“Eurozone industry continues to fall”, the publication stated Wall Street Journal.
Eurozone factories have been unable to produce more goods for four straight months as the sector struggles to overcome a prolonged slump led by its most important contributor, Germany. This decrease reflects the general trend towards a reduction in industrial activity in the region, which began a year and a half ago. In July 2024, industrial production in the Eurozone decreased by 2.2% compared to July 2023.
What factors determine the economic regression in the first economy of Europe
Therefore, the leading role in this recession is assigned to Germany. What is dragging the first economy of Europe to the bottom?
Back in May, the German Ministry of Economics predicted a slowdown in the country’s GDP growth to 0.2% this year. The forecast was confirmed by the IMF. The situation for such an export-oriented country as Germany is pessimistic. As early as 2021, 40% of the GDP of the Federal Republic of Germany was formed at the expense of export revenues.
For comparison, in France – Germany’s main economic competitor in Europe – this indicator was one and a half times less – only 25%. And the reason for Germany’s export dependence is simple – the German economy is heavily capitalized and produces much more than what is needed for domestic consumption, which forces German capital to seek sales on world markets. If, against the background of globalization, Germany’s exports were decreasing only to China, but they are also decreasing to the USA, Japan, India, and Great Britain.
Basic reason reduction of GDP – reduction of individual consumption due to “still high rates of price growth”. Inflation has forced households to reduce spending on both food and beverages, as well as clothing, shoes, furniture, and cars. The decline in consumer spending was, according to statistical calculations, 1.2% without taking into account the increase in prices, seasonal and calendar factors, but this was enough to put the entire economy in the red. At the same time, the investment activity of German enterprises increased, and the volume of exports also increased noticeably.
The second problem of the German economy is the gas needle
The second problem of Germany, besides excessive export orientation, is Moscow’s lobbying. For a long time, the German elites were dismissive of the Ukrainian and Baltic directives about the need to end the partnership with Russia’s Gazprom. To such statements, the leaders could deny that the Ukrainian gas transportation system was involved in this cooperation, which brought profit to Ukraine as well.
Germany has cooperated with Gazprom since the 1970s. This cooperation included the supply of natural gas and the construction of infrastructure for its transportation and storage. In 2017, the then Chancellor of Germany Schröder was invited to the Supervisory Board of Gazprom. It was an intriguing situation: Ukraine was denied NATO membership because of its corruption, while the chancellor of Europe’s largest economy received financial rewards from Gazprom and promoted its interests, sacrificing the interests of his own state.
In 2022, due to the war in Ukraine and sanctions against Russia, Germany nationalized a former subsidiary of Gazprom, Gazprom Germania, to ensure its energy security.
Germany could in advance build terminals for storage of liquefied gas purchased in other countries, thereby reducing its dependence on Russian blue fuel. But such terminals appeared only in 2022.
In essence, Berlin voluntarily placed itself on the gas needle of Moscow and among the world’s largest economies, it did so most actively. Even Russia’s business partner, China, took care to diversify its energy independence, so as not to fall into complete dependence on Russian gas. Apparently, it is organic to the Chinese mentality – to avoid any dependence on someone who is stronger.
Energy resources are the lifeblood of the modern economy. After a full-scale invasion, a sharp rise in the price of gas on the EU market led to higher prices for electricity and other goods, leading to record inflation in the EU. Thus, in 2023, inflation in the Eurozone amounted to 5.4%. It is forecasted, that in 2024 this indicator will decrease to 2.7%. In August 2024 annual inflation in the eurozone has already decreased to 2.2%, compared to 5.2% in August 2023.
The growth of inflation forced the European Central Bank to raise the discount rate. The EU’s economy, which was already suffering from underflows, also received an increase in the price of loans and a drop in investment activity.
The third reason for the stagnation of the German economy is green populism
Industrial production requires powerful energy generation. The effort of a civilized country to switch to renewable energy sources is quite understandable. Energy transition is a typical economic process that occurs during the discovery of new sources of energy or technologies for the exploitation of these sources. But such a transition should be gradual and balanced. This process has been going on for decades, and German society and authorities decided to do it unrealistically quickly, ignoring the warnings of scientists and practitioners. In addition, the solar energy development initiative requires a lot of investment. And here another problem opens – dependence on China.
Pedaling the speed of Germany’s energy transition is also associated with the rejection of nuclear energy after the accident at the Fukushima nuclear power plant in 2011. The decision was part of a wider strategy to transition to renewable energy sources known as the “Energiewende”. The last three nuclear power plants were closed on April 15, 2023.
Formal reasons for closure – environmental and safety risks associated with nuclear energy, as well as the desire to reduce dependence on nuclear fuel and move to more sustainable energy sources. At the same time, France is the leader in nuclear energy in the Eurozone. Even the accident at Fukushima did not force her to abandon the development of the industry.
In accordance with social surveys, almost two-thirds of Germans were against such cutting of the Gordian knot of the energy issue as closing all nuclear power plants.
But, probably, the abandonment of nuclear energy was a purely political decision. Chancellor Schroeder was ready to return to coal power, not to revive nuclear power. As a result, electricity in Germany is very expensive, which increases the cost of goods and services.
Among the recent force majeure circumstances that are likely to hit the German economy is the fact that the German concern BMW is recalling 1.5 million cars due to malfunctions in the braking system. The company warned that recalling so many cars would cut into its profits this year, adding to the industrial crisis in Europe’s biggest economy. The company’s shares fell 9.6%, the biggest drop since March 2020. The automaker now sees revenue well below the $18.9 billion it reported a year ago, and forecasts that its operating margin for auto production will be just 6%.
What can make Germany a phoenix rising from the ashes
Some politicians believe that the revival of the German economy can be facilitated by focusing on the defense industry. For example, German Defense Minister Boris Pistorius noted, that Europe should actively increase production in the defense sector, because in the future it will not be able to rely on the United States to guarantee security. He emphasized that Europe needs to strengthen its commitments to ensure security on the continent.
In addition, the German government is working on strategy modernization of the defense industry, which includes speeding up the approval of the construction of plants for the production of weapons. This can be an important step for the economic revival of the country.
Directions of economic cooperation between Germany and Ukraine
Germany should increase economic relations with other countries, including Ukraine, which has unique experience in the production of armored vehicles and weapons, as well as many resources necessary for the implementation of the energy transition, such as uranium, lithium, gas, etc.
Under the conditions of continued dependence on Russian gas for some time, Germany could use gas storage facilities available in Ukraine to store gas purchased at an acceptable price during the season from third countries other than Russia. In addition, Germany is aware that Ukraine is a useful market. Thus, the Ukrainian Railways has a significant wear and tear of the locomotive fleet, which can meet the demand for hundreds of locomotives. Long-term contracts for the supply and maintenance of these vehicles can provide stability and predictability for both parties.
So, money needs to be freed up and directed to armaments and reindustrialization, as well as expanding domestic demand, making electricity cheaper and the pace of the green transition viable. In addition, Germany should rein in the destructive forces operating in the EU, first of all, the pro-Russian structures of Hungary and Slovakia, which accuse Ukraine of being a puppeteer and are destructive to European integrity.
Tatyana Morarash
