By Peter Bergman (MoneyAmped.com)
Throughout most of the current century, Germany has consistently achieved notable economic triumphs, exhibiting a remarkable prowess in global markets about esteemed commodities such as luxury automobiles and industrial machinery. The nation’s prodigious export activity has been so substantial that it has accounted for a significant portion, precisely half, of its overall economic activity.
There was a notable abundance of employment opportunities, accompanied by a substantial augmentation of the government’s fiscal reserves, while several European nations grappled with mounting indebtedness. Moreover, scholarly works were authored, expounding upon the valuable insights that other countries could glean from Germany’s experiences.
Disappointing Outlook for the German Economy
The current state of affairs has undergone a significant alteration. Currently, Germany is regarded as the most underperforming major developed economy globally, as indicated by projections from esteemed institutions such as the International Monetary Fund and the European Union. These projections anticipate a contraction in Germany’s economy for the present year.
The subsequent events encompassing Russia’s incursion into Ukraine and the consequential deprivation of Moscow’s economically advantageous natural gas supply have engendered an unparalleled disruption to Germany’s energy-intensive sectors, traditionally the cornerstone of Europe’s manufacturing prowess.
The recent occurrence of suboptimal economic performance in Europe’s largest economy has triggered a substantial influx of criticism, introspection, and deliberation regarding the appropriate course of action moving forward.
According to Christian Kullmann, the Chief Executive Officer of Evonik Industries AG, a prominent German chemical company, Germany faces the potential risk of “deindustrialization.” This peril arises from elevated energy costs and governmental inaction towards persistent issues, which may ultimately result in the relocation of new factories and the loss of well-compensated employment opportunities to alternative locations.
From a high-rise office on the 21st floor in Essen, located in western Germany, Kullmann directs attention towards the visual representations of previous achievements scattered throughout the historically significant Ruhr Valley industrial region. These include towering smokestacks from metal manufacturing plants, colossal mounds of discarded materials from now-defunct coal mines, an expansive BP oil refinery, and Evonik’s extensive chemical production complex.
In the present era, the mining above region, once characterized by the darkening of suspended laundry due to coal dust, has evolved into a symbolic representation of the ongoing energy transition. This transformation is evident through the proliferation of wind turbines and the emergence of verdant expanses within the area.
According to Kullmann, the absence of affordable Russian natural gas, which is crucial for powering industrial facilities, has significantly undermined the fundamental framework of the German economy. The current circumstances have placed us in a vulnerable position, as we are experiencing significant adverse impacts from external influences.
Following the decision by Russia to significantly reduce its gas supply to the European Union, a consequential energy crisis has emerged within the 27-nation bloc, which heavily relied on Moscow for 40% of its fuel requirements. In response to this situation, the German government has formally requested Evonik to extend the operational lifespan of its coal-fired power plant, initially established in the 1960s, for a limited period of a few months.
The company is transitioning from the plant, which relies on a 40-story smokestack to produce plastics and other goods. Instead, it is adopting two gas-fired generators that have the potential to operate on hydrogen in the future. This shift aligns with the company’s objective of achieving carbon neutrality by 2030.
A subject of considerable contention revolves around implementing a government-funded limitation on industrial electricity prices to navigate the economy during the transition toward renewable energy sources.
The proposal put forth by Vice Chancellor Robert Habeck of the Greens Party has encountered opposition from Chancellor Olaf Scholz, a member of the Social Democrat party, as well as the Free Democrats, a coalition partner with pro-business inclinations. According to environmental experts, the proposed course of action could perpetuate the dependence on fossil fuels.
Wrong Policy Decisions Have Caused Many Problems
According to Kullmann, the prevailing factor behind the escalation of energy costs can be attributed to erroneous political decisions that have significantly impacted this matter. The German industry and its workforce must not be burdened with financial responsibility.
The current market conditions have led to a significant gas price increase, approximately twice the value observed in 2021. This cost surge has adversely affected various industries reliant on gas as a crucial resource for maintaining the optimal temperature required for the continuous production of glass, paper, and metal coatings. These industries encompass the construction and automotive sectors, which rely heavily on these materials for their operations.
Another significant development occurred when China, a crucial trade partner, encountered a deceleration in economic activity following a prolonged period of robust expansion.
The recent external disturbances have brought to light specific structural vulnerabilities within Germany’s framework that had been overlooked during sustained prosperity. These vulnerabilities encompass inadequate adoption of digital technology within governmental and commercial sectors and protracted procedures for authorizing crucial renewable energy initiatives.
Additional emerging insights include the observation that the government’s readily available financial resources can be attributed, at least in part, to the deferred investments in infrastructure such as roads, the rail network, and high-speed internet connectivity in rural regions.
The decision made in 2011 to decommission Germany’s remaining nuclear power plants has recently come under scrutiny due to concerns surrounding electricity pricing and potential shortages. A notable deficit of proficient workforce within companies exists, as evidenced by the unprecedented surge in job vacancies, reaching a pinnacle of nearly 2 million.
The government has acknowledged that the decision to depend on Russia for the consistent supply of gas via the Nord Stream pipelines, which were constructed during the tenure of former Chancellor Angela Merkel and subsequently disrupted due to the ongoing conflict, was an error that was recognized with delay.
The progress of clean energy projects is impeded by a significant amount of bureaucratic processes and opposition from local communities. The annual construction of wind turbines in the southern Bavarian region remains limited to single digits due to spacing constraints imposed by residential areas.
The implementation of a ten billion-euro ($10.68 billion) electrical transmission line, intended to facilitate the transportation of wind power from the northern regions to the industrial sectors located in the southern areas, has encountered significant financial setbacks due to political opposition arising from concerns regarding the visual impact of above-ground towers. The projected timeline for completion has been extended from 2022 to 2028, indicating a delay in the burial of the line.
The substantial clean energy subsidies provided by the Biden administration to companies investing in the United States have generated envy and concern regarding Germany potentially falling behind.
There is currently a global phenomenon wherein various national governments are competing to acquire technologies deemed highly lucrative and capable of bolstering economic growth, as stated by Kullmann.
The individual referenced Evonik’s strategic choice to construct a production facility valued at $220 million in Lafayette, Indiana, dedicated explicitly to manufacturing lipids, crucial components in COVID-19 vaccines. The expeditious granting of approvals and the provision of up to $150 million in subsidies from the United States had a discernible impact after the lack of enthusiasm displayed by German officials, as stated by the individual.
Kullmann desired a heightened pragmatism to be observed in Brussels and Berlin.
Energy-Dependent Firms Seek New Solutions
Meanwhile, enterprises that heavily rely on energy are actively seeking strategies to mitigate the impact of the sudden surge in prices.
Drewsen Spezialpapiere, a company specializing in the production of passport and stamp paper and non-de-fizzing paper straws for soft drinks, has recently acquired three wind turbines near its mill located in northern Germany. This strategic investment aims to fulfill approximately 25% of the company’s external electricity requirements while transitioning from reliance on natural gas as an energy source.
Schott AG, a renowned specialty glass company, has undertaken a notable endeavor to explore the utilization of emissions-free hydrogen as a substitute for gas within its glass production facility. This facility operates at exceedingly high temperatures, reaching up to 1,700 degrees Celsius, and is responsible for manufacturing an extensive range of products, including stovetops, vaccine bottles, and even the colossal 39-meter (128-foot) mirror for the Extremely Large Telescope astronomical observatory located in Chile.
The efficacy of the operation was observed solely within a limited scope, wherein hydrogen transportation was facilitated via truck. A notable factor to consider is the need for a sufficient infrastructure for the large-scale production and transportation of hydrogen using renewable electricity.
Scholz has advocated for the energy transition to adopt a pace akin to that of Germany, characterized by a sense of urgency comparable to the swift establishment of four floating natural gas terminals in a matter of months, aimed at mitigating the impact of the shortfall in Russian gas supply. The imported liquefied natural gas, sourced from the United States, Qatar, and other regions, is more expensive than the Russian pipeline supplies. Nevertheless, this endeavor effectively demonstrates Germany’s capabilities in times of necessity.
The discord within the coalition government regarding the implementation of an energy price cap and the enactment of legislation prohibiting the installation of new gas furnaces has elicited frustration among business leaders.
Evonik’s Kullmann expressed a critical perspective on the recent set of government proposals, which encompassed tax incentives for investment and a regulatory simplification law, characterizing them as merely a temporary solution.
According to Holger Schmieding, the chief economist at Berenberg Bank, Germany experienced economic growth from 2010 to 2020, commonly called the “golden decade.” This growth was primarily attributed to the reforms implemented under Chancellor Gerhard Schroeder between 2003 and 2005. These reforms aimed to reduce labor costs and enhance competitiveness, leading to complacency within the country.
According to the individual, the perception of Germany’s inherent robustness may have played a role in the ill-advised choices to discontinue nuclear energy, prohibit fracking for natural gas, and rely heavily on substantial natural gas provisions from Russia. Germany is currently experiencing the consequences of its energy policies.
According to Schmieding, the individual who previously characterized Germany as “the sick man of Europe” in a highly influential analysis conducted in 1998, it is now deemed excessive to apply such a label to the country, given its currently low unemployment rate and robust government finances. This allows Germany to engage in strategic actions while diminishing the urgency to implement necessary reforms.
According to Schmieding, a crucial and pressing measure would involve eliminating ambiguity surrounding energy prices. This could be achieved by implementing a price cap, which would assist major corporations and smaller enterprises.
The expeditious agreement upon policies by the government would significantly facilitate companies in acquiring a clear understanding of the regulatory landscape, enabling them to strategize and make informed investment decisions without unnecessary delays.
