decrease in investments
Is Germany at the “beginning of de-industrialization”?
By Thomas Schmoll
07/04/2023, 4:30 p.m
For months, top managers have been warning of an increasing number of companies going abroad, coupled with rapidly declining investments in Germany. Information from managers and figures from science confirm the trend. Olaf Scholz and Robert Habeck speak of scaremongering.
If there was an election for the “naysayer of the year” among the CEOs of the Dax companies, BASF boss Martin Brudermüller would have had the best chance in 2022. In April – Putin’s war of aggression against Ukraine had been going on for almost six weeks – he warned against a complete ban on imports of gas and oil supplies from Russia. “That could bring the German economy into its worst crisis since the end of the Second World War,” said Brudermüller to the “Frankfurter Allgemeine Sunday newspaper” at the time and asked: “Do we want to destroy our entire economy with open eyes?”
More than a year later we know: Germany had the situation under control, experienced no power outages, and the industry was obviously using energy more efficiently. The Federal Republic recorded growth of 1.9 percent in 2022. So everything good? Not at all. A great deal of uncertainty is evident in the economy, the country is in the midst of a review – and the bad word about “deindustrialization” is making the rounds more and more frequently, which means that companies or individual production facilities are leaving the country never to be seen again.
When “Wirtschaftswoche” asked Robert Habeck how he assessed the situation, pointing out that BASF wanted to cut jobs because of the high energy prices, the Federal Minister of Economics said: “The buzzword ‘deindustrialization’ is one that is circulating in interested circles. But it will does not do justice to reality and dynamics at all. We are currently registering large investments in Germany.” Thyssenkrupp and Salzgitter set up the first green steel production. ZF wants to produce semiconductors in Saarbrücken, Infineon is expanding the Dresden site.
IW: Largest decline since the post-war period
The economist Thomas Fricke supports Habeck’s statements. The co-founder of the Forum New Economy warns of “false prophets of crisis” and the “return of Gaga economics”. In an article for “Spiegel”, Fricke cited a survey by the consulting group EY as an example of his position, according to which foreign companies are “investing less and less in Germany”. On “closer inspection” the numbers turned out to be “only strongly related to the energy crisis and temporary”.
Fricke’s position of dismissing the gloomy forecasts as lobby-driven, collective pessimism, i.e. “typically Germany”, contradicts scientific calculations and several surveys of top managers. According to the findings of the Institute of German Economics (IW), companies have never transferred so much money from Germany abroad as in the past year. According to the IW study, the decline was the largest in the post-war period: the gap between direct investments by domestic companies outside Germany and foreign companies in Germany was a minus of 125 billion euros. In other words, the latter limit their involvement more or less drastically or avoid Germany altogether.
The financial expenses of foreign companies in Germany shrank to 10.5 billion euros according to IW, which refers to figures from the OECD. However, companies with headquarters between the Baltic Sea and the edge of the Alps have invested around 135.5 billion euros directly abroad. The downward trend began before the corona pandemic with its supply bottlenecks and the Russian invasion of Ukraine and the associated high energy prices. “In the worst case, this is the beginning of de-industrialization,” the institute said of its survey.
Another obstacle is the blatant lack of workers
Here, too, economists with the opposite opinion find it easy to interpret the numbers as alarmism – the IW is known to be close to employers. According to the President of the German Institute for Economic Research (DIW), Marcel Fratzscher, the development cannot be ignored. The DIW boss, who is politically left-leaning, explained in an article for the “Handelsblatt”: “Current figures do not indicate that the demise of entire branches of industry is imminent.” However: “If the German economy continues to sleep through the ecological transformation and digitization, deindustrialization could actually become reality in ten to 15 years.”
That matches the statement by the general manager of the German Chemical Industry Association (VCI), Wolfgang Große Entrup. He speaks of a “creeping deindustrialization”. Companies still put money into maintaining existing systems, he told the “Berliner Zeitung”. But new investments are rare. There is a lack of international competitiveness. He cites the high energy prices as the cause – which is why the industry is demanding advantages in industrial electricity.
Management consultancy Deloitte surveyed 120 managers from German industry who are responsible for purchasing and logistics. Result: Half (52 percent) stated that Germany’s image as an attractive location had suffered badly – with a continuing negative trend. Slightly fewer (45 percent) rated the risk of de-industrialization as “large or very large”.
A blatant shortage of workers and the constantly growing bureaucracy are also mentioned as major obstacles: “At the moment we have the situation that a company is constantly being confronted with new regulations, legal provisions, measures and laws from Brussels, from Berlin or even from the federal states “, said the President of the German Chamber of Industry and Commerce (DIHK), Peter Adrian, recently. Regarding the review, he said: “We are one of the few countries in Europe whose economic output is back below the pre-corona level. That is an alarm signal.”
The scenario could be exaggerated
So the old scam of painting the devil on the wall to push through demands? If that’s the case, the head of the German Trade Union Confederation (DGB), Yasmin Fahimi, also has a brush in her hand. “What is currently happening in the industry is really still threatening to exist,” she told the German Press Agency (dpa) at the end of December. She, too, put the word “deindustrialization” on her lips. “The deeper the cuts in the value chain, the more companies in the value chain leave Germany, the more dramatic the domino effect will be,” said Fahimi. “And that’s not a question of two or three years. It’s a question of one to three quarters in 2023. That must be clear to all those responsible in politics.”
The scenario could be exaggerated, but it is not unlikely. In a survey of member companies by the Federation of German Industries (BDI) published in April, 16 percent said they were relocating parts of their production and jobs abroad. Another 30 percent are “considering specifically about it,” said BDI President Siegfried Russwurm. Politicians are responsible for improving the framework conditions.
In an interview with Olaf Scholz, the “Bild am Sonntag” referred to a possible de-industrialization of Germany and other developments such as the voluntary departure from Linde, the most valuable group on the German stock market at the time, from the DAX and asked whether it was scaremongering. “The way you sum it up, yes,” replied the Chancellor. It is clear to him what needs to happen to strengthen Germany as a business location: “Get more speed in, make approvals faster. The new Germany speed should not only apply to the construction of LNG terminals, but to all projects.”