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German industrial employment shrinks as service sector expands

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Germany has lost nearly 250,000 jobs in the manufacturing sector since the onset of the COVID-19 pandemic.

The decline in manufacturing jobs appears to have been obscured by a broader shift in employment trends.

According to Bundesbank data, the number of jobs in Germany rose by 4.8% between early 2020 and November of the previous year. This increase was driven by growth in service sectors, including real estate, healthcare, communications, and public administration.

However, among the most severely affected industrial sectors, such as automotive industry suppliers, the losses were substantial. The German Association of the Automotive Industry (VDA), an industry group, reported that approximately 11,000 jobs were lost last year alone among German car suppliers, marking them as one of the first sectors to announce layoffs as car production started to decrease.

Gesamtmetall, the lobby group for employers in the metal and electrical industries, has cautioned about further job reductions. They estimate that up to 300,000 more of its members could be made redundant within the next five years, representing a decline of about 7%.

Declining values of industrial companies in the DAX

The contraction of German industry is also reflected in the decreasing market capitalization of the sector. According to the Financial Times (FT), DAX constituents Volkswagen, Thyssenkrupp, and BASF have lost €50 billion, or 34%, of their market value over the last five years.

From 2010 to 2014, automakers in the DAX index were, on average, valued higher than their peers in other sectors. However, as demand started to stagnate, valuations declined.

VW’s deliveries to customers last year decreased by almost a fifth compared to 2019, before the pandemic. In other industrial sectors, steelmaker Thyssenkrupp announced plans to cut production capacity by up to a quarter and reduce 40% of jobs. BASF intends to cut costs by €2 billion annually at its Ludwigshafen center, the world’s largest chemical plant.

The biggest challenge: Energy costs

A major challenge for German industry is energy costs, which are significantly higher than those of its competitors in the US and China.

Since the start of the war in Ukraine, Germany, formerly Gazprom’s largest European customer, has increasingly transitioned to more expensive energy sources.

While the country remains Europe’s largest gas consumer, industry, especially steel and chemicals, accounts for 60% of Germany’s total consumption.

According to the Federal Statistical Office, energy-intensive companies in Germany are now producing approximately 20% less than before the war.

Tens of thousands of workers in the chemical industry under threat

From BASF, the world’s largest manufacturer, to numerous small family-owned businesses, Germany’s extensive chemical industry is among the most severely impacted.

According to Destatis data, around 40% of employment and over half of the revenues in Germany’s chemical industry are dependent on so-called basic chemicals, most of which are derived from gas and crude oil.

Producers of these materials, used in plastics, fertilizers, and coatings, depend on affordable energy to maintain their slim profit margins in a highly competitive market.

Germany’s chemical and energy industry union IG BCE warned in January that over 200 plants had either reduced capacity or shut down, endangering 25,000 jobs.

The sector, which also provides supplies to other industries, has long served as an indicator of industrial demand.

Corporate stress level in Germany above the European average

Corporate distress in Germany remains elevated and is projected to rise over the next 12 months, as restructuring experts at the US law firm Weil, Gotshal & Manges told the FT.

The quarterly distress index, based on the financial health of approximately 3,750 listed European companies, estimates that in the most pessimistic scenario, Germany’s score could nearly double, reaching levels not seen since the peak of the pandemic.

The index employs 16 metrics to gauge corporate distress, including profitability, bankruptcy risk, and changes in valuation.

In contrast, according to the study, Britain, France, Spain, and Italy remain well below pandemic levels, even in the worst-case scenario.

Call for the next German government to ‘exit the crisis’

“Industry, property, and retail are the biggest drivers of distress in Europe, and Germany has two of them,” stated Andrew Wilkinson, partner and co-head of Weil’s restructuring practice in London.

Peter Leibinger, President of the Federation of German Industry, urged the next German government to prioritize strategies to steer the country out of the “deep economic crisis.”

“Order books are empty, machines are idle, and companies are looking abroad for investments. I don’t remember such a bad mood among industrial companies,” Leibinger said.

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Germany considers transferring Nord Stream 2 to US control

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In Germany, discussions are underway regarding the potential transfer of the Nord Stream 2 pipeline to US control. The pipeline became unusable following sabotage in September 2022. The aim is to resume the flow of Russian gas to Europe.

According to a report by Bild newspaper, negotiations are ongoing to reach an agreement.

Meanwhile, some politicians from the Christian Democratic Union (CDU), led by Friedrich Merz, who was recently elected as prime minister, have suggested that natural gas imports from Russia could resume after the war in Ukraine ends.

CDU Member of Parliament Thomas Bareiss stated that Nord Stream 2 could be used for supplies, saying, “If peace is restored, relations normalize, and embargoes gradually ease, then, of course, gas could flow again, perhaps through a pipeline now under US control.”

Jan Heinisch, the deputy chairman of the CDU group in the North Rhine-Westphalia State Parliament, also stated that Germany should consider buying Russian gas again if a “fair and reliable” peace agreement is signed in Ukraine.

Heinisch added, “Whether this will be done by sea or via a pipeline remains to be seen.”

At the same time, Heinisch emphasized that Germany should not be dependent on a single supplier and should avoid situations where prices are “dictated.”

Heinisch is involved in developing the energy policy of the future ruling coalition consisting of the CDU, CSU, and SPD.

On the other hand, Free Democratic Party (FDP) Member of Parliament Marie-Agnes Strack-Zimmermann claimed that the CDU is “already making efforts” to resume natural gas imports from Russia, undermining the country’s hard-won energy independence from Russia.

However, there are those within the CDU who do not want such cooperation to resume.

Party member Ruprecht Polenz said, “Vladimir Putin’s Russia can never be trusted again, and Donald Trump has shaken confidence in America. Therefore, the coalition agreement should rule out the reactivation of the Nord Stream pipeline.”

CDU foreign policy expert Roderich Kiesewetter also criticized this step.

Kiesewetter said, “Those who have always opposed sanctions, those who want Nord Stream to work again and want to pounce on cheap Russian gas again, those who do not care about the genocide suffered by the Ukrainian people, each of them would be extremely pleased with such a rapprochement.”

In addition, SPD Member of Parliament Michael Roth stated that Bareiss’s proposal was an inappropriate signal at the wrong time, coming from someone who had “obviously learned nothing from recent history.”

The German Ministry of Economy, led by Robert Habeck of the Green Party, stated that Nord Stream 2 has not been approved and has not received legal approval, and “there is no question of operating it at the moment.”

The party itself described Bareiss’s statement as “scandalous,” saying, “If Germany starts buying gas from Russia again, it would mean rewarding President Vladimir Putin for his war of aggression.”

Sources speaking to Bild newspaper previously reported that Richard Grenell, the former US Ambassador to Berlin and currently Trump’s special envoy, had traveled unofficially to Switzerland a number of times to discuss the commissioning of Nord Stream 2.

The headquarters of Nord Stream 2 AG, the operator of the pipeline, is located in this country.

The sources claimed that the American side wanted to mediate the supply of Russian gas to Germany, but only at the level of private companies.

Prior to this, sources interviewed by the Financial Times had said that Matthias Warnig, the former CEO of Nord Stream 2 AG, was trying to reactivate Nord Stream 2 with the help of an American investor consortium that had drafted an agreement with Gazprom if sanctions were lifted.

A former senior US official familiar with the matter said, “The US will say, ‘Russia can be trusted now because there are reliable Americans involved.'”

The official added that if everything goes well, American investors will start making money “without doing anything.”

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Europe plans for US absence in NATO with 5-10 year strategy

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Europe’s major military powers are formulating plans to assume greater responsibility for the continent’s defense, reducing reliance on the United States.

According to a report in the Financial Times (FT), these discussions are driven by fears of a unilateral US withdrawal from NATO, exacerbated by repeated threats from former President Donald Trump to weaken or abandon the transatlantic alliance. The aim is to avoid the chaos that such a withdrawal could cause.

Four European officials familiar with the matter indicated that Germany, the United Kingdom, France, and the Scandinavian countries are among those engaged in these informal discussions.

The FT reports that their objective is to devise a plan that shifts the financial and military burden towards European capitals. The intention is to present this plan to the US before NATO’s annual leaders’ summit in The Hague in June.

The proposal would include firm commitments from Europe to increase defense spending and enhance military capabilities, with the goal of persuading Trump to accept a gradual handover that would allow the US to focus more on Asia.

Since Trump’s election, countries such as Germany, France, and the UK have moved to increase defense spending or accelerate already planned increases. The EU has also launched initiatives to boost military investments among its member states.

Officials estimate that it would take approximately 5 to 10 years of increased spending to elevate Europe’s capabilities to a level where they could replace most US competencies, excluding US nuclear deterrence.

One source stated, “Increasing spending is our only leverage: burden-sharing and moving away from dependence on the US. We are beginning these discussions, but the task is so enormous that many are overwhelmed by its magnitude.”

While US diplomats have assured their European counterparts that Trump will remain committed to NATO membership and Article 5’s mutual defense clause, many European capitals worry that the White House might rapidly reduce troop or equipment deployments or withdraw from NATO’s joint missions.

Officials noted that some capitals are hesitant to participate in burden-sharing talks, fearing it might encourage the US to act more quickly, while others believe that despite Trump’s rhetoric, he does not intend to make significant changes to the US presence in Europe.

Others are skeptical that the Trump administration, given its unpredictable nature, would even agree to a structured process.

One official questioned, “You need an agreement with the Americans, and it’s not clear whether they will be willing to do that. Can you even trust that they would stick to an agreement?”

Officials highlight ongoing and regular discussions, led by France and Britain, about establishing a “coalition of the willing” to support Ukraine in its war against Russia and to invest in European defense.

These discussions among more than ten European defense powers do not include the US.

When asked what a European pillar within NATO would mean and whether it is feasible, a senior Western official responded, “We are seeing it now: the UK and France are taking the initiative [on a guarantee force for Ukraine] without the Americans.”

NATO officials argue that maintaining the alliance with less or no US involvement is much simpler than creating a new structure, given the difficulty of recreating or renegotiating the existing military plans, capability targets, rules, command structure, and Article 5 for the continent’s defense.

Officials stated that for Europe’s core defense, the UK and other Atlantic maritime powers, the Scandinavian countries for the north of the continent, and Türkiye for the southeast defense will always be needed.

Marion Messmer, a research fellow in international security at Chatham House, noted, “Even without the US, NATO provides a structure for security cooperation in Europe. There are aspects that would need to be replaced if the US were to leave. But it provides a framework and infrastructure that Europeans are really familiar with. It does so much of the work that you would have to do from scratch if you were just setting up a different type of structure for just European members.”

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Scholz comments on İmamoğlu’s detention

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German Chancellor Olaf Scholz made a statement regarding the detention of Istanbul Metropolitan Municipality Mayor Ekrem İmamoğlu.

According to DW Türkçe, Scholz, speaking at the beginning of the summit that brought EU leaders together in Brussels on Thursday, said, “Allow me to address an issue that is very important to me on a current occasion. In recent years, we have made great efforts to further develop relations between Europe and Türkiye. In this context, the detention of Istanbul Mayor Ekrem İmamoğlu, a centrally important opposition politician, is a very, very bad sign.”

“This development is upsetting for Turkish democracy as well as for the relations between Europe and Türkiye,” Scholz said, calling on Türkiye to allow a policy where “the opposition and the government are in competition” and “the opposition is not held accountable in the judiciary.”

Scholz later shared these words in English on his personal social media account.

Yesterday, the German Foreign Ministry also stated about the detention of İmamoğlu and his colleagues, “It is a heavy blow to democracy in Türkiye. Protecting the rights of the people’s elected representatives is an important part of supporting the rule of law.”

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