Germany got rich on exports and cheap Russian gas. Now it's in trouble.
The Washington Post October 14, 2022
LUDWIGSHAFEN, Germany - Larger than Lower Manhattan, the sprawling BASF chemical plant on the Rhine River is a symbol of both German industrial might and how much Europe's largest economy has to lose in its worst energy crisis in generations.
On any given day, the plant uses more power than Switzerland as it churns out everything from rubber for sneakers to coatings for cars. But the fallout from the war in Ukraine is exacting a high price. During the second quarter of the year alone, sky-high natural gas prices jolted the company's energy bill up by the equivalent of $776 million.
To contain costs, the plant has begun streamlining operations and cutting high-energy production of ammonia for fertilizers - compounding a fertilizer shortage on the continent that is threatening the global food supply. Should energy availability in Germany turn critical in the coming months, Chief Executive Martin Brudermüller has warned, the company may have to shift more production to "plants outside of Europe."
"We have a war on our doorstep in Europe and an unprecedented energy crisis that is threatening the very existence of Europe's industrial production," Brudermüller told chemical industry executives last week. He added, "many of our value chains are breaking up as we speak."
Russia's revival of war in Europe has prompted seismic shifts in Germany. In the early days of the invasion, the German government moved away from a posture of military restraint adopted in the shadow of World War II. Officials announced a dramatic increase of defense spending and dropped opposition to weapons deliveries to conflict zones.
Now, fallout from the war is forcing a further reassessment of modern Germany's foundations. The nation grew prosperous, establishing itself as the economic engine of Europe and the world's fourth largest economy, by relying on the twin pillars of cheap Russian energy and manufacturing exports. But as the German economy sputters - threatening to drag down Europe with it - the economic model that gave rise to Germany, Inc. has been thrown into doubt.
"We were too dependent on one country - Russia - and we're paying for that now," said Claudia Kemfert, one of Germany's leading energy experts. "Germany has to change, and we've known that for a long time now. This business model is not really sustainable."
The souring of western ties with Moscow has had outsize impact here. Before the war, Russia supplied more than half of the natural gas used in Germany - for industrial production, to heat homes and to generate electricity. Now, with the main pipeline from Russia shut off, Germany has had to seek other suppliers, and is paying 7 to 10 times last year's prices.
At the same time, the country is feeling the ramifications of its reliance on industrial exports. Germany is the world's third-biggest exporter, behind the United States. But manufacturing makes up roughly 20 percent of the economy, compared with about 11 percent in the United States. That's made Germany particularly vulnerable to turbulence in world trade and energy prices.
Already, energy price shocks, layered on top of pandemic-related supply-chain disruptions and a softening of global demand, have eroded the country's legendary trade surplus. Economists say Germany is poised for recession next year - the International Monetary Fund predicts it could suffer the worst hit among major economies other than Russia.
But the ripple effects would be felt far beyond Germany, especially if a recession coincides with energy shortages.
A German slowdown would put pressure on a single currency of the euro zone. Some economists are predicting it could push the euro below parity with the dollar for a sustained period.
Especially hurt would be countries in Eastern Europe that house suppliers for major German manufacturers, and whose economies are closely linked to Europe's juggernaut via trade.
Production delays in Germany could also compound pandemic-related global supply-chain woes, especially for finished products such as cars, medical equipment and the other specialized industrial products that Germany is known for.
"If we have a recession in Germany, and I think this is unavoidable now, that will impact the broader European economy and the rest of the world," said Emily Mansfield, Europe economist for the Economist Intelligence Unit.
For the time being, Germany's energy reserves are brimming with boosted imports from Norway and the Netherlands. France, too, began sharing its gas with Germany through a newly modified pipeline on Thursday. A terminal to receive shipments of Liquefied Natural Gas from further afield is due to open next year. Germany is also burning more coal and oil.
Meanwhile, a nation that once scolded other countries in Europe for profligate spending is - to the chagrin of its neighbors - deploying hundreds of billions of euros to keep its economy afloat and shield its companies and consumers from high energy prices, a solution critics say could fan the fires of already-high European inflation.
But fully replacing Russian gas imports will be a costly and complicated process that might leave energy prices elevated in Germany for years, and sharply higher for at least the next 12 months. A particularly cold winter, analysts say, could spark shortages as soon as early next year.
"Even if the economy in general is relieved by the price brake," said Peter Adrian, president of the Association of German Chambers of Industry and Commerce, "there are two economically challenging winters ahead of companies. Gas conservation and big business efforts remain central to getting through the energy crisis."
Some companies have been cycling down production of energy-intensive goods like ammonia and aluminum, turning to imports or relocating production. Other firms are doubling up on inventories, in anticipation of shortages of everything from glass windshields for BMW convertibles to bottles for German beer.
Speira, a German aluminum giant that makes processed metals for fuel-efficient cars, beverage packaging and construction, made the hard decision last month to slash in-house aluminum production by 50 percent at its Rhinework plant in the city of Nuess. Natural gas prices had risen so high that one ton of aluminum was selling for only one-third of the price of the energy needed to make it.
"This cannot be sustained," said Volker Backs, the company's managing director. "It is impossible. That not only applies to aluminum. That applies for the whole of German industry. There is currently no energy-intensive industry which would state that the current [conditions] are sufficient. Nobody."
Citing the "current energy cost environment in Europe," U.S.-based Trinseo last month announced the potential closure of a chemical plant in Boehlen, Germany, after losing $30 million over the last four quarters. Also in September, Volkswagen Group warned some of its component makers that it might consider moving production out of Germany in the medium term if gas shortages persisted.
"Politicians must also curb the currently uncontrolled explosion in gas and electricity prices," Thomas Steg, the company's head of external relations, told reporters. "Otherwise, small- and medium-sized energy-intensive companies in particular will have major problems in the supply chain and will have to reduce or stop production."
Asked this week whether the government's proposed interventions alleviated concerns, the company said in a statement to The Washington Post that capping the price of gas would be helpful to companies for "planning security" and "safeguarding production and employment."
"A final assessment will only be possible once the concrete implementation of the measures by the German government and the Bundestag has been determined," the company said, adding that "the Volkswagen Group, with its brands and at all locations, will exhaust the possibilities to achieve significant savings in gas and energy consumption in the coming months."
Some countries criticized by Berlin during the debt crisis of the past decade are watching Germany's woes with a measure of schadenfreude.
"Unlike other countries, Spaniards have not lived beyond their means from an energy point of view," Spain's energy minister Teresa Ribera said in July, parroting a phrase German officials once wielded to describe freewheeling government spending in Spain, Greece, Portugal and Italy.
To an extent, Germany's predicament recalls the late 1990s and early 2000s, a period of high unemployment and low growth when the country was dubbed the "sick man of Europe." There are differences. Germany today has labor shortages and one of the lowest unemployment rates in Europe. But solving the energy problem may prove just as difficult as the hard-won labor and work contract reforms that helped clear the path for Germany to bloom by the mid-2000s.
And Germany's difficulties could run beyond energy, to Berlin's close trading ties with China. The Chinese economy has already been slowing. And some experts fear that market could become as poisoned as Russia's in the event of a future showdown with the West over Taiwan.
The German government last month announced it would develop a new trade policy that reduced its reliance on Chinese raw materials, and components such as semiconductors, in what officials described as a break with "naivete."
"Russian gas was one mistake," Kemfert said. "Our reliance on China could be our next big problem."
Yet the industrious Germans also see a silver lining, saying the energy crisis has crystallized the folly of overreliance on Russian gas, and the pain of weaning off it now will pay off in the medium term, by giving the country and its companies a stronger, more secure and greener energy mix.
In central Germany, for instance, pharmaceutical giant Boehringer Ingelheim is putting the finishing touches on a massive new biomass plant that will generate 80 percent of the factory's energy needs next year, mostly by burning old furniture.
A $200-million investment made before the onset of the current energy crisis, the model of energy self-reliance at the factory is now seen by many German companies as the best solution to the roiling energy crisis now.
"This will make us really independent," said Sabine Nikolaus, the company's Germany head.