21 Sep 2023 07:49 – Updated 21 Sep 2023 07:53
The consequences of the Ukraine war have hit Germany hard. The German economy, which had long been the world leader, is this year in danger of shrinking.
Germany’s economy was for a long time a global success story and an ideal of this century. The country achieved one economic success after another: the Germans dominated the global market for advanced products such as luxury cars and industrial machinery, selling so much to the rest of the world that half the economy was driven by exports.
There were plenty of jobs, and the state’s coffers grew, while other European countries were drowning in debt. Books were written about what other countries could learn from Germany.
This is no longer the case. Industrial production in Germany fell in July for the third consecutive month. The figures substantiate the fear that Europe’s largest economy is in a prolonged period of decline.
In recent months, Germany’s industrial sector has faced strong headwinds in the form of high inflation, rising energy prices and lower demand.
The International Monetary Fund and the EU estimate that Germany will be the only major country with negative growth in 2023.
A big shock
Russia’s invasion of Ukraine and the loss of cheap Russian natural gas have been a major shock and disaster for German energy-intensive industry, long considered Europe’s manufacturing powerhouse.
The German research institute DIW calculated in February this year that the war had then cost the German economy around 100 billion euros, or around 2.5 percent of the country’s gross domestic product.
Germany will probably have to sharply reduce or even shut down its industrial capacity if the supply of Russian gas stops next year.
The economic slowdown has triggered a wave of criticism for the policy that has been pursued – and debate about how to get out of the trouble.
Chief economist Holger Schmieding at Berenberg Bank believes that Germany became too complacent during the “golden decade” of economic growth in 2010-2020.
– The perception that Germany’s economy was so strong may also have contributed to the erroneous decisions to end nuclear power, ban the fracking of natural gas and bet on large natural gas supplies from Russia, says Schmieding. He believes that Germany is today paying the price for this erroneous policy.
Fracking involves pumping water, sand and chemicals into the ground under high pressure to extract oil and gas from shale formations in the ground.
Even Evonik Industries AG, which is the second largest chemical company in Germany and one of the largest specialty chemical companies in the world, is weighed down by the current problems in the German economy. Read more Close
Risks «deindustrialization»
Christian Kullmann is CEO of Evonik Industries AG, which is the second largest chemical company in Germany and one of the largest specialty chemical companies in the world. Kullman believes that Germany risks “de-industrialisation” as a result of high energy costs and a lack of political action from the authorities. He fears that factories and expertise will seek to leave Germany.
– The loss of cheap Russian natural gas led to painful losses for the business model of the German economy, says Kullmann to the AP news agency.
– We are now in a situation where we are strongly influenced – and damaged – by external factors, he adds.
When Russia cut off most of the gas to the EU, it led to an energy crisis for the union’s 27 nations, which had received 40 percent of their gas supplies from Russia. In Germany, the government asked Evonik to keep its coal-fired power plant from the 1960s operating a few months longer than originally planned.
The company will phase out coal power and switch to two gas-fired generators that can later run on hydrogen – as part of plans to become carbon neutral by 2030.
But the price of gas is roughly double what it was in 2021, and that has fatal consequences for the country’s large power-intensive industry.
Chinese brake
On top of that, Germany has also noticed that China, their most important trading partner, is experiencing a slowdown after decades of strong economic growth.
The consequences of the changed external conditions have revealed cracks in the foundations of the German economy, such as a lack of investment in roads, the railway network and high-speed internet in the countryside.
Other problems are that German companies today have a serious shortage of qualified labor – there are just under two million vacancies.
Projects that will ensure the transition to clean energy are also delayed by extensive bureaucracy and popular opposition to facilities in the immediate area.
German businessmen are now looking longingly at the United States, where President Joe Biden’s administration offers companies that invest in clean energy large subsidies.
– We see that a worldwide competition is unfolding for the future’s most attractive technologies, i.e. those that are most profitable and that strengthen growth, Kullmann points out.
He refers to Evonik’s decision to build a $220 million production plant in the city of Lafayette in the United States.
– A quick approval process and up to 150 million dollars in US subsidies made the big difference. Our authorities showed little interest, he adds.
This leads to fears that Germany will now be lagging behind.
Despite many problems, Holger Schmieding still does not believe that the situation is all black. The reason is that the country has low unemployment and good state finances. It gives Germany room for maneuver – but also reduces the pressure to make changes, adds Schmieding.
He believes the most important move would be to put an end to the uncertainty surrounding the price of energy through a price ceiling. This is to help both large and smaller companies. He emphasizes that it is also important that the government gives clear political signals for the future so that the companies have good predictability.
2023-09-21 05:49:04
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