Germany’s Green Economy Minister Robert Habeck issued an unusual warning last month. If Ukraine’s gas transit agreement with Russia was not extended after it expires at the end of next year, Germany would be forced to reduce or even shut down its industrial capacity.

Also deputy chancellor, Habeck delivered the stark warning at an economic conference in eastern Germany. The venue was significant: The Alternative for Germany (AfD) seemed to be in the lead among eastern voters, and one of the main things that attracted voters to the party was the fact that the ‘German economic miracle’ had not really worked there. According to Habeck, policymakers should avoid ‘making the same mistake again’ by assuming that the economy would not be affected without measures to secure energy supplies.

Growth data: Alarm bells ring in the manufacturing sector

It is widely accepted that Germany, Europe’s number one economically, is in a difficult situation due to the war in Ukraine, sanctions against Russia, the energy crisis and ‘protectionist’ policies in the US.

For example, the German economy has technically been in recession for two quarters consecutively. According to data released today (July 24), the German Composite PMI Manufacturing Index declined for the third consecutive month, falling to 48.3 from 50.6 in June. The index entered the contraction zone below 50 for the first time since January. Manufacturing production levels fell at the fastest pace since May 2020 as demand for goods fell sharply.

The service sector also lost momentum, with growth hitting a five-month low. Across the sector, new business declined again, leading to the sharpest drop in total new business inflows in more than three years. Customer hesitancy, destocking, high inflation and rising interest rates are cited as factors contributing to the decline in demand for both goods and services.

The pace of job growth across the private sector in Germany slowed significantly in July and the overall rate of job creation was the weakest in almost two and a half years. Hiring slowed in the service sector, while payrolls in the manufacturing sector fell marginally.

The unemployment rate is likely to continue to rise as manufacturing employment declined and the service sector reduced hiring. Moreover, the service sector experienced an increase in input and output prices in July, postponing hopes for a rapid slowdown in inflation until next spring. The manufacturing sector, on the other hand, saw a moderation in the increase in input costs.

Industry lobby pessimistic

It is clear that German industrialists are making the most noise in the debate on ‘deindustrialization’ in Germany.

The Federation of German Industries (BDI), for example, says that not only large companies but also SMEs are planning to move some of their operations outside Germany.

“Many businesses headquartered in Germany are doing well globally, but they are struggling with operations at home,” BDI President Siegfried Russwurm told CNBC, citing “bureaucracy and slow management” as additional pressures companies face in the current climate. Russwurm said that the German economy will also be flat in 2023, with his country ‘lagging behind’ if global GDP grows by 2.3 percent.

Automotive sector shrinks

Things are not going well in the automotive sector, perhaps Germany’s most important industry.

The sector has shrunk significantly compared to the pre-COVID-19 period. According to data cited by Handelsblatt, Volkswagen, Audi, BMW and Mercedes-Benz alone produced half a million fewer passenger cars on their continent between January and May 2023 compared to the same period in 2019. This corresponds to a decline of almost 20 percent.

COVID-19 lockdowns and a shortage of semiconductors and wiring harnesses had slowed car production between 2020 and 2022. At that time, demand exceeded supply, and manufacturers were able to charge high prices and compensate for production losses with the help of short-term pandemic allowances.

After the pandemic, supply chains were now considered to be largely intact. The industry therefore expected a strong rebound in production for 2023. However, the latest data suggests that this expectation was too optimistic.

Chinese competition throws Germans off balance

The rapid entry of China, the new player in the automotive sector, into the European market is also worrying Germany. Last October, a deal made by the German car rental company Sixt worried the Germans: Sixt signed a deal not with a European or German company, but with the Chinese carmaker BYD to buy 100,000 electric cars in the coming years.

News that Chinese carmakers such as BYD and NIO have started selling their vehicles in European markets has raised questions about the future of German manufacturers. Last May, for example, Germany’s largest tabloid, BILD, headlined “Chinese cars flood Europe,” referring to the rapidly growing market shares of the new suppliers.

There are no German companies among the top 10 companies dominating the electric car market in China. The share of German companies in the world’s largest automotive market is still 19 percent, but when it comes to electric vehicles, it is around 5 percent.

In fact, a survey conducted by the Association of German Engineers (VDI) and published on May 25 revealed that 55% of Germans do not think that “the best cars will still come out of Germany in 10 or 15 years”.

Only 12% said they thought this was definitely the case, while 33% said they believed it was likely but not certain.

The gap between inward and outward investment is widening

A decline in manufacturing, slowing consumer spending and weak export growth, combined with high inflation and rising borrowing costs, have caused the German economy to shrink in the last two quarters.

Added to this are investment problems. Citing OECD data, the Cologne-based German Economic Institute said the gap between German companies’ outward investment and inward business investment in 2022 will be the largest on record.

Germany’s ability to attract business investment fell sharply last year. More than 135 billion euros in foreign direct investment (FDI) went abroad, while only 10.5 billion euros came into the country.

The institute’s report says that 70 percent of German companies’ outward investments went to other European countries, making “the collapse of investment in European neighbors particularly worrying. According to the Institute, many of Germany’s problems are related to its own internal failures: high corporate taxes, excessive bureaucracy and poor infrastructure. We note for the moment that these findings are perfectly in line with the criticisms coming from Europe’s ‘libertarian’ right-wing movements.

US ‘declaration of war’

The warnings of a politician belonging to the Greens, one of the most prominent defenders of American interests in Germany, may seem strange, but Habeck’s warnings did not stop with his words at the beginning of this article.

“[Americans] want to own semiconductors, they want the solar industry, they want the hydrogen industry, they want electrolyzers,” he told a conference in June, and said of the government subsidies the Biden administration has introduced under the Inflation Reduction Act (IRA), “It’s like a declaration of war.”

If the Financial Times (FT) is to be believed, calls for retaliation against the US are growing in Germany. A senior German official told the FT, “People came to the WTO. So I said: we are in the middle of a war. Now is not the time to fight with our biggest ally,” he told the FT.

‘Deindustrialization’ or ‘recalibration’?

When it comes to ‘green transformation’ and ‘independence from China and Russia’, it is inevitable that the Euro-Atlantic world, led by the US, will make a political move.

There is a major restructuring going hand in hand with monopolization: The unity of state-economy is being reinforced and the lines between capital and the state are blurring.

German Green Minister Habeck made this point very clearly at the BDI Industry Day conference: “In my view, Germany is an attractive location for both new and existing companies. Of course, the materials industries are under pressure as a result of high energy prices, but there are political decisions to be made.”

At this point in the world capitalist system, we are once again entering a period of intensified ‘political economy’. Statements by US National Security Advisor Jake Sullivan and European Central Bank President Christine Lagarde have signaled that a global economic policy dependent on ‘geopolitical’ goals is on the horizon.

Germany is part of this world and the implementer of a series of political decisions ranging from ‘green transformation’ to ‘de-risking’. Indeed, initial anger at the US IRA has given way to ‘keeping up’. The EU, Japan and South Korea have introduced subsidies for the technology and clean energy sectors to attract new investment or prevent more companies from moving to the US. “If we don’t keep up, they will have [key sectors] and we won’t,” Habeck said. That’s the bitter truth,” Habeck said, suggesting that even an acceptance is accompanied by ambition. Both German monopolies and foreign companies with manufacturing investments in Germany are warning Berlin and Brussels to create an alternative to the IRA. The new stage of monopoly-state integration does not necessarily entail ‘deindustrialization’: ‘traditional’ industries are declining, while ‘new-green’ industries are growing with state subsidies. Gunter Erfurt, CEO of Meyer Burger, a Swiss solar technology company with three factories in eastern Germany, praised the IRA and its subsidies for clean technology companies, saying: “Unlike us Europeans, Americans have realized that solar technology is not just a commodity that you can buy from a random supplier at the best price, it risks becoming a plaything of geopolitics. Everyone needs it for the energy transition.”

Indeed, in May, Swedish battery maker Northvolt committed to building its next factory in Germany after Berlin pledged to pour hundreds of millions of euros into the project. The US and the IRA almost won this race. But Berlin managed to hold on to the Swedish giant with the Temporary Crisis and Transition Framework (TCTF), which turned out to be not so temporary after all. The TCTF framework is now also being used to help solar companies. At the end of June, Habeck’s ministry asked for declarations of intent for a new subsidy program for companies planning to manufacture solar modules or components or process the critical raw materials needed to make them.

Also in May, the German government announced plans to set aside about 4 billion euros ($4.4 billion) each year to subsidize electricity prices for energy-intensive industries in an effort to protect some businesses from high costs. Habeck says they want to keep industry in Germany, and the electricity subsidies are aimed at that.

German companies can profit from ‘green transformation’

German central bank governor Joachim Nagel also said on April 13 that Germany’s energy crisis was ‘more or less solved’ and that the country had the ‘inner strength’ to recover from the double shock of the pandemic and the war in Ukraine.

“German industry has a good capacity to deal with the situation … and I believe they will overcome it and get back to the levels we saw before the pandemic,” Nagel said.

What’s more, Europe’s ‘green tech’ exports, while still behind China, are still ahead of the US. Germany, too, appears to be on its way to catching up with the US (its global export market share of ‘low carbon technologies’ is around 12 percent, compared to around 14 percent in the US). It should also be noted that German companies entering the US market stand to gain.

We should especially note the comfort of machine builders and equipment manufacturers. New factories are being built all over the US thanks to IRA subsidies. It is very difficult to build a factory in North America without European equipment and especially German machinery.

One of the beneficiaries is ebm-papst, a manufacturer of motors and ventilation systems based in Mulfingen in southwest Germany. The IRA has boosted demand for the company’s cooling fans for electric vehicle chargers and megapack battery storage systems.

“The IRA is an opportunity for everyone,” says Mark Shiring, CEO of the Americas for ebm-papst’s Air Technology Division. His company is poised to benefit from the planned rollout of high-speed electric vehicle chargers across the US.

German financial power ready for incentives

Germany and Europe are lagging behind the United States in this regard, but the expansion of subsidy schemes and the loosening of bureaucracy are likely, especially in a country as financially strong and export-dependent as Germany. US chip giant Intel has announced plans to invest 17 billion euros in two new factories in the eastern German city of Magdeburg. The German government had promised to subsidize the project to the tune of €6.8 billion. Intel then asked for more, citing high energy costs. And it got what it asked for: The government agreed to increase the subsidy level to 9.9 billion euros, and Intel announced that it was increasing its investment volume from 17 billion euros to 30 billion euros.

Before the 2000s, Germany was already being called the ‘sick man of Europe’ because of low growth rates and high unemployment. It is clear that part of the clamor for ‘deindustrialization’ or ‘economic decline’ comes from the ‘left-behind’ sectors of capital. Moreover, with the war in Ukraine, the German defense sector has received a significant infusion of blood. Both arms companies and their related industries have been enjoying unprecedented share rallies since February 2022. The EU’s efforts to reorganize its economy according to the war will also accelerate the integration of some monopolies into the state and show that for them ‘deindustrialization’ is not a reality at all.

Those who can be dismissed

For example, Ingeborg Neumann, President of the German Textile Industry Association, said in his speech at the BDI event, “Energy costs, labor shortages, bureaucracy; it is no longer attractive for us to produce in Germany.” First, the share of textiles in the German economy has been declining since 1998. While the sector is still an important source of employment, it could be discarded or outsourced to other nearby countries, for example in Central and Eastern Europe. Second, the problems listed by the sector representative can somehow be solved or mitigated: Re-establishing ties with Russia; attracting migrant labor; restructuring the state to make it easier for capital; new incentives for export markets… Moreover, the fact that export-oriented manufacturers are struggling should not prevent us from seeing the bigger picture: while the German economy has struggled recently, the Dax index, the country’s 40 largest listed companies, has risen by 20% in the past year to an all-time high. The German economy is still dominated by the services sector and this divergence between services and manufacturing is expected to continue.

Chemical conglomerates like BASF are making losses and scaling back their German operations, that’s true. But the divergence itself does not necessarily mean that ‘the economy is doing badly’. For example, Maria Ferraro, Chief Financial Officer at Siemens Energy, said, “We are now seeing a revival in the market with real momentum. We have an overflowing order book,” she said. Spending on R&D is fourth in the world, behind the US, China and Japan. According to the World Patent Office, about a third of all European patents come from Germany. Much of the innovation power is embedded in large companies such as Siemens and Volkswagen and focused on well-established industries. The following sectors stand out in patent applications respectively: Transportation; Electrical machinery, equipment, energy; measurement; mechanical components; computer technology. Compared to other G7 partners, Germany is still a country where the manufacturing industry plays an important role. Bloomberg also points this out in an analysis and points out that the giant German banks still ‘dwarf’ those on Wall Street. The combined market capitalization of Deutsche Bank and Commerzbank is less than a tenth of that of JPMorgan!

The German problem and the AfD

Almost 20 years ago, Germany overcame its reputation as the ‘sick man of Europe’ with an ambitious package of ‘labor market reforms’ that ushered in a period of sustained prosperity, driven by strong demand for its machinery and automobiles, especially from China. Germany exported far more than it bought. Now, the ‘divergence’ from Russia and China signals a new situation. The rise of the AfD can also be explained by the difficulty of ‘exporting Germany’ in adapting to the new world. From the creation of new economic zones within the EU to the ‘controlled dismantling’ of the EU, there are a number of policy proposals to overcome the difficulties on the establishment front. SMEs, the Mittelstand, an important component of the German economy, are the biggest bearers of the cry of ‘deindustrialization’. We will analyze the AfD phenomenon from this perspective in the next article.