MNI INTERVIEW: VW Crisis Should Be Wake-Up Call - IWK's Demary
MNI (LONDON) - The plight of car maker Volkswagen, which cancelled a job security deal and is threatening to lay off thousands of workers to cut costs, is indicative of a broader crisis trapping Germany in a cycle of under-investment and low growth, a leading economist told MNI.
“We are experiencing something of a deindustrialisation trend here in Germany,” Markus Demary, senior economist for monetary policy and financial markets at IW Koeln said. “At the same time, we still rely a lot on the industrial sector and automotive production because we don’t have large tech companies. Therefore, if Volkswagen is in crisis it’s an indicator of a wider structural problem.”
The decision by Germany’s largest private employer to consider closing factories, move to a four-day week and open negotiations with labour unions over future work guarantees has sent shockwaves throughout the country in recent weeks.
Like many German auto firms, VW is struggling to come to terms with the rise of electric vehicles in the face of Chinese competition. Companies in energy-intensive sectors such as cars and chemicals have complained for some time that gas and electricity prices remain too high, with some increasingly diverting investment abroad.
Demary cited the example of Heidelberg Materials, a cement producer.
“Cement is very CO2 intensive, and they have a facility now which uses carbon capture to produce it in a more climate neutral way. But that plant is in Norway, not Germany. There is some essential risk that industry is moving to countries with better framework conditions.” (See MNI INTERVIEW: Structural Drags On German Growth-ifo's Wohlrabe)
MUDDLED POLICYMAKING
VW’s problems have been compounded by a muddled approach to policymaking at the top of government, Demary said, with significant knock-on effects for hundreds of smaller enterprises tied into bigger firms’ supply chains.
“On the one hand, the EU says that the internal combustion engine has a natural end date. German politicians say ‘No, that's not true. We like the combustion engine.’ Intermediate producers for parts needed for combustion engines but not in electric cars are also left unsure as to what the future will look like.”
Companies need better guidance with reliable framework conditions to transform their business models, he said.
“Meanwhile, we can already see that a lot of Chinese electric cars are on the road here in Germany. So there really is intense competition from new competitors of a kind we have not seen in a long time.”
After years of stability Germany’s labour market now looks “weaker, not as robust,” Demary said, with unemployment likely to increase and analysis from the Halle Institute for Economic Research (IWH Halle) suggesting that the number of firms and partnerships going bust will go up again in September and October after a slight fall last month. (See MNI INTERVIEW: Prices Key To Puzzle Of Weak German Consumption)
Fear of unemployment will in turn trigger lower household demand for goods and services, Demary said, a trend which already goes some way to explaining weak consumer expectations.
INFRASTRUCTURE UNDER-INVESTMENT
German GDP fell 0.1% between Q1 and Q2 2024, and was flat compared with the same quarter a year earlier, having already declined by 0.3% in 2023 compared with the previous year. Experts suggest there is little scope for improvement over the medium-term. (See MNI INTERVIEW: German Growth Weak Despite Wages- GCEE's Werding)
Above all, Demary said, Germany needs investment in modern infrastructure and new technologies on the grand scale envisaged by former ECB president Mario Draghi in his recently-published report on improving European competitiveness.
“We can already see such investments in Europe and elsewhere. Norway and Iceland are investing in carbon capture and storage. Italy, too - but not Germany. Germany is still discussing whether it is or isn’t allowed; whether to build a pipeline or not. Other countries are simply adapting better to the new environment.”