High Energy Prices, De-Nuclearization, and Renewables Challenges in Germany and the E.U. in 2022 Have Resulted in Some De-Industrialization

     For much of this century, Germany has been the economic powerhouse of Europe and a major exporter, but this is changing. While other EU countries suffered debt, Germany was long the exception. Germany’s energy-intensive manufacturing prowess was powered by cheap Russian natural gas via pipeline. The Russian invasion of Ukraine ended that and exposed Germany as overly dependent on Russian energy.

     I think Germany deserves some credit for sticking to the sanctions and strong opposition to Russia, but it has paid a big price and continues to pay a price. Industries are moving out of the country to places where energy is cheaper. Germany also has among the highest electricity prices in the E.U. partially due to higher energy and fuel prices but also due to its reliance on wind and solar. Natural gas is a feedstock for several industries, notably fertilizer plants, several of which were shut down in the U.K. until prices recovered. Manufacturers have become quite aware of high energy prices as a liability. The whole German business model has been disrupted. Glass, petrochemicals, steel, paper, cement, and metals refining industries are also very sensitive to energy prices. Some commentators have suggested that German de-industrialization is immanent and may be permanent to some extent.

     Germany’s Energiewende, or energy turnaround, did not go as planned as many of these pledges and mandates and renewables portfolios don’t. Increases in energy and electricity costs are assured if the time frames are short. Higher energy costs are probably the biggest support for inflation. This has become known as greenflation. Germany was facing energy supply shortfalls in 2021 when 4GW of nuclear reactors were shut down.

     The L.A. Times writes about a debated cap on German electricity prices: “One hotly debated solution: a government-funded cap on industrial electricity prices to get the economy through the renewable energy transition.”

 

“The proposal from Vice Chancellor Robert Habeck of the Green Party has faced resistance from Chancellor Olaf Scholz of the Social Democrats and pro-business coalition partner the Free Democrats. Environmentalists say it would only prolong reliance on fossil fuels.”

 

Germany has also been affected negatively economically due to China’s economic slowdown since Germany is a major exporter to China. That downturn will likely subside in time.

     One might also fault Germany’s decision in 2011 to gradually shut down all their nuclear power plants in response to the Fukushima meltdown event as well as long-established anti-nuclear sentiment. Fukushima was the result of an unpredictable natural disaster as a result of building nuclear in a location where earthquakes and tsunamis are more likely, much more likely than in Germany. Japan initially shut down its nuclear plants but wisely reversed course. Germany could do the same, but that is unlikely. Meanwhile, nuclear-heavy France continues to enjoy low energy and electricity prices and low emissions. However, France did unexpectedly experience some nuclear maintenance shutdowns in 2022 that really came at a bad time. Science educator Zion Lights writes in the article for Human Progress regarding Fukushima: “No one died because of the meltdown, but knee-jerk reactions have led to increased greenhouse gas emissions and increased deaths from air pollution. Blackouts take lives too.” She also suggests that Germany’s renewables push was a worthy experiment, but one that failed.

     The German government does acknowledge that reliance on Russian gas was a mistake. Chancellor Olaf Shultz and especially Foreign Minister Annalena Baerbock have been rightly quite hawkish against Russian aggression as well as Chinese human rights issues. The country is also beset by a slowdown in renewables deployment due to NIMBYism and regulatory bureaucracy, especially in the energy-consuming southern part of the country. The better wind resources are in the north of the country which creates need to add transmission from the north to the south, which is also difficult to get built. Subsidies and lower energy prices in other countries have led to German companies building facilities in other countries, including the U.S.  Germany did build four floating LNG receiving and degasification terminals to help replace Russian gas. They did this very quickly, which was a good move. Germany has banned fracking but does produce small amounts of domestic oil & gas. I read of one small discovery just a few months ago. While some argue that Germany is a victim of its own energy policies, others argue that the economy is still quite healthy, and the energy price cap will help stop de-industrialization by giving longer-term certainty about energy prices.

     Germany experienced a severe natural gas shortage over the winter. New gas service was banned, and people were compelled to stop using gas cookers after 5 p.m. While Germany had planned to shut down coal mines, the energy crisis due to the Russian invasion compelled them to break ground on new coal mines. More coal and biomass were burned to replace gas. That should not be the case this year, as long as it doesn’t get too cold for too long.

     U.K. Prime Minister Rishi Sunak just announced a plan to tap the brakes on the transition to EVs and heat pumps. I think it was a wise decision. Al Gore disagrees. It doesn’t mean these transitions won’t continue to take place, but it does mean that unnecessarily strict time limits and schedules for the transitions will not be enacted. This is a sensible energy policy. The whole of Europe just suffered a difficult economic year that followed the difficult economics of Covid in 2020 and 2021. While natural gas storage levels are currently ahead of the seasonal schedule, that is due in large part to a warmer winter last year. There is no guarantee that will be the case this year. Indeed, it was a cold winter the year before that dropped storage levels then as natural gas prices were significantly elevated long before the Russian invasion began.

     Energy writer Robert Bryce has been writing and speaking about the de-industrialization of Europe for quite a while now, even a few months before the Russian invasion of Ukraine. He noted in 2022 that many smelters and plants were shutting down all over Europe, particularly in Germany and the U.K. due to high energy costs. He has since kept up the rhetoric on Europe’s ongoing de-industrialization.

     Economists Hugo Erken and Frank van Es wrote in February of this year: “In Europe, the realization is slowly dawning that the functioning of the economy is increasingly determined by geopolitical decisions, which often stand in stark contrast to the ideal of apolitical free trade (see Ricardo, 1817). There is a risk that Europe will not be able to secure strategic autonomy on all fronts in the harsh reality of geopolitics, as we recently saw in the energy sector. This development may be accompanied by a loss of European competitiveness, a sharp deterioration of the balance of payments and public finances, and ultimately even lead to partial deindustrialization, as part of the European industrial sector disappears or moves, for example, to the US. This increases the risk of a balance of payments crisis, something we regularly see in emerging markets but rarely in developed economies.”

     They consider that geopolitics cannot be ignored and as demonstrated in 2022 can result in economic turmoil in some cases. While I do not understand all their graphs and flow charts these economists favor an alternative macroeconomic model here to the standard dynamic stochastic general equilibrium (DSGE) model, which suggested to them that the financial turmoil in Europe will continue beyond what DSGE models predict. Luckily since February when this was written, energy prices and energy supplies have stabilized, which offsets predictions of continued turmoil. No doubt the situation remains unstable in general.  

 

 

 

References:

Will We Learn from the Deindustrialization of Germany? Zion Lights. Human Progress. February 28, 2023. Will We Learn from the Deindustrialization of Germany? - Human Progress

Germany, once the envy of the world, is now its worst-performing major developed economy. Why? David McHugh. LA Times. September 20, 2023. Germany, once the envy of the world, is now its worst-performing major developed economy. Why? (msn.com)

Seven Top Energy Stories Of 2021. Robert Bryce. Forbes. December 31, 2021. Seven Top Energy Stories Of 2021 (forbes.com)

The Economic Impact of European De-industrialization: Geopolitics Takes Center Stage.Hugo Erken and Frank van Es. February 3, 2023. The Economic Impact of European De-industrialization: Geopolitics Takes Center Stage - Rabobank

Balance of Payments -and Power- Crises. Model the world to model the economy. Hugo Erken, Frank van Es, Michael Every, and Erik-Jan van Harn. Rabobank. February 5, 2023. Balance of Payments -and Power- Crises (rabobank.com)