Germany went from envy of the world to the worst-performing major developed economy. What happened?

Germany went from envy of the world to the worst-performing major developed economy. What happened?

Germany’s ESSEN (AP) — Germany saw economic success after success throughout the majority of this century, dominating international markets for high-end goods like luxury automobiles and industrial machinery, and exporting so much to the rest of the globe that exports accounted for half of the country’s GDP.

Books were published about what other nations might learn from Germany, there were plenty of jobs available, and the government’s finances expanded as other European nations sank deeper and deeper into debt.

not anymore. The International Monetary Fund and the European Union both predict that Germany’s GDP will contract this year, making it the largest developed country in the world with the lowest performance.

It comes after Russia’s invasion of Ukraine and the end of Moscow’s cheap natural gas, a shock never before experienced by Germany’s energy-intensive industries, which have long been the engine of Europe’s industry.

The startling underperformance of the biggest economy in Europe has sparked a flood of criticism, worry, and discussion about the future.

According to Christian Kullmann, CEO of significant German chemical manufacturer Evonik Industries AG, “deindustrialization” poses a danger to Germany due to high energy costs and government delay on other persistent issues that might result in the loss of new factories and well-paying employment.

Kullmann points out the remnants of earlier prosperity throughout the historic Ruhr Valley industrial region from his 21st-floor office in the west German town of Essen, including smokestacks from metal plants, enormous piles of waste from now-shuttered coal mines, a massive BP oil refinery, and Evonik’s sprawling chemical production facility.

Where coal dust formerly stained hanging clothes black, the old mining area is now a symbol of the energy revolution, studded with wind turbines and greenery.

According to Kullmann, the loss of the low-cost Russian natural gas needed to run industries “painfully damaged the German economy’s business model.” “We’re in a situation where external factors are severely affecting — damaging — us.”

The German government urged Evonik to keep running its 1960s coal-fired power plant for a few more months after Russia turned off most of its gas to the European Union, causing an energy crisis in the 27-nation bloc that had got 40% of the fuel from Moscow.

In an effort to become carbon neutral by 2030, the corporation is moving away from the plant, whose 40-story chimney powers the manufacturing of plastics and other items, and toward two gas-fired generators that can eventually run on hydrogen.

The price of industrial electricity should be capped by the government and financed in order to help the economy shift to renewable energy sources.

The idea from Green Party vice chancellor Robert Habeck has been met with opposition from coalition partner and Social Democrat chancellor Olaf Scholz as well as the pro-business Free Democrats. According to environmentalists, it would simply increase our dependence on fossil fuels.

Kullmann is in favor of it and says, “These high energy costs were mostly produced and impacted by bad political decisions. And it cannot be right now that German workers and industry should foot the tab.

Since gas costs are about double what they were in 2021, businesses that rely on it to keep metal and glass molten and heated 24 hours a day to create coatings for buildings and automobiles are suffering.

After several decades of rapid economic expansion, China, a significant trading partner, is now slowing down, dealing a second blow.

These external shocks have revealed foundational flaws in Germany that had gone unnoticed during years of prosperity, such as slow adoption of digital technology in industry and government and a protracted approval procedure for vital renewable energy projects.

Other dawning insights: Delays in investing in roads, the train network, and high-speed internet in rural regions contributed to the money that the government had on hand. A decision made in 2011 to shut down Germany’s last nuclear power reactors has come under scrutiny amid concerns about rising electricity costs and supply constraints. With just under 2 million job opportunities, there is a serious scarcity of trained workers for businesses to fill these positions.

It was also finally acknowledged by the administration that depending on Russia to consistently deliver gas through the Nord Stream pipelines beneath the Baltic Sea—built under previous Chancellor Angela Merkel and subsequently turned off and destroyed during the war—had been a mistake.

The current state of sustainable energy initiatives is one of excessive bureaucracy and “not in my backyard” opposition. In the southern Bavarian area, yearly wind turbine building is restricted to fewer than ten due to distance requirements from dwellings.

Political opposition to unattractive above-ground towers has caused costly delays for a 10 billion euro ($10.68 billion) electricity line that would have transported wind power from the breezier north to industry in the south. Burying the railway results in 2028 completion as opposed to 2022.

Envy and concern that Germany is falling behind have been stirred up by the enormous renewable energy subsidies that the Biden administration is providing to corporations investing in the U.S.

According to Kullmann, “We’re witnessing a global competition by national governments for the most alluring future technologies—attractive being the most lucrative, the ones that support growth.”

He mentioned Evonik’s choice to invest $220 million in Lafayette, Indiana to construct a lipids production plant. Lipids are a crucial component of COVID-19 vaccinations. After German officials showed little interest, quick permits and up to $150 million in U.S. subsidies helped, he claimed.

Kullmann remarked, “I’d like to see a bit more of that pragmatism in Brussels and Berlin.

Energy-intensive businesses are currently attempting to adapt to the price shock.

The manufacturer of paper straws that don’t de-fizz soft drinks and passport and stamp paper, Drewsen Spezialpapiere, purchased three wind turbines next to its mill in northern Germany to meet around a quarter of its external energy need as it transitions away from natural gas.

Schott AG, a specialty glass manufacturer that creates items like stovetops, vaccine bottles, and the 39-meter (128-foot) mirror for the Extremely Large Telescope astronomical observatory in Chile, has experimented with replacing gas at the facility where it makes glass in tanks that can reach 1,700 degrees Celsius with emissions-free hydrogen.

It was successful, but only on a limited scale and with truck-supplied hydrogen. Hydrogen in large amounts, which are not currently available, would need to be created using renewable power and transmitted through pipeline.

The “Germany tempo,” the same urgency that was utilized to quickly build four floating natural gas terminals to replace lost Russian gas, has been called for in Scholz’s appeal for the energy transition. Liquefied natural gas from the United States, Qatar, and other countries is significantly more expensive than supplies from the Russian pipeline, but the endeavor demonstrated what Germany is capable of when necessary.

Business leaders are irritated by the coalition government’s disagreements over the energy price ceiling and a rule that forbids the installation of new gas furnaces.

A recent government proposal package, which included tax advantages for investments and a measure aimed at decreasing bureaucracy, was derided by Evonik’s Kullmann as “a Band-Aid.”

According to Holger Schmieding, chief economist of Berenberg bank, Germany became comfortable during a “golden decade” of economic development in 2010-2020 based on measures made under Chancellor Gerhard Schroeder in 2003-2005 that reduced labor costs and raised competitiveness.

“The perception of Germany’s underlying strength may also have contributed to the misguided decisions to exit nuclear energy, ban fracking for natural gas, and bet on ample natural gas supplies from Russia,” he added. Germany is suffering as a result of its energy policy.

Schmieding, who previously referred to Germany as “the sick man of Europe” in a significant 1998 study, believes such moniker would be overused now given the country’s low unemployment and sound fiscal position. As a result, Germany has more leeway to take action while also feeling less pressure to change.

Schmieding said that the most crucial immediate move would be to put an end to energy price uncertainty by enacting a price cap that would benefit both large and small businesses.

No matter the policies, “it would already be a great help if the government could agree on them fast so that companies know what they are up to and can plan accordingly instead of delaying investment decisions,” he added.

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