Anger in Germany’s industrial heartlands as Putin cuts gas

The automotive industry is highly dependent on a skilled workforce, which makes living in Germany attractive. On the other hand, the presence of the automotive industry also means demand for domestic steel production.

“I’ve heard a lot of swan songs about the German auto industry in recent years, and it’s still there,” says Carsten Brzeski, global head of macro for ING in Frankfurt.

The outlook is bleaker for other highly energy-intensive industries, such as the chemical sector. After vehicles and machinery, chemicals are among the country’s most important export products.

A new economic order

Economist Jens Südekum, who advises the German government, remains a bit more optimistic, although he expects some companies to leave – notably fertilizer producers.

“Only the largest BASF chemical plant consumes as much energy throughout the year as several major cities. When we had a debate right after the start of the war whether we should embargo Russian energy, [CEO Martin Brudermüller] was the one who said it would be impossible. That would be the death of German manufacturing.

“But now, six months later, they’ve already reduced their dependence on gas by about 50 percent. That’s why they understood the message and tried to rearrange the business model.”

Other economists are less optimistic. “I think companies in the manufacturing sector, especially the chemical industry, will ask themselves, is Germany really the right place?” says Peter Bofinger, an economist and former member of the German Council of Economic Experts, which evaluates government policies.

“In the chemical sector, you can see a decline in production since January of about 10 percent. So she is most seriously affected. I think this is also the type of industry that could leave Germany, because the price of energy is the most important thing to them.”

This is an opinion shared by Berenberg Bank Chief Economist Holger Schmieding: “It is likely to be a permanent shift that the most energy-intensive part will now move to the US, where gas prices are lower, and will probably not return for three to five years. .

“This is likely to cause some permanent losses, but permanent losses are part of structural change. Structural changes with record labor demand, which we have, are much less painful than structural changes when you already have unemployment.”

But similar to what we’ve seen in the past in declining industrial areas, the pain from structural change tends to be concentrated in certain regions. Different energy regulations across Germany could even change the economic order, Südekum believes.

“I expect the crisis to hit traditional production areas in the south more and benefit East Germany in relative terms,” ​​he says.

According to him, the southern regions with a large manufacturing industry, such as Bavaria, Baden-Württemberg and Posarje, will feel the impact the most. Some of these regions are wealthy, while East Germany has historically been poorer.

“Bavaria has no coal-fired power plants and lags behind renewable energy sources. Thus, their dependence on gas is much higher than in other regions. So if there are local power shortages or blackouts, it will affect the south more than other regions,” he says.

“On the other hand, if you look at these big investments in the automotive industry, you see a slow shift actually towards East Germany. Tesla is close to Berlin, all these new battery manufacturing plants are in the area, there are big semiconductor investments in the Magdeburg area. Slowly, a kind of German regional economy is beginning to adapt to this new reality.”

Economists have different views on what the energy crisis will mean for Germany in the long term. Although there has been some talk of starting a process of deindustrialization, it is more widely believed that it accelerated the structural changes that will crown winners and losers.

The challenges are particularly noticeable in Posar, one of Germany’s regions with the highest production. Its growth has been well below the German average for almost a decade.

It ranks ninth among 16 countries in terms of GDP per capita, and second lowest in absolute terms.

The forested hills of Posar were once a prime location for coal mining, but a decade after the last mine closed, locals fear the car and steel industries could follow.

Jacob von Weizsäcker says that “more or less on the first day” he walked into his new office in Saarbrücken, he realized that preventing a downward spiral in the area would require drastic measures.

The former chief economist for Scholz arrived from Berlin in May at the outbreak of the energy crisis. He took over the position of Posar’s new finance minister in the government of social democrat Anka Rehlinger.

The challenges required a new – and for Germany – unorthodox approach: a lot of borrowing.

He plans to use the constitution’s emergency clause to achieve a €3 billion transformation fund. The money will be directed to three areas: industry, infrastructure and innovation.

“Of course, it is far from enough to meet the challenges,” says von Weizsäcker. The idea is that it will provide enough incentive to encourage private sector investment and free up money from Brussels.

“The energy transition has always been a litmus test for Germany, with no region left behind,” he says.

“Posarje is the region with the largest share of people working in the automotive industry. It also has the highest concentration of jobs in the metal industry, including steelmaking, of all 16 Länder in Germany. That is why we are particularly exposed to challenges.”