Will gas crisis spell end for 'Made in Germany'?

Berlin, Aug 08: The danger of reading too much into snapshot pieces of economic data is illustrated by Germany's latest export figures.

German exports hit a record level in June according to figures released last week. However, economists say soaring prices and rampant inflation are responsible, rather than German exports being in good health.

Germany is an export behemoth. It is the third-biggest exporter in the world, behind China in first and narrowly behind the US in second place.

However, there is growing anxiety about the extent to which Germany's export-dependent economy has been left exposed by a string of global events in the past few years.

Trade wars and increasing tension between the West and China, the supply shocks of the pandemic and most recently, the war in Ukraine, have all upended the order upon which much of Germany's recent prosperity has been based.

Endgame for Made in Germany?

"I think globally there is no economy that is more exposed to the changes in globalization than Germany," Andreas Nölke, a professor of political science at Goethe University Frankfurt, told DW.

Nölke has written a book titled "Exportism: The German drug" in which he argues that Germany has become addicted to its powerful export base and needs a new economic model to meet the demands of a changed global context.

"Germany was one of the countries that benefited most from the period of globalization that we have seen since 1990 up to and perhaps just after the global financial crisis," he said. "But now you can see the data around globalization is slowly but steadily decreasing. I think Germany is in trouble."

Germany's trade data for May revealed the country's first trade deficit in more than 30 years, meaning it had imported more than it had exported. Carsten Brzeski, economist at ING bank and a longtime German economy analyst, assessed the news in stark terms.

"The war in Ukraine puts an end to the German economic business model as we knew it — a model which was mainly based on cheap energy imports and industrial exports into an increasingly globalized world."

Gas games

While Nölke argues that Germany's export exposure risk has been apparent for years, one of the latest and most pressing threats is the crisis around Russian energy, particularly gas.

Europe's largest economy has been one of the most dependent on Russian energy for decades, but the war has forced a colossal rethink. With the EU rushing to cut back on imports of Russian energy and Russia itself cutting the amount it supplies, many large exporting industries in Germany are wondering how they can survive without the relatively cheap energy they have relied upon for so long.

While much of the focus on the impact of the energy crisis has been on domestic households, German industry could potentially be hugely affected.

A survey of 3,500 companies recently carried out by Germany's Chambers of Industry and Commerce (DIHK) found that 16% were either scaling back production or partially discontinuing business operations due to rising energy prices.

"These are alarming figures," DIHK president Peter Adrian said. "They show how permanently high energy prices are a burden."

Ammonia on the chopping block

The warnings have been getting more and more dire. Commerzbank, one of the biggest German corporate lenders, said last week that the gas crisis could lead to a "severe recession", comparing the consequences to the global financial crisis.

Certain sectors within German industry are particularly energy-intensive. The chemicals sector is the most significant (see graphic below), although around one-third of the nearly 30% energy share it had in 2020 were for raw materials, such as gas, which is used directly to produce certain chemical products.

Other key energy-intensive sectors in Germany include the metals sector, coking and mineral oil production and glass and ceramics. Common to most if not all energy-intensive sectors is that they are major drivers of German exports.

At the start of the crisis, Germany's BASF, the world's largest chemicals group, warned it would have to stop production if natural gas supplies fell to 50% of its requirements.

Last week, the company duly announced it would cut ammonia production due to soaring energy costs, a decision which could have implications for ammonia-dependent sectors such as plastic production, the making of fertilizers and the fizzy drinks industry.

Ammonia production has been cut back before during times of high gas prices and can be replaced by overseas suppliers. However, Nölke sees it as an example of how things may start to change in the long term for German industry.

He also highlights other price-sensitive sectors and exporters as being at major risk of going out of business because of the energy situation, particularly in areas related to steel components.

"I think the best example is the car parts industry and the companies that are producing parts for the big automobile companies," he said. "This is a section of industries that is in deep trouble at the moment."

Russia today, China tomorrow

As severe as the energy crisis is, the existential threat to Germany's export-based economic model comes from many factors, and not just the war in Ukraine and its knock-on effects for global energy markets.

Another major cause for concern is the German business sector's dependence on China, for example. China remains Germany's biggest trade partner — a situation critics say is unacceptable given the deteriorating relations between China and the West, and the risk that decoupling from China becomes a political and economic imperative.

"Clearly at the moment, large parts of German industry...are extremely dependent on the Chinese market. And if there is a big confrontation, there's big trouble for this part of Germany," says Nölke.

The energy crisis is just the latest in a range of threats. For Germany's army of exporting companies, the next few years present a unique challenge: to prove that Made in Germany still refers to products, rather than crises.

Source: DW