Germany is in recession, and warning bells are being sounded internally that a key reason is that green energy policies are creating energy supply uncertainty and price volatility.
The driver of the German economy has long been its manufacturing – most visually represented by its luxury car brands which are exported all over the world. However, employment in this sector of the economy has remained static since the 1950s whilst the services sector has grown to encompass three-quarters of German employment.
German industry is now not just stagnant, it is in decline.
Can Germany’s industrial decline be a good thing? Some people in the green camp would think so. How much of this deindustrialization is a result of energy policies that focus heavily on renewable and a green ideology that drives government decisions?
Green policies which drive up the price of energy, as well as increasing compliance and admin costs, may shut down industry in Germany and make it a low emissions economy; but does that mean those emissions are stopped, or does it just mean that the industries are shipped to a lower cost production economy? More importantly for the Germans, what does it mean for the German economy and German jobs.
German steel plants are shutting down. Last September, Vallourec announced the closure of its Dusseldorf pipe rolling plant and ArcelorMittal, Europe’s biggest steelmaker, shut down three plants in Germany.
They cited “the exorbitant rise in energy prices” as the reason.
Another industrial giant, Lanxess, in the process of closing two plants in the city of Krefeld said through their CEO, Matthias Zachert, that “Deindustrialization has begun”. This was cited by a Der Spiegel article which claims that German industry and business leaders seem unified in their pessimism.
They predict “prosperity losses of an extent not previously imagined” blaming this on the elimination of “ cheap energy.”
Added to the drive to decarbonise, the German government driven by green ideology, have also decided to shut down nuclear power plants. With base load capacity reduced and the grid depending more heavily on weather dependent renewable, this move has added further instability to the grid and to power prices. This has led leaders of German industry to warn that companies will be driven out of the country, taking much needed jobs with them.
Manufacturing jobs in Germany have been steadily at around 10 million since the 1950s but that figure alone doesn’t tell the full picture.
In 1955 there were 10.6 million employed in manufacturing in Germany, 4.2 million in agriculture forestry and fishing, and 7.4 million in the services sector. In 2023, these figures were: 10.8 million in manufacturing; 0.55 million in forestry agriculture and fishing, and 34.6 million in services. Germany is no longer an industrial production based economy. Why is that, and is it a matter of concern for Germany.
Much of this depends on the mix of jobs being created in the services sector. One of the drivers of this is government created jobs which don’t create wealth but distribute it in line with policy preferences. Many public sector jobs are necessary of course, but they have to be paid for by wealth created in the private sector. With industrial jobs stagnating, and now under threat because of energy price inflation and uncertainty of supply, Germany’s economy is losing the fundamental thing that kept it strong.
A strong industrial sector enabled Germany to subsidise the less profitable green sector. This includes state projects such as including the Energiewende experimental project, a long lasting committal to renewables. However, with Germany now having to “tightening belts” the generous subsidies to green tech such as EVs are drying up. EV sales dropping are dropping off a cliff, the Wall Street Journal reported.
Energy is the ability to do work, and cheap energy is the driver of an industrial economy. No cheap energy means no ability to subsidise inefficient, if politically favoured, sectors.
In an interview with the Financial Times, the leader of Germany’s main industry association, The BDI (Federation of German Industries), Siegfried Russwurm, said that the German energy policy was “absolutely toxic”. He said that high prices and a strategy that created future uncertainty driven by dogmatism was “absolutely toxic”.
All of these indicators suggest that Germany could be cascading to disaster. The years of prosperity are insulating the German economy from the visible effects of a liquidity crisis, but the combined effects of onerous regulatory polices, a sustained energy crisis, and stagnation, are building to a critical level. Will these combine to create a cascade of collapse?
“Whether the country has to first experience another year or two of poor growth rates or a major automotive company has to go out of business first before something happens, I don’t know. But we’re heading in that direction,” says Moritz Schularick, the recently appointed president of the Kiel Institute for the World.
Germanys manufacturing advantage is dissolving fast. Ironically it was Germany’s gas deal with Russia, steered by former chancellor, Gerhard Schroder, which ensured cheap energy and strengthened their economy over the past two decades, which allowed for the green transition attempt. Ironic, because that is what is creating the uncertainty in energy prices now, especially as the gas supply from Russia has been turned off.
Another irony is that German industry pays more than twice what French industry pay for electricity – and they still have higher CO2 emissions. Germany’s electricity price to industry is 26.62 c/kWh, in France the price is 10.15 c/kWh
The German government has responded to this by imposing a price cap, or a subsidy, to some industries. In spite of this, Germany is systematically closing down their nuclear generators increasing their dependence on coal which has higher emissions than gas.
And much higher than nuclear obviously. It seems a foolish decision if the big priority is to decarbonise? Nuclear power is generally a safe means of generating electricity, and Germany frequently imports electricity from France which is heavily dependent on nuclear. These policies are driven by ideology not science.