The ongoing war between Russia and Ukraine has accelerated the exodus of industries from Europe, a trend that began long before the conflict.
Even before the war, the economic cycle was causing more and more industries to relocate to low-wage countries. An international company with factories in the United States, Europe, and Asia almost always opts to close its European facilities during recessions and contractions. In Europe, the cost to produce is higher than in the United States or Asia. Then, following economic recovery, new factories invariably open in Asia, not in Europe or the United States.
Consequently, economic growth recoveries don’t bring job market revivals. Every recession leads to jobless growth. The jobs exist, but only in Asia. Environmental measures have further accelerated this trend. Rising energy prices, due to the Russian boycott, are now sealing the fate of European industry.
Energy exodus
In the last two years, numerous energy-intensive producers in chemicals, steel, ceramics, glass, and fertilisers have left Europe. Energy costs are so significant that they can no longer compete globally. Some retain a European presence, hoping for better times.
However, the boycott of Russia has irrevocably altered the European energy market. Previously, Europe could buy energy in euros from Russia and see those euros return through investments, deposits, or luxury expenditures. Those days are over. Now, Europe must buy energy on the global market, paying in dollars—a currency we must first earn, amidst high energy and labour costs.
Energy now arrives as LNG (liquefied natural gas), meaning prices are affected by global market developments. For example, gas prices might spike due to a train strike in Australia or a drought in China reducing hydropower.
Ironically, Europe is rich in shale rock for natural gas extraction, but environmental concerns prevent its use. Meanwhile, importing LNG contradicts CO2 emission reduction goals. The extraction and transport of natural gas, primarily methane, lead to significant losses and emissions, making coal-fired power plants a more efficient alternative.
Many vanishing industries underpin long production chains essential for daily life, from agriculture to electronics. As these sectors leave Europe, their absence will be felt throughout the economy. Meanwhile, Asia stands ready to fill this gap. The question remains: how will Europe afford this shift?
Consumption dilemma
There are suggestions that we must simply consume less. However, considering global economic growth and consumption patterns, this is a difficult objective. In Europe, even minor consumption declines have political repercussions. While a green contraction is feasible, it might require a global population reduction, achievable through family planning and economic growth with fewer children, as seen in Germany, Italy, Japan, China, and Mexico.
Finance can play a role in curbing population growth. For instance, offering pension schemes in Africa to families with fewer than three children could stabilize population growth. Countries with more economic growth tend to have fewer children, making this an effective environmental strategy.
The departure of industry from Europe is regrettable, especially as it often drives innovation and progress. Now, the greening of industry is in the hands of the Chinese, who are advancing in electric cars, solar cells, and wind turbines. Europe’s economic and environmental policies, focused on offshoring problems to less regulated countries, make the region less attractive to investors. Europe allows pollution, as long as it’s not on its soil.
Han Dieperink is chief investment strategist at Auréus Asset Management. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co.