Last week Germany suffered a few days of intense fog, without sun and without wind, which caused the production of electricity from renewable sources to be almost non-existent. Gas plants and electricity imports from France had to make up for the absence of electricity from renewable sources. This specific event highlights the serious energy problems that Germany suffers from.
Germany has traditionally been considered the locomotive of the Eurozone due to its strong economy, based mainly on a leading, competitive and exporting industry. Now, The German engine seems to be seized, largely due to the delayed effects of its own decisions and the implementation of green policies for accelerated energy transition. Its economy is in recession and the problems expressed by some of its main companies do not bode well for a good future if a substantial change of direction is not undertaken.
Under the mandate of Angela Merkel (2005-2021), Germany made decisions in energy policy whose consequences are currently being suffered:
- His government approved the Climate Protection Act, which requires a reduction in CO2 emissions of 65% in 2030 compared to 1990 levels.
- It based the supply of cheap energy on energy imports from Russia, developing two major infrastructure works: the Nord Stream 1 gas pipelines, inaugurated in 2012, and Nord Stream 2 completed in 2021 and sabotaged by a mysterious attack without declared responsibility in 2022.
- After the accident at the Fukushima nuclear power plant in Japan in 2011, Merkel decided to do without nuclear energy, through the phased closure of the plants then in operation. The last German nuclear power plant has been closed in 2023. Germany decided to end its nuclear energy without having a reliable replacement alternative.
- The pursuit of accelerated energy transition policies has led to the closure of coal plants and a large deployment of renewable energy. Renewable energies are intermittent and do not guarantee supply. They require having an alternative available for when they are not available, as happened last week.
With the start of the war in Ukraine and the sanctions on Russia, the energy cost for German industry has skyrocketed, disappearing the supply of cheap energy from Russia. The German industrial employers’ association (BDI) has repeatedly spoken out in a highly critical manner with the energy policy developed by the German government.
The effect on the German industry of all the measures mentioned is palpable: Industrial production, excluding construction, is down 17% from 2017 levels; automobile production has fallen by 28% from 5.7 million vehicles in 2016 to 4.1 million in 2023; companies such as BASF, the flagship of the German chemical industry with 400 plants in the world and 200 in Germany, is closing plants on German soil and while announcing investments of 10 billion euros in China; Volkswagen has announced its intention to close three factories in Germany for the first time in its long history.
Representatives of German industry complain about their government’s energy policy. They consider that neither the medium-term energy supply nor the price that energy will have in the future is guaranteed. They state that this puts them in inferior competitive conditions with other developed markets. In this environment it is difficult to make investment decisionsso in practice they are making large investments outside their own borders, such as the construction of a Volkswagen battery factory in the US, or the BASF factory in China. Having a guarantee of energy supply at a reasonable price is essential to maintain industrial competitiveness at a global level.
The self-imposed European regulations prohibiting the sale of combustion vehicles from 2035, assuming that the winning technology will be the electric vehicle, have been a shot in the foot for the other powerful German automobile industry. Additionally, competition from Chinese electric vehicles is a serious problem not only in the European market itself.but also in the Chinese market, destination of a high percentage of German car exports.
China has gone from being the destination for numerous German industrial goods to becoming a competitor both within the Chinese market and globally. The electric car is just one example.
Trump’s victory exacerbates Germany’s problems: it will have to increase its defense spending; the tariff war will harm their exports; The greater laxity with respect to environmental standards by Asian, and now American, competitors, further reduces the competitiveness of German and European products.
On February 23 there will be new elections in Germany. As the polls stand, it is difficult for a strong government to emerge. Barring major surprises, the new government will necessarily have to be made up of two or three parties, making a clear change of course difficult.
Germany’s problem is Europe’s problem. Germany remains the main net contributor to the EU. Europe cannot do well if Germany does badly.
In short, the measures adopted by Germany and the EU are causing the deindustrialization, without this implying a global reduction in emissions. What is not manufactured in Europe will be manufactured in other parts of the world with much fewer environmental considerations. It remains to be seen if the new German government changes course, something unlikely, but not impossible.
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