MNI INTERVIEW: Losing Russia Gas To Sap German Competitiveness

German industry faces losing ground to European competitors with more plentiful supplies of renewable energy and as it loses access to cheap Russian gas, a former government adviser on energy policy who is one of the country’s leading economists told MNI.

Even once the war in Ukraine ends, energy prices will settle at higher levels, rendering some activities in Germany’s highly export-focused manufacturing sector unviable at a time when Europe is transitioning to a greener industrial model, Jens Suedekum, professor of International Economics at Heinrich-Heine University Dusseldorf a member of the Federal Ministry for the Economy and Energy's Advisory Board, said in an interview.

“Especially in the manufacturing sector, it might be argued that other European countries have better natural conditions; that business models will move to areas within Europe where green energy is just cheaper,” he said. “So, for example, steel production to northern Sweden. Not to India and China, but Sweden.”

Costs may prove too high in Germany, where companies face an expensive transition to renewable energy, with liquefied natural gas replacing Russian natural gas in the interim, said Suedekum, who before the war in Ukraine had been optimistic that Germany might boom following the end of the Covid pandemic. (See MNI INTERVIEW: Germany Nears "Roaring 20s" As Debt Taboo Fades)

“Some business models will no longer be possible in Germany,” he said. “If they don’t manage the transition phase they will lose global demand.”

UNCERTAINTY HIGH

Germany’s leading economic institutes see the economy growing by around 2.7% this year, though uncertainty is elevated given the war in Ukraine and the forecast could be revised down by the autumn, with two consecutive quarters of contraction a realistic scenario, he said.

While Suedekum favours a large-scale EU fund proportionally allocated between member states to assist with the cost of the energy transition, along the lines of the NextGenerationEU fund unveiled in response to the Covid pandemic, he said that the German government should also come up with comprehensive relief measures given the possibility that Russian gas imports could be cut off soon.

“What we've seen so far is - I wouldn't call it peanuts, but it's a very small scale programme, and an internally inconsistent programme,” he said. “The cap on fuel is exactly the opposite of what would be needed, but reflects disagreements within the coalition. I'm sure we will have to see at least one other, if not more packages, for households and also for industry.”

MIS-TIMED AUSTERITY

Additional danger comes from the urge - expressed by Finance Minister Christian Lindner in particular - to bring public spending back in line with the so-called ‘debt-brake’ next year. Among arguments for doing so is a projected EUR250 billion increase in tax revenue between now and 2026. However, much of the extra cash is attributable to higher prices, while the cost of government spending has increased accordingly, Suedekum pointed out.

“I see real danger that eventually we will return to this discussion of a slight move back to austerity; to what we have to cut now that we had all these expensive redemption packages, first for COVID, then for high energy costs, so now we have to return to a more austere fiscal stance,” he said.

Arguing that there are still very few signs of a wage-price spiral in Europe or in Germany, where some politicians have recently argued that rising inflation is also being driven by demographic changes, Suedekum also sounded a note of caution to the European Central Bank, which appears set to hike rates at least twice this year.

“I would say we have to live through the supply side-inflation [affecting Europe] and avoid hitting the brakes. Choking off demand by interest rate hikes would be the wrong therapy. The big danger is that we're hitting the brakes too much; that we will enter a stagflation scenario initiated by the ECB.”