German industry grew rich thanks to its close energy trading relationship with its political and economic rival Russia. Recent years have shown how deceptive that relationship was, as Russia invaded Ukraine and cut off Germany’s cheap, vital gas supply.
Now one of Germany’s leading renewable energy bosses has suggested it is a mistake the country could regret forever as the fallout from the energy crisis will permanently damage the industry.
Speaking to the Financial timesRWE boss Markus Krebber said gas prices in Germany were structurally higher than elsewhere in Europe, thanks to the country’s dependence on liquefied natural gas imports.
Germany imported 55% of its natural gas supply from Russia when the country invaded Ukraine in February 2022. Russia was also Germany’s main source of oil and coal imports.
The country has managed to lose most of its dependence on Russian gas. Germany has cut its gas imports by 32.6% in 2023, the country’s energy regulator said, mainly due to cuts in Russian supply.
However, Germany is still heavily dependent on other countries for its energy supply, creating price problems for its troubled economy. The consequences for German industry are pronounced and, according to the RWE chief, are likely to be long-lasting.
“You will see some recovery, but I think we will see significant structural demand destruction in the energy-intensive industries,” Krebber told the newspaper. FT.
German industry is shrinking
Since Russia’s invasion of Ukraine, Germany has found itself in the unusual position of becoming the biggest laggard in Europe’s faltering economic engine.
The country is on the brink of a technical recession after the economy shrank by 0.3% in 2023. The outlook for this year is bleak: the German government has lowered its GDP growth forecast from 1.3% to 0.2% in 2024.
The former engine of its economic superpower, energy-intensive industry, has been sputtering since the Russian invasion and has become a serious thorn in the country’s side.
The German Purchasing Managers Index (PMI) for the construction sector has been declining since the beginning of 2022. Meanwhile, production has been declining since mid-2023.
“The German manufacturing sector has been in recession since the middle of last year, and the latest PMI figures indicate a new contraction in the first quarter of 2024,” wrote Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
“What makes matters worse is that the downturn is very broad-based and includes capital goods as well as intermediate and consumer goods.”
It has fueled debates over whether Germany can once again be considered the ‘sick man of Europe’, having previously shed its post-Cold War title in the 1990s.
Deutsche Bank CEO Christian Sewing warned in September that Germany could become the sick man of Europe, citing rising energy costs and a shortage of skilled workers as some of the obstacles facing the country’s economy.
The head of Germany’s central bank, the Bundesbank, was forced to backtrack on this unfortunate name, arguing that Europe as a whole was at risk of “getting sick”, and not Germany in particular.
German companies on the run
RWE is one of many German companies that seem to have had enough of the German flatlining industry.
Analysis from fDi Markets shows that German companies will almost triple their investments in the US to $15.7 billion by 2023.
The decline of German industry was equally the cause of capital flight to the United States and Joe Biden’s Inflation Reduction Act (IRA), which offered strong subsidies to new companies.
Major automakers such as Volkswagen and Mercedes-Benz have increased their commitments in the US
RWE, meanwhile, announced a new US branch, called RWE Clean Energy, after completing an acquisition for Con Edison Clean Energy Businesses. The group has set aside $15 billion to invest in its US operations.
“You have a coherent and comprehensive policy in the US to encourage the return of production to the country,” RWE’s Krebber told The Guardian. FT.
“Europe has the same intention, but not yet the right measures.”
This story originally appeared on Fortune.com
