Fading European economy’s motor: frightening deindustrialization in Germany

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Recent article in Politico revealed some frightening for the EU-wide growth signs of economic decline in Germany. The main reason is a “toxic mixture” of such new factors in contemporary growth as high energy costs (though in some EU states energy prices have already fallen to pre-2012 levels), skilled-worker shortages and red tape, etc. which are forcing numerous Germany’s biggest companies to “relocate” to other countries in the world.     

     Numerous surveys have shown that German companies and consumers are deeply skeptical about the EU-wide industrial future coped with already polarized views on regional political economy. Present development made it clear that country’s economic model is no longer a guarantor of prosperity due to the lack of economic diversification. It seems, noted Politico that the age-old concept that made Germany a European industrial powerhouse, with highly skilled workforce, innovative companies and cheap energy has gone forever…
For example, Germany’s trade balance in 2021 was down by more than half from about € 175 bn to €89 bn, mainly due to sharp energy price increase leading to value of exported goods of about €1,6 trillion and imported goods of €1,5 trillion in 2022, so exports increased by 14.1% and imports by 24.1% compared with 2021. The foreign trade balance showed a surplus of about €82 bn in 2022, the lowest in recent years.
Source: https://www.destatis.de/EN/Press/2023/02/PE23_064_51.html, and https://www.destatis.de/EN/Themes/Economy/Foreign-Trade/_node.html

     About two decades ago, Germany escaped the reputation of a “sick man state in Europe” adopting a package of labor market reforms that saved its industrial facilities and sustained a period of prosperity, driven in particular by strong demand for its machinery and cars from China. Germany’s positive trade balance with huge export and low import helped economy to flourish; however, the country’s reliance on industry has made the situation “particularly vulnerable”, said experts in Politico; so, with the exception of software maker SAP, Germany’s tech sector is almost non-existent; in the financial sector, the country’s biggest Deutsche Bank suffered from bad decisions followed by the Wirecard’s scandal; hence, presently manufacturing sector accounts for about 27 percent of its economy, compared with 18 percent in the US.

“Toxic mixture” of problems…
Situation in German’s economy is not “technical”, as some politicians used to note; on the contrary, it is a “toxic mixture” of such new factors in contemporary growth as high energy costs (though in some EU states energy prices have fallen to pre-2012 levels), skilled-worker shortages and red tape, etc. that forced numerous Germany’s biggest companies, like Volkswagen, Siemens and BASF as well as plenty of smaller ones (including engineering companies, as well as those in constructions and chemical industry) to move to “greener pastures” in e.g. North America, Asia and Middle East.
E.g. this March, the Germany’s largest aluminum smelter, Uedesheimer Rheinwerk, said it would close the plant by the end of the year due to the high cost of energy. A related problem is that Germany’s most important industrial segments (in chemicals, autos and machinery, etc.) are rooted in the 19th-century technologies; presently, many of them are either becoming obsolete (like the internal combustion engine production) or too expensive for making in Germany.
According to the World Intellectual Property Organization, WIPO Germany ranks only eighth in the “income group” in the Global Innovation Index (2022) and number five among top in Europe. In artificial intelligence, a technology that is expected to drive economic growth for the coming generations, Germany is already lagging behind: only four of the 100 most-cited scientific papers on AI in 2022 were German, compared with 68 in the US and 27 in China.
Source: https://www.wipo.int/edocs/pubdocs/en/wipo-pub-2000-2022-en-main-report-global-innovation-index-2022-15th-edition.pdf

Example of Linde
Until recently, the company (which originated in the 1870s by developing refrigeration for breweries) and presently the industrial gases’ conglomerate, was the most valuable blue-chip in Germany, with a market capitalization of about €150 billion. In January 2023, it decided to exit the Frankfurt stock exchange in favor of its New York listing.
The move followed the group’s 2018 merger with a US competitor after which it moved its Munich headquarters to Dublin. In the course of the restructuring, Linde cut hundreds of jobs in Munich, though Germany remains an important market and accounts for about 11 percent of revenues.
Linde illustrates that big German companies can still survive and thrive around the world; i.e. if conditions “at home” worsen, they move elsewhere; however for Germany that would mean fewer high-paying jobs and lower tax revenue, not to mention the threat of sustained economic decline and political instability.
Another example is social welfare, which is the most generous in the EU and the world, with social spending accounting for 27 percent of the budget (compared to 23 percent in the US). Added to economic decline and pressures to spend more on defense, things might only get worse, concluded Politico.
German officials are expecting bad trends in the labour market, although the overall unemployment rate remains low at 5.7 percent and the job vacancies are at nearly 800,000. Thus, presently the number of foreign direct investment in Germany is at the level of 2014 (of about 832) with a sharp decrease from 1,124 in 2017.
Germany in the early 2000s pioneered modern solar-panel technology to become the world’s largest producer; however, Chinese companies managed to copy German designs and flooded the market with cheap alternatives and German’s solar-panel makers collapsed.
In biotech, Mainz-based firm BioNtech was as the forefront pandemic’s vaccine-developer a couple of years ago; on the back of that success, however, the company announced plans in early 2023 to invest in the UK’s cutting-edge cancer research.
Source: Karnitschnig M. Rust belt on the Rhine in: https://www.politico.eu/article/rust-belt-on-the-rhine-the-deindustrialization-of-germany/

The German carmakers went through intensive discussions on “conversion to EVs (aka electric vehicles); the country has had a competitive advantage for more than a century with combustion engines. However, the essential technology in an EV is not a traditional motor, but the batteries; the latter’s production relies on chemistry, rare materials, etc. and not on the “mechanical engineering”! For decades, the world viewed German industry and engineering as a model to emulate”; but all of a sudden, the German’s producers started looking around the world to find necessary resources.
As Politico confirmed, the lack of technology transformation in economy could be better seen in comparing the situations on both side of the Atlantic during last 15 years: the US economy, driven by a boom in Silicon Valley, expanded by 76 percent to $25.5 trillion, while that in Germany grew by only 19 percent to $4.1 trillion.
https://www.politico.eu/article/rust-belt-on-the-rhine-the-deindustrialization-of-germany/

Negative EU-wide impact
Germany is still regarded as the Europe’s largest player, the hub linking the region’s diverse economies, as well as the largest trading partner and investor: over the past three decades, German industry has turned Central Europe into its factory floor.
Examples abound: e.g. Porsche makes its top-selling Cayenne SUV in Slovakia, Audi has been producing engines in Hungary since the early 1990s, and premium appliance-maker Miele makes washing machines in Poland, etc.
Thousands of small- and medium-sized German firms (so-called Mittelstand) that traditionally formed the backbone of the country’s economy, are still active producing mainly goods for the European market; but changes are hanging in the air: an expected decline in Germany, unless fundamental transformations occurred, would inevitably pull the rest of the region down…

Government’s support is needed
BASF opened a plant near Dresden that makes cathode materials for electric-car batteries just two weeks ago and has pledged to keep investing in its home market. To secure such commitments, however, local and federal governments have been forced to offer generous incentives. BASF will receive €175 million in government support for its new battery operation, for example.
Similarly, in June, the US chipmaker Intel invested about €10 billion into a new factory in the eastern city of Magdeburg, providing around €3.3 million for each of the 3,000 jobs for the created company; without such injections the progress in the region would be impossible.
German engineering has already lost its advantage in the electric sphere: e.g. the carmakers are doubling their overseas investments, especially in China and/or the US, also using tax incentives and subsidies for investors.
Funding offered by the US Inflation Reduction Act has been particularly attractive: e.g. Volkswagen unveiled plans this March to build a $2 billion factory in South Carolina, where it wants to revive the Scout brand, a popular American 4×4 in the ’60s and ’70s.
In April, executives from the carmaker’s battery startup, PowerCo announced a €5 billion investment in a new battery factory in Ontario, Canada: the carmaker has pledged to invest billions more in North America in the next several years as it shifts to electric vehicles.
In Germany, by contrast, Volkswagen has abandoned plans to build a new factory for the “Trinity,” a new electric SUV, opting instead to retool existing facilities. The carmaker, which has a stable of brands that also includes Audi and Porsche, decided not to build a second battery plant in its home state of Lower Saxony due to the high cost of electricity; in April 2023, however, the company announced investment of about €1 billion in an electric vehicle center near Shanghai.
A recent survey of 128 German auto suppliers by the VDA, an industry group, found that not a single one planned to increase their investment in their home market; more than a quarter were planning to shift operations abroad.
However, despite the country’s industrial exodus, Germany’s politicians are largely in denial about the looming political and economic challenges: e.g. industry lobbyists argue that the “interdependence” between China and Germany will be positive in the long run (similar logic, argued Politico, drove Berlin’s embrace of Russian natural gas, with disastrous consequences). And there’s no sign the German’s interest in China is diminishing: in 2022, German companies invested €11.5 billion in China, a record figure…

 

 

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