “milk lakes” for which no appropriate use could be found. The effects on the EU budget were also considerable—in the 1970s, the common agricultural policy consumed 90% of the total EEC budget.

The experience with state stock-keeping and with state intervention in the economic incentive system to secure supplies has often been mainly expensive and of modest benefit. Now, insurance is not superfluous just because one has not made use of it. Nevertheless, it remains unclear whether the insurance would really have been serviceable and helpful in case of need. The term “resilience” often remains so unspecific that it can be applied to a multitude of different risks. No two crises are the same. Therefore, it is less about concrete measures than about patterns and decision-making capacity. Even state stock-keeping could not have done anything against the 2008 financial crisis. In Germany, medical protective equipment is stored in a “National Health Reserve” since the Corona pandemic (Die Zeit 2021)—but it is uncertain whether there will be another comparable pandemic in the coming decades and whether medical protective equipment will then be in short available again.

In this sense, general measures for a robust state are certainly the best guarantee for more resilience (Gleißner 2020). The state does not have to be prepared for every eventuality, but must be able to make the necessary decisions quickly and flexibly in the event of a crisis (Gleißner and Follert 2022). A good regulatory framework that allows and promotes an efficient, flexible and diversified economy protects against dependency. A sustainable budgetary policy also allows for support measures when they are needed: Germany was only able to launch the generous aid programmes in the Corona pandemic because it had the corresponding budgetary leeway. Conversely, government debt that is out of balance with economic performance challenges resilience in the long run, for example through significant debt crises, massive tax increases or high inflation that is not consistently fought. At the same time, a resilient public spending policy requires a clear prioritization on investments—unlike in the past (from 2000–2019, public net investments were negative on average). Finally, the Ukraine conflict shows that the danger of war is by no means averted on the European continent. A robust state therefore also requires Germany to restore its defence capabilities enabling it to defend itself and its allies adequately in a timely manner.

If the goal of resilience is to be pursued beyond these rather general measures it must first be defined for which areas state resilience would be required at all—this is especially true since very different crises are conceivable. To do this, it is necessary to operationalise the term and the desired level accordingly—concrete goals and measures must be named and, if necessary, coordinated with each other (Rudloff 2022). For some years now, the EU has begun to develop resilience strategies in response to the 2010 financial crisis, see the European Strategy and Policy Analysis System (ESPAS 2015). For a systematic crisis assessment, see European Commission (2020). There, economic-social, ecological, geopolitical and digital resilience are named as strategic core objectives (Rudloff 2022). Stress tests can also be carried out and, if necessary, it must be clarified how to deal with the results. Within the framework of its industrial strategy, the EU Commission has, for example, identified 137 out of 5200 products with a high dependence on imports—production in the EU would be significantly more expensive or impossible to establish in the short term (European Commission 2021). The Commission has identified a need for action especially in raw materials and chemicals for energy-intensive industries, for the digital and green transformation, and for healthcare. Here, companies are in demand above all, but also politicians. In the medium and long term, the expansion of trade agreements and the dismantling of trade restrictions are helpful. In the short term, the suspension of tariffs and the dismantling of punitive tariffs on shortage products can also be helpful (Treier and Herweg 2022).

An alternative European approach can be well illustrated by the European Chips Act, which was publicly discussed in particular due to the high investments announced by Intel in Magdeburg and Bosch in Dresden, among others (European Commission 2022). The EU share of the one trillion-euro chip market was around 10% in 2020. Especially in view of the strategic importance of computer chips in the value chain and the strong but exposed position of Taiwan, which is confronted with Chinese territorial claims, this share is perceived as too low. With investments of 43 billion euros, the European world market share is to be increased to 20% in 2030.

The dismantling of trade restrictions or targeted state support for strategically important industries show that state resilience does not necessarily mean that the state itself ensures the supply of the population and the economy. It always makes sense to examine the extent to which market actors can be integrated into a resilience strategy—if necessary with corresponding legal requirements. Examples can be found in Switzerland or Great Britain, where emergency partnerships are concluded in which supermarkets commit themselves to storage and delivery services in crisis situations (Rudloff 2022). The German Control and Transparency Act (Kontroll- und Transparenzgesetz) successfully obliges limited companies (AGs and GmbHs) to implement early warning systems, which can also be understood as a state-imposed resilience measure for companies (Wellbrock 2022). Voluntary agreements between the private sector and the state that reward desired behaviour also offer a good way forward. In Germany, on the other hand, there was serious discussion during the pandemic about confiscating strategically important goods—the suppliers of these goods would thus have been punished.

Due to the interdependencies of economic cycles, which are difficult to oversee, and the unspecific risk addressed by resilience, a major challenge for the state is to identify and name possible bottlenecks and crises in time and to initiate countermeasures. Good experience has been gained with monitoring systems, for example. The “Agricultural Market Information System”, for example, was founded by the G20 to be better prepared for food supply crises such as those in 2008 and 2011. It provides transparent information on the risks to the economy or a sector.⁶ The system is also linked to the international policy level. By referring to the information gathered, fewer export restrictions were imposed on agricultural products during the Corona pandemic than had been feared (Rudloff 2022). Such a politically desired and transparent monitoring system could also be applied to critical goods and infrastructures. In 2021, the G7 actually proposed similar monitoring for minerals and metals, which should also be interwoven with the political level. This refers to the Critical Minerals and Metals Information System (CriMMIS) (Rudloff 2022).

Moreover, the establishment of monitoring systems at the intergovernmental level shows that resilience goes beyond the supply goals of individual states. A modern concept of resilience therefore not only encompasses the security of supply of one’s own population, but also takes into account the effects and interdependencies on the international trade (Rudloff 2022). Autonomy in the sense of national security of supply, on the other hand, should not be the goal of a resilience strategy.

Resilience also cannot mean that the state tries to take all the risks away from private actors. It is more important to create the right framework conditions and to rely on individual and market coordination and self-healing forces—a lean state is better able to act in serious crisis situations. Above all, it is essential to avoid serious mistakes—such as misguided incentives for private individuals: For example, prices should be understood as scarcity signals that must also have an effect. Bureaucratic, undifferentiated attempts at detailed control can significantly limit flexibility and responsiveness. The socialisation of risks can be tempting in the short term but highly problematic in the long term, for example if companies can pass on the negative consequences of misjudgements to the state. Insurance always carries a moral hazard risk. An example would be an excessively long and state financed short-time work without employers’ co-payment (Felbermayr 2022): In the interim, short-time work is a proven instrument for ensuring resilience to economic cycles, but in the long term there is a risk of burdening the insured community with wrong decisions in corporate policy, such as too little inventory.