Germany is witnessing an economic downturn, a phenomenon receiving surprisingly scant attention. This mirrors a broader European trend of overlooking the foundations of prosperity in favor of more sensational topics.
Germany’s robust industrial sector, about 20 percent of its GDP, is the linchpin of its economic success.
The chemistry and energy-intensive industries are vital here, consuming 77 percent of the industrial energy and contributing significantly to the GDP.
However, these sectors are currently beleaguered by soaring energy costs, a situation exacerbated when compared internationally, highlighting the need for a recalibrated focus on foundational economic elements.
European vs US natural gas prices
The price of gas in Europe was generally slightly higher than in the US before the pandemic, but never before has our price been structurally five times higher than there, which is the case now. Bear in mind that the cost of energy today is considerably heavier than before the pandemic, because prices are significantly higher in absolute terms. By the way, this comparison does not even take into account taxes on energy that are higher in Europe or the ETS (Emission Trading System) price for CO2 emissions in Europe.
Electricity prices are also higher in Germany than elsewhere. German companies pay approximately six times as much for electricity as US producers and 10 times as much as companies in China.
No wonder production in energy-intensive industries in Germany is under pressure. Of course, you can say that we want to reduce energy consumption and that we would therefore rather lose industries that use so much energy than get rid of them, but that does not benefit the world as a whole. After all, we do need the products of these industries. If production moves to other countries, chances are it will emit even more CO2 there.
The disaster unfolding is that production in Germany’s five energy-intensive sectors keeps falling. It is now some 25 per cent lower than at the end of 2017. Incidentally, what may also play a role in this is uncertainty about future regulations, energy supply (in)security and taxes. Europe’s ambition to be far ahead with the energy transition certainly does not help in this regard.
German industrial production
Why is that actually a disaster, you may ask. That’s simple. As reported, these five sectors generate about 3.5 per cent of Germany’s GDP. They do so with just 2 per cent of total employment. In other words, the added value created by an employed person in these sectors is 75 per cent higher than that of the average worker. This amounts to almost a million jobs.
What escapes most people is that the surplus value-added generated in these sectors through the economic process ultimately enhances the prosperity of everyone. That is why I find the indifference towards the demise of this activity incomprehensible. The sad thing about this is that, in retrospect, the cause of the disappointing development of prosperity will remain unclear to most.
Incidentally, the Germans themselves are partly to blame for the loss of their beautiful energy-intensive industry with their failed Energiewende. What is taking place here is no less than economic harakiri.
Han de Jong is a former chief economist at ABN Amro. He writes weekly for Investment Officer on economics and markets. You can read more of his views at Crystal Clear Economics.