German industry: Can the backbone of the economy be saved?

Business sentiment in Germany is at rock bottom, as Europe's economic powerhouse has reported the worst economic data for the first half of 2023 of the seven most-industrialized countries: While countries like the US and even France are growing, the German economy is set to shrink by 0.4% this year.

A survey conducted by the Federal Association of German Employers (BDA) this month shows that 82% of the surveyed business owners express great concerns about the state of the German economy. Some 88% think the government has no plan whatsoever on how to handle the crises.

Economy Minister Robert Habeck from the environmentalist Greens party has a bunch of massive problems on his plate, including geopolitical challenges from the war in Ukraine, the situation in the Middle East and China's muscle-flexing in Asia. Adding to these are Germany's costly transition to a carbon-neutral economy, a massive infrastructure backlog, the country's slow pace of digitalization, as well as a lack of skilled labor and excessive bureaucracy.

For decades, a strong industrial base — accounting for about 23% of gross domestic product (GDP) — has been the backbone of the German economy, in addition to thousands of family-owned small and medium-sized enterprises (SMEs).

Grand plan for industrial rescue

In mid-October, Habeck surprised the German public with a so-called Industrial Strategy — a 60-page catalog of urgently needed measures and plenty of state subsidies to make them a reality over the coming years.

With the plan, the economics minister is following in the footsteps of US President Joe Biden, who is currently shelling out a total of $740 billion (€700 billion) for investments in greener US industries. Called the Inflation Reduction Act,  Biden's plan includes massive tax incentives alongside direct subsidies.

Habeck's strategy has been hugely welcomed by both industry leaders and trade union bosses, who've long been crying out for state support in trying times.

However, the plan didn't go down so well within the German government as a whole, which is made up of three different parties with different economic policies. While Habeck's Greens are known for their state interventionist approach, the liberal Free Democrats are traditionally against state meddling in business, and the Social Democrats loath anything that could harm their working-class voter base.

But what caused the ire of Habeck's coalition partners most was the timing of the strategy and the fact that he didn't discuss it with them before he went public with his proposals.

Cap on electricity costs for industry

A key element of the new industrial strategy is a heavily subsidized electricity price for certain industries that are suffering disproportionately from rising energy prices in the wake of the Russian invasion of Ukraine.

Germany's roughly two decades of outstanding economic success had been firmly rooted in cheap Russian energy that companies here turned into goods with a competitive advantage on world markets. Germany was the so-called export champion of the world for many years, and products "Made in Germany" became global hallmarks of quality.

 Without cheap Russian gas, industrial companies now have to rely on supplies of more expensive liquefied natural gas (LNG).

As a result, German electricity prices surged to become the highest in the world due to the expensive reliance on gas for power production.

Deaf ears and empty state coffers

Under his new strategy, Habeck is now calling for a subsidized electricity price for the industry of 6 eurocents ($0.063) per kilowatt-hour. By comparison, Germans are still paying about 40 eurocents for their retail electricity supply, while industries in the US or France enjoy prices as low as 4 eurocents.  

The fixed industrial electricity price is viewed with a wary eye, first and foremost, within Habeck's party of environmentalists. Making energy cheaper runs counter to green climate ideology and attempts to reign in ways of production they deem unfriendly to nature. Rather grudgingly they seem to consent to the plan after realizing that the German population is increasingly overwhelmed by the emerging cost of living crisis. 

The Social Democrats of Chancellor Olaf Scholz largely condone a subsidized price for industry, fearing industrial decline and job losses could fuel the radical political fringes in Germany that are already making big strides in the polls.

It's only that Olaf Scholz, the Chancellor, isn't quite convinced yet, citing economic orthodoxy whereby low prices raise demand and subsequently create shortages that cause prices to go up again. Scholz argues that state subsidies may undermine industry's efforts to save energy and become carbon-neutral.

The toughest resistance to Habeck's plan, however, is coming from the pro-business Free Democratic Party (FDP) but less for ideological reasons. Finance Minister Christian Lindner, a member of the FDP, is a staunch defender of Germany's so-called debt-break policy, meaning the government is bound by constitutional constraint to overspend its budget and add to the country's debt burden in a big way. That is why Lindner has simply refused to earmark the €30 billion needed until 2030 in the budget plan for next year.

Core industries threatening to vanish

Amid the government's inability to find common ground, both industry leaders and trade unions have already warned of "a loss of energy-intensive production" if the subsidy for industrial energy doesn't come.

Their concern was echoed by Habeck at a recent industry conference in Berlin, where he said that Germany's industrial supply chains were "very intact from basic materials to final manufacturing."

"Of course, we can return to manufacturing everything by hand, but then we weaken Germany as a site of industrial production, which is why I have politically decided that this is exactly the wrong consequence now," he told an audience of industry captains.

Indeed, the Federation of German Industries (BDI) is repeatedly warning that energy-intensive businesses might be forced to relocate abroad if nothing changes. "If there is no more chemical industry in Germany, it's an illusion to assume that the transition of chemical plants will continue to happen in Germany," BDI President Siegfried Russwurm told the conference.

The Deputy Chairman of the powerful metalworkers' union IG Metall, Jürgen Kerner, added that medium-sized, family-owned companies currently have "no prospects of continuing their business." There's great uncertainty, he said, as "aluminum smelters cease production, and foundries and forges are losing orders." IG Metall's local branches were increasingly reporting insolvency administrators in the companies, planning "layoffs, insolvencies, and business closures."

How to finance the strategy?

With German state coffers virtually running on empty amid the multiple and costly crises, a political consensus about how the subsidized industrial electricity price could be financed seems elusive.

The green economics minister is planning to increase national debt for financing, but has added that this could only happen after the next general election in 2025.

Despite the pressure on German industries, lobbyists like BDI's Siegfried Russwurm are against adding to Germany's debt. "I think we will have to set priorities [in the state budget]. We need to resolve the conflict between what we can afford and what's desirable but which we can no longer afford."

Habeck is still hoping to convince his coalition bedfellows of the Social Democrats and liberals of his plan to save the German industrial base with state support. Crunch time will be the 2024 budget talks starting in November, for which he sees the odds at "fifty-fifty" that an industrial electricity price will be agreed.

This article was originally written in German.

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