Germany Falls Into Deindustrialization, As United States Cheers On

Ever since the beginning of 2022, Germany has been experiencing increasing economic turmoil associated with declining competitiveness of German goods and decreasing attractiveness of the country for domestic and foreign investors. The International Monetary Fund has concluded that Germany was the only advanced economy to shrink in 2023 and predicts that it will be the slowest-growing major economy in 2024. Other accounts predict stagnant growth at best, with negative results highly likely, as this may become the first two-year recession in Germany since the early 2000s.

This is starkly contrasted by the high-quality reputation that has usually been attributed to the “Made in Germany” brand. For most of the 2000s and 2010s, the German economy was synonymous with production of luxury cars and industrial machinery, with the country lavishing in money, as other European countries struggled with debt. This was due to a simple formula – innovative labour force and cheap energy. Ever since the beginning of the COVID-19 pandemic and the Russian military operation in Ukraine, this formula has been slowly falling into obsolescence.

For two decades, Germany was firmly relying on Russia to supply natural gas via the Nord Stream pipelines under the Baltic Sea. In early 2022, Germany imported 55% of its natural gas from Russia, which ensured cheap costs. EU-imposed sanctions on Russian gas imports resulted in the prices of gas nearly doubling compared to the pre-sanction period, with most companies citing rising production costs and the subsequent unviability of the German business model. Additional challenges hit the German manufacturers due to the slowdown of the Chinese economy after several decades of strong economic growth and high demand for German products.

Scholtz and a worker
German Chancellor Olaf Scholtz (R) talks with an employee who works on the assembling of a brake caliper for an electric vehicle during a visit at the plant of Neapco Europe in Duren, Western Germany, August, 2023

This has resulted in a mass exodus of German companies from the country. The German Chamber of Commerce and Industry published the results of the survey, suggesting that 32% of industrial companies plan to relocate, with 16% already completing this process, 11% kicking off the relocation measures, and 5% planning to relocate in the future.

Among notable examples, car manufacturer Volkswagen announced plans to spend over $14.8 billion to build its largest factory to date in Ontario, Canada, and $2 billion for a production plant in South Carolina, US. Chemical giant BASF SE has announced its plans to downsize permanently in Europe and to shift nearly all of its production to the US and China. Siemens has invested over $510 million in its Texas manufacturing plant. Evonik Industries AG has decided to build a new $220 million production facility in Lafayette, Indiana.

This huge exodus of manufacturing from Germany to the United States is boosted by the Inflation Reduction Act, which has been one of the biggest pieces of environmental legislation in the history of the US. The point of contention lies in the fact that the United States pursues climate policy through extensive subsidies that are accessible to European companies only to a limited extent. For instance, new electric vehicle tax credits for passenger cars only apply to those vehicles that have been produced inside the United States. Thus, more German manufacturers of these cars are inclined to shift their production to the US rather than produce the cars in Europe and export them to America.

The chemical industry is also subject to stress, as more and more companies are looking for incentives abroad. Chairman of the Board of Executive Directors of BASF SE Martin Brudermüller summed up the current situation in the German economy as follows: “The significant increase in natural gas and power prices is putting pressure on chemical value chains. Moreover, uncertainties due to the enormous number of regulations planned by the EU are weighing on the chemical industry. These challenging framework conditions in Europe endanger the international competitiveness of European producers and force us to adapt our cost structures as quickly as possible and also permanently. We, as a company, must act now. We are looking at incentives that come with the [US] Inflation Reduction Act”.

Germany must act fast to counteract American protectionist policies in order to save its manufacturing. The US Rust Belt and Britain’s Midlands are just some of the historical examples of thriving industrial hubs that collapsed overnight as their competitiveness declined. Germany and subsequently, the whole of Europe may face a similar fate in the future.

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    One Comment
    1. Patrick B. Ludwig

      Not with the current “traffic light” Government:

      The current finance minister of Germany – a Mr. Habeck, by profession an author childrens books – publicly announced that he does not give a toss about Germany.

      The current foreign minister – a Miss Baerbock – is a University dropout and has serious cognitive speech and arithmetic problems and publicly announced that Germany was at war with Russia.

      Another politician – a certain Miss Lang – is “curvy”, to be kind and say the least – styles herself as dietary expert and lectures the public on the subject.

      The list goes on ….

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