The economic twilight of Germany (and Europe)

The economic twilight of Germany (and Europe)

by Giacomo Gabellini

Source: https://www.ariannaeditrice.it/articoli/il-crepuscolo-economico-della-germania-e-dell-europa

According to a study carried out by the authoritative Institut der Deutschen Wirtschaft (Iw) on the basis of data provided by the OECD, Germany made foreign direct investments amounting to 135 billion euro in 2022, and received an inflow of foreign capital amounting to just 10.5 billion over the same period. A colossal negative balance, punctually certified by the fall in the Business Climate Index (which dropped from 91.5 in May to 88.5 in June) and charged by the report's authors primarily to factors such as declining demographics, a worn-out and obsolete infrastructure network, oppressive and cumbersome bureaucracy, and a tax structure that is highly penalising for companies.

The cost of labour and the shortage of skilled labour have also played a role, as shown by a recent survey according to which 76% of the small and medium-sized enterprises surveyed placed precisely these two elements at the top of the list of dysfunctions gripping the country.

By far the greatest contribution to the fall in German competitiveness, mentioned almost en passant by the IW, is however to be ascribed to the drastic increase in energy costs, which in turn can be attributed to a long series of gigantic strategic errors made by the Berlin management apparatus over the years. The associated acceleration of the decarbonisation process and the decommissioning of the last remaining nuclear power plants have strengthened the German economy's dependence on the remaining energy sources, mainly gas and renewables. Insufficient yields from the latter forced Germany to increasingly rely on methane supplies from Russia, either directly via the Nord Stream-1 pipeline or via the pipeline via Ukraine, Slovakia and the Czech Republic. In 2021, Russia covered about one third of German needs with its own supplies.

However, the European Union's gradual switch to the spot market centred on the Amsterdam Stock Exchange at the expense of the old long-term supply contracts opened the way for speculation, which is mainly responsible for the drastic price increases in natural gas since the summer of 2021. The situation then degenerated with the dynamics triggered by the Russian-Ukrainian conflict, which led Berlin to at least formally ration energy imports from Russia through the 'freezing' of the Nord Stream-2 pipeline - then 'providentially' put out of action together with Nord Stream-1 in a sabotage operation that according to the famous investigative journalist Seymour Hersh was organised and executed by the US with the collaboration of Norway - and the search for alternative sources of supply.

Starting with Liquefied Natural Gas (LNG) from Qatar and, above all, the USA, which is sold at prices enormously higher than those charged by Moscow. The increase in costs related to the change of suppliers was soon added to that for the construction of regasification plants, which are necessary to return the liquefied methane transported by tankers arriving from the United States to a gaseous state, with a view to its introduction into the national network. The expenditure forecast for the construction of the regasifiers in the German budget for 2022 was EUR 2.94 billion, but Economy Minister Robert Habeck admitted last November that the construction of the terminals would require no less than EUR 6.56 billion. More recently, Habeck himself stated that Germany could be forced to reduce its industrial capacity even drastically if the flow of gas coming through the pipeline to Ukraine were to be interrupted, either due to the non-renewal of the relevant agreement by Moscow and Kiev, or due to a deliberate manoeuvre by Gazprom, which has threatened to considerably reduce supplies through the pipeline.

Should the pipeline really stop transporting Russian gas, a nightmare scenario would instantly take shape for Germany, one that is in fact already tending to unfold due to the increasing difficulties encountered by Germany's energy-intensive industries.

With all the predictable consequences. BASF, the world's largest chemical company, has announced a 'permanent downsizing' of its presence in Europe due to high energy costs, soon after inaugurating the first part of one of its new €10 billion engineering plants in China and making a major investment in upgrading its industrial complex in Chattanooga, Tennessee.

Bayer, the Leverkusen-based pharmaceutical giant, announced an investment plan focused on China and the United States, where incentives from lower energy costs are superimposed on those - government subsidies and tax rebates - provided by the Inflation Reduction Act.

Volkswagen has moved in the same direction, withdrawing from its declared intention to build an electric car complex in Germany in favour of new plants in China.

BMW, for its part, unravelled the details of an industrial programme involving the construction of a mega-factory to produce batteries for electric cars in the Liaoning province.

Mercedes-Benz has made essentially similar manoeuvres, as have dozens and dozens of small and medium-sized companies in the automotive industry.

Number of exported personal cars (PKW) and utilitarian vehicles (Nutzfahrzeuge) from China.

According to a survey reported by the 'Economist', about a third of the Mittelstand companies are considering transferring production and jobs abroad. Add to that a trend decline in industrial production and a seesaw situation with regard to industrial orders, which is likely to become structurally negative, by virtue of the fact that, the Iw specialists observe, 'the German export model no longer functions as it once did in the face of growing protectionism'. As well as the substantial loss of international competitiveness of the German industry, starting with the automobile industry itself, for which the difficulties linked to high energy costs are to be added to those generated by a transition to electric traction that has proved to be much more troubled and complex than expected and by the rise of decidedly fierce competitors such as China.

According to the Cologne-based institute, the collapse of the German automotive industry's exports to the People's Republic of China - -26% year-on-year in the first quarter of 2023 - could be the point of origin of a new long-term trend characterised by the deterioration of bilateral trade caused by China's rapid rise in electric vehicles.

These clear, unmistakable signs of deindustrialisation are, moreover, combined with a long chain of company bankruptcies, the individual links of which comprise respectable historical companies such as Eisenwerk Erla (steel industry), Fleischerei Röhrs (butchery), Weck GmbH & Co. (glass industry), Klingel (postal services) and Hofer Spinnerei Neuhof (postal services).

The result, to which the massive influx of refugees - more than one million people - from the Ukraine also contributes, is a noticeable increase in the unemployment rate, recorded year-on-year in all 16 German Länder, together with a drop in the food expenditure of German households and a rather significant increase in the approval ratings of the radical party Alternative für Deutschland (Afd).
In the eyes of the Iw scholars, the situation appears so critical that they speak of the 'beginning of the deindustrialisation' of Germany and the European Union as a whole. For which the collapse of exports is combined with the increase in expenses for the payment of the onerous US energy supplies, the subsidising of energy to companies and households and the reconstitution of the arms depots emptied by the non-repayable deliveries to the Ukraine, to be realised to a very large extent through the purchase of weapon systems manufactured by the US 'military-industrial complex'.

As a quid pro quo, the US seems to be inclined to give the German company Rheinmetall the go-ahead for the production of F-35 components at a new plant with more than 400 employees, which is to be built near the Weeze airport in the Kleve district. A striking example of the many transatlantic 'unequal trades' to which the European Union has been increasingly bowing in recent times. So much so, in fact, that an 'unsuspected' think-tank such as the European Council on Foreign Relations has spoken of the '(European) art of vassalage' and the 'Americanisation of Europe', called upon by Washington not only to sever the vital energy artery with Russia, but also to 'support US industrial policy and help ensure American technological dominance over China [...] by circumscribing economic relations with the People's Republic of China on the basis of US-imposed limitations'.

The stratospheric trade deficit of a record EUR 432 billion recorded by the European Union in 2022 stems in no small part from the downgrading of the 'old continent' to a merely ancillary role vis-à-vis the US and its strategies, and risks for the same reasons to crystallise into a structural character. With the result of compressing the exchange rate of the euro against the dollar, mowing down the purchasing power of European workers and forcing governments to make further cuts in public spending. In other words, to adopt programmes modelled on the one recently devised by the executive led by Olaf Scholz, including a drastic reduction in funding for all sectors except the military. A budgetary manoeuvre branded by economist Marcel Fratzscher as 'economically imprudent, anti-social and strategically counterproductive', but made necessary to a certain extent by the financially critical situation in which Germany finds itself.

This is evident from statements made by German Finance Minister Christian Lindner to the newspaper 'Die Welt' last June, according to which the country is in no position to make additional contributions to the EU budget. Not least because it could be forced to organise a rescue operation of the Bundesbank, the historical guardian of the ordoliberal orthodoxy, which is burdened with losses of more than 650 billion Euro related to the depreciation of the government bonds in its possession, which occurred due to the gradual rise in interest rates by the European Central Bank - a phenomenon mirroring that which led First Republic Bank, Silicon Valley Bank and other US credit institutions to bankruptcy.

For the 'European locomotive', and again for the entire 'Fordist periphery' of transnational scale firmly integrated in the German value chain, rather gloomy times lie ahead.