Is Germany threatened with de-industrialization – and what needs to be done?

With a ceremony in Berlin, the industrial group Siemens on Wednesday celebrated its 175th anniversaryt. It is an example of the long tradition of German engineering, to which the country owes its economic weight and prosperity. But at the moment, when talking about the industry, hangover is dominating instead of pride. In the next few weeks, it will be “to ensure nothing less than the survival of industry in Germany and Europe,” said Siegfried Russwurm, President of the Federation of German Industries, in September.

fear is all around

“If we look back at the current energy crisis in about ten years, we could see this time as the starting point for accelerated deindustrialization in Germany,” he said Deutsche Bank economists. The warnings against de-industrialization are illustrated with anecdotal individual cases, including the Announcement by the steel group Arcelor Mittalto reduce production in its Bremen steel mill for the time being, the recent major acquisition by the German energy company RWE in the USA or that Insolvency proceedings of the hygienic paper manufacturer Hakle.

Statistics also show that industrial production is faltering and the former German foreign trade surpluses have largely melted away, not least because of high prices for energy imports. In its latest forecast, the International Monetary Fund expects Germany and Italy to be the only countries in the euro zone to show negative economic growth in 2023. There are many indications that not only an economic slump is imminent, but also a structural upheaval: the business model of the German economy is under scrutiny.

Germany is more vulnerable

This is challenged twice. First, the supply of comparatively cheap pipeline gas from Russia has ground to a halt – for a long time, maybe forever. Replacement from other sources is more expensive. Second, there is a crunch in the world economy: supply chain problems in the wake of the pandemic, the war in Ukraine and Chinese lockdowns are hampering production, and geopolitical risks are increasing.

Both affect all national economies. But Germany is more vulnerable than others in two respects. First, it pays the price for failed energy policies. While some Eastern European countries were even more dependent on Russian gas, as small countries with limited needs, they find it easier to switch to other suppliers than behemoth Germany.

Second, the global economic frictions are hitting Germany particularly hard because its foreign trade ratio is above average for such a large country: in 2021, German exports and imports of goods and services corresponded according to the World Bank together 89 percent of economic output, while in Italy and France it was just over 60 percent. Industry’s share of value creation is also higher than in other large EU countries.

The most important partner was 2021 with a share of 9.5 percent in German foreign trade in goods for the sixth time in a row China. It is not only a sales market for German machines and cars, but also a supplier of important raw materials and intermediate products, including lithium. The risks emanating from an economic slowdown in China or even an escalation of tensions in Taiwan are correspondingly high.

Creative Destruction

Against this background, will the “world export champion” Germany become the “sick man of Europe” again? Two to three difficult years are unavoidable until the supply chain problems are mastered and the new energy supply conditions are digested. But even in the longer term, energy is likely to remain more expensive in Germany than in the USA, which puts the industry at a competitive disadvantage.

For this reason, individual industrial companies that can neither get their higher energy costs under control by saving energy or switching to other energy sources nor passing them on to their customers, and some particularly energy-intensive productions, are likely to move away or go under. As brutal as it is for those affected, from an economic point of view it is the “creative destruction” described by the economist Joseph Schumpeter that frees up resources for something new.

There is always something new: climate protection through renewable energies, the digitization and networking of industrial processes and the use of artificial intelligence are examples of profitable challenges for German engineers. But you have to tackle them.

Cold turkey

Companies are the first to be challenged in the transformation. You have to learn lessons from cold turkey from “Russian gas”. The return to diversification is key: Being overly dependent on a single supplier is always dangerous, whether it’s gas, semiconductors or lithium. In addition, the supply chain problems suggest that a little more stock should be held again to weaken the just-in-time principle. Finally, recycling can defuse dependencies. None of this can be had for free, but the cost of every crisis is much higher.

In a social market economy, the state is responsible for cushioning the transformation. In individual cases, as with the energy supplier Uniper, it can also prevent chain reactions that spread to healthy companies. Above all, however, he should support the change with clever framework conditions instead of hindering it.

This could begin in Germany with an acceleration of the approval process. Although floating liquefied natural gas terminals can now be erected within months, the approval and planning of each individual wind turbine has now taken seven years or more. And the powerful power lines from the windy north to the industrial south, which have been talked about for years, are still missing today.

Stay away from the prices

A denser network of free trade agreements can also contribute to diversification. These have to be negotiated by Brussels. But Berlin could act as a driving force at the EU level, instead of mulling over years of concerns over the national ratification of the EU’s Ceta free trade agreement with Canada. Because one thing is clear: de-globalization is not a solution. It would bring enormous losses in prosperity to the globally networked, resource-poor Germany. However, politicians and companies on the global stage need to develop a better sense of geopolitical risks.

Prices play a central role in steering structural change. High energy prices signal scarcity. They act as an incentive to save on expensive gas and to invest in alternative energy sources. In doing so, they will ensure a new balance of supply and demand – if you let them play.

Against this background, skepticism is warranted with regard to the ideas of gas and electricity price brakes and skimming off “chance profits” that are rampant at national and European level. State intervention in pricing distorts market signals, price subsidies cost a lot of money – and, like the watering can principle, they also make many people and companies happy who don’t need it. Temporary direct aid to low-income households would be cheaper and more targeted.

Crippling belief in the state

The more the state intervenes beyond the points mentioned, the greater the risk that it will artificially keep outdated structures alive with huge amounts of tax money instead of supporting the ultimately inevitable change. This danger exists precisely in Germany, with its belief in the state, which is astounding for outsiders. Not just since Corona, but even more so since Corona, the German state has been giving citizens and companies the illusory message that they should take every burden off their shoulders. No job should be lost because of Corona, it was said under the conservative Chancellor Angela Merkel, “You’ll never walk alone,” asserted her social democratic successor Olaf Scholz.

This falls on fertile ground: not only citizens are taking to the streets and loudly demanding that prices be capped, business associations are also outdoing each other with calls for state aid. “No company should run the risk of falling through the grid of vital support,” said Albrecht von der Hagen, general manager of the Association of Family Entrepreneurs, on Monday.

In this rescue hysteria, self-responsibility and trust in one’s own strength, in innovation and technology easily fall by the wayside. Germany would now need more of the pioneering spirit of Werner von Siemens, who opened the “Telegraphen-Bauanstalt von Siemens & Halske” with the precision mechanic Johann Georg Halske on October 12, 1847 in a Berlin backyard, thereby laying the foundation for a global corporation Has.

You can contact the Berlin business correspondent René Höltschi Twitter follow.