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This article is a part of a dossier
The reckless blitzkrieg of the energy transition, the drastic reduction of hydrocarbons in Germany's energy mix, the closure of nuclear power plants, and the politically motivated rejection of cheap Russian pipeline gas have all plunged the country into a dire economic crisis from which it is unlikely to ever recover.
It is now impossible to deny that Germany is experiencing real deindustrialization. In September 2024, huge resonance was generated by the news that the Volkswagen (VW) automobile group is considering closing two plants in Germany. Before a gathering of workers at the Wolfsburg assembly plant at VW’s headquarters, Arno Antlitz, VW’s chief financial officer, called the company’s decision a necessary measure to boost productivity, cut production costs, and improve operating margins, which have declined due to increasingly ruthless competition from Chinese electric car makers and, more generally, a failure to rebuild the auto market. This news has sent shockwaves, as it would mark the first closure of a VW plant in 90 years of operation and could initiate a huge and negative change not only for Germany but for the whole of Europe.
In 2023, economic journalist Gabor Steingart stated that “if the automobile industry collapses, the whole of Germany will collapse. That is, the Germany we have known for many years and the remnants of which we see today will cease to exist.” A very strong statement, but certainly not without merit, as the German automobile industry now employs about 780,000 people. Its weight in the country’s gross domestic product in 2023 was 5%, nearly double the roughly 3% that was in the late 1990s. Revenues of German automakers, despite a downturn in 2020, reached 564 billion dollars in 2023, of which 393 billion dollars came from exports, which is roughly 24% of the total of 1.6 trillion dollars of goods exported from Germany in the same year.
The auto industry is just one of the examples that can illustrate very clearly how much the fate of the entire European economy is linked and dependent on that of Germany.
The negative effect of auto market’s problems obviously impacts related companies, both large and small. Already in July 2023, tire manufacturer Continental approved a plan to close by 2027 the production site in Gifhorn near Wolfsburg. In September 2024, after failing to reach an agreement to sell the company’s business, the WKW Group, an automotive parts supplier, declared insolvency, jeopardizing the layoffs of 2000 workers in Germany and another 1800 employees worldwide.
The automotive sector is just one example that can illustrate very clearly how the fate of the entire European economy is linked and dependent on Germany’s fate. Today, there are 213 automakers operating in the European Union, which directly and indirectly employ about 13 million people across Europe. Only VW has 32 assembly plants in Europe and another 15 component factories.
Therefore, the severe downturn experienced by the German economy over the past two years cannot but be a cause for concern for the entire system. The German economy went into negative territory in 2023, contracting at an annualized rate of 0,3%, and the forecasts for 2024 were revised downwards by the German Federal Ministry for Economic Affairs and Climate Action from growth of +0.3% to a contraction of -0,2%. After a period of contraction that began in 2020, today we see a new increase in the trade balance, which, however, is mainly related to a decrease in the volume of imports, attributed to a decline in consumption. It’s not just the automotive sector that will suffer, and VW is not the first company to say it plans to cut production in Germany. In May 2022, Vallourec, the world’s second-largest steel pipe manufacturer, said that German production sites would be closed after failed attempts to sell its assets in Germany, resulting in 2400 workers being out of work. In September of the same year, steel company ArcelorMittal was forced to shut down one of the furnaces at its Bremen plant. In March 2023, German aluminum producer Speira said it wanted to close its 140,000-ton-per-year Rheinwerk production facility. In mid-2023, Europe’s oldest steel mill, Eisenwerk Erla, which has been operating in Saxony for 600 years, declared insolvency and began insolvency proceedings. In April 2024, steel giant Thyssenkrupp announced production cuts at its Duisburg plant, followed by a reduction in some 13,000 jobs (and these numbers are far from final).
In September 2024, global chemical giant BASF announced that after stoppages and cutbacks in production, already carried out in 2023, three production lines will be permanently closed in 2025 in Ludwigshafen am Rhein, the German company’s main production site, where approximately 36,000 people are employed. The problem also concerns other multinational corporations operating in Germany. In early October 2024, Coca-Cola announced that it will close five production and logistics sites between Cologne, Neumünster, Berlin, Bielefeld, and Memmingen by 2025, resulting in the loss of 10% of its approximately 6500 jobs.
Overall, the entire German industrial production recorded a two-year period of decline: -0.2% in 2022 and -1.2% in 2023. With an already consolidated -9% from 2018 highs, Deutsche Bank’s 2024 forecasts speak of a further potential -2.5% decline. According to official statistics, in Germany alone, 176,000 companies of various sizes ceased operations in 2023, which is about 2.3% more than a year earlier. Of the companies that closed, 11% were insolvent, which is 12% more than in 2022. In the first half of 2024, the number of insolvent companies increased by as much as 41%, whereas about 162 of them had yearly turnover exceeding 10 million dollars. In the first six months of 2024, more than 10,000 companies have already declared bankruptcy, an increase of 30% over the same period in 2023, which is double the number previously estimated and is the highest recorded since the 2008 financial crisis.
The implementation of the “green” agenda has very seriously compromised Germany’s energy security.
The decline of the German economy is mainly caused by the political choice, which, in order to carry out the Energiewende (energy transition) at any cost, jeopardized the energy security of this industrialized country and the competitiveness of its companies. Germany, like many other countries, has set itself very ambitious environmental targets: by 2030, 80% of its electricity should come from renewable sources, and by 2050 it plans to achieve absolutely clean air emissions, completely eliminating hard coal from its energy mix. The amount of electricity generated from renewable sources that accounts for approximately 50% of the total is little consolation for Germany’s industrial sector, which has had to deal with the rapid and forced introduction of alternative sources and the sudden shift away from hydrocarbons, which is also linked to the very harsh sanctions regime imposed on Russia.
Despite improvements in energy efficiency, data from the International Energy Agency (IEA) show that between 2000 and 2023, energy intensity in Germany has decreased by 43%. The figure is not surprising, given the closure of production facilities in the most energy-intensive industries, namely metallurgical, machine-building, and chemical. The political will to abandon the most reliable and cheapest sources of energy and introduce clean sources (in terms of emissions from energy production – ed.) has created enormous problems in planning Germany’s energy strategy.
Although the idea of a nuclear “renaissance” began circulating between late 2023 and early 2024, the last three operating nuclear power plant reactors were shut down in Germany in April 2023 under a plan approved after Japan’s Fukushima disaster in 2011. The government also confirmed that it does not intend to make new investments in the sector, thus excluding nuclear power from the country’s future energy mix. The closure of nuclear power plants, however, was not accompanied by a reliable compensation of the lost production capacity, so that the total amount of produced electricity decreased by 10% between 2021 and 2023, leading to a sharp increase in electricity prices, which rose from €50/MWh in mid-2021 to €75/MWh in October 2024.
Germany also had to encounter rising hydrocarbon supply costs, which, while below the highs reached in 2022, still remain 26% higher than the average for the last decade. Germany’s energy mix at the end of 2023 was still dominated by oil (34%) and natural gas (26%). The sharp decline in hydrocarbon supplies from Russia, which covered about 55% of Germany’s natural gas needs and about 34% of its oil needs before the start of the special operation in Donbass, has put further severe pressure on Germany. The European embargo against the Russian energy sector cost the German government $465 billion in 2022 alone, or about 12% of gross domestic product, which was spent to avoid the collapse of the national energy system. The most critical situation relates to the natural gas market, which, after losing almost all of its pipeline supplies – about 80% of the total to be exact – has been forced to invest heavily in liquefied natural gas (LNG) in order to differentiate the sources of supply of this fuel. Despite the doubling of LNG storage capacity, market operators forecast that, although the likelihood of a downward correction remains, the “premium” that Germany will have to pay to meet its gas needs will persist in the short term. The price of imported gas in Germany at the end of August 2024 was $10.24 per million BTU, almost 5% below the 2023 price, but still about twice the early 2020 price.
The rising cost of hydrocarbons and the uncertainty and unreliability of alternative energy sources are the real cause of deindustrialization in Germany, where companies, given the loss of competitiveness and profitability, are forced to close down and move their business abroad. A survey by the German Chamber of Commerce and Industry on a sample of 3300 companies showed that 37% of them are considering moving their production facilities abroad. For companies with energy-intensive production processes, this percentage reached 45%. Thus, the statistic of a -5% year-on-year decrease in gas consumption in 2023 is mainly due to a reduction in industrial production, which accounts for 60% of Germany’s gas consumption. Compared to the three-year period 2018-2021, the decrease in average gas consumption is 17.5%, but the decrease in consumption in the industrial sector is about 20%.
It should therefore come as no surprise that the statements made public in April 2024 by Markus Krebber (photograph), CEO of the German multinational electricity company RWE, stated that “Germany will no longer be able to recover and return to the industrial level of 2021 because the national energy policy promoted so far does not take into account the real energy needs of the country itself.” These words echo those of IEA Executive Director Fatih Birol, who in January 2024 called Germany’s choice of energy strategy “a historic mistake,” which is likely to become not only an obstacle to the recovery and future development of the German economy, but also of the European economy, where the former powerful “locomotive could become the last carriage of the entire train” and lead the rest of Europe into crisis.
