May 30, 2023 - 1:45pm
Last week Germany announced that, after the government statistics agency revised its recent GDP figures, it was clear that the country was in recession. In recent history it has tended to hold up well as the global economy softened relative to some of Europe’s weaker economies. But this time it seems that Germany is leading the pack into recession.
This is because the recession that is currently looming over Europe is fundamentally different from previous iterations. The coming recession is no simple turning of the business cycle. Instead, it could be the beginning of the deindustrialisation of the European economy, which no longer has access to cheap Russian energy.
Since chatter about deindustrialisation started last year, there has been much confusion on the matter. Some appeared to think that deindustrialisation would mean the instantaneous closure of energy-starved European factories and mass layoffs. Others assumed that the crisis was over because energy futures prices have fallen in recent months.
Deindustrialisation is not something that happens overnight. Rather, it is a gradual process whereby European industry becomes less competitive on the global market, as higher energy costs are passed through in the form of higher prices. We saw something similar happen in Britain in the 1990s, as many factories shut down and few reopened. But the potential deindustrialisation of Europe will probably be more rapid than the British example.
As for energy prices returning to normal, this seems unlikely. Last week the head of Britain’s energy regulator admitted that energy bills were unlikely to fall to pre-crisis levels for at least two years. By all accounts, the regulator is likely being optimistic. Qatar’s energy minister warned around the same time that the “worst is yet to come” for European oil and gas shortages. He would probably know, since Europe is relying heavily on Qatari LNG imports for their energy supplies.
Quantifying the impact of deindustrialisation at this early stage is quite difficult and a clear picture will only emerge in retrospect. But there are already some very notable trends in the data. The German services sector is booming while the manufacturing sector is cratering. This divergence explains why the German economy is currently experiencing only a very shallow or even “technical” recession.
Bluntly, the current contraction we are seeing in Germany’s manufacturing sector relative to its services sector is associated with a much larger downturn — something along the lines of what followed the 2008 financial crisis. Today we are seeing a very large relative contraction in the manufacturing sector that cannot be explained by the relatively modest weakening of the economy.
Put differently: the current manufacturing crunch in Germany is not primarily being driven by Germany’s slack economy. This means that something else is to blame and that something is likely the high energy prices putting enormous pressure on German manufacturing.
German and European deindustrialisation is not yet certain. There is a chance that, after the war in Ukraine is over, the Europeans turn once again to Russia for their energy needs. But right now, in the current diplomatic environment, this seems unlikely. If the current trajectory is followed for the next five to 10 years, however, it seems fairly certain that Germany and Europe will deindustrialise to a significant extent.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
philippilk
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeEuropean de-industrialisation has been happening for as long as UK de-industrialisation. Consumer electronics: competely gone. Electronics and computing: mostly gone. Telecoms: significantly smaller. Metals: dramatically shrunk. Shipbuilding: now tiny. Textiles: mostly gone. Chemicals: stagnant in a world of rising production. European automotive market share: in decline in the face of Asian imports since the 1970s. Etc. etc.
German manufacturing had a partial stay of execution (and it was only partial – see above) because:
1. Mercantalist policies of its government, for example forcing consumers to pay higher electricity costs to subsidise industrial electricity and 500 euro jobs. Those policies have been slowly unwound by EU policy makers over the last 2 decades.
2. Large specialisation in machine tools, providing the tools for the 1st and 2nd wave industrialisation of Asia. That industrialisation is now largely complete, and it seeded competitors to German industry. Earlier failures in innovation mean German industry does not have equivalent specialisation in modern equivalents such as semiconductor fabbing to supply the 3rd and 4th wave of Asian industrialisation.
3. Strong brands, securing existing market share. Unfortunately, this does not work in new markets for new technologies, e.g., EVs.
The rot has been present for decades, but only when the last of the trees start falling do you see the forest has gone. Much like the collapse of coal mining in the UK which is perceived to be a 1980s phenomena but in fact started in the late 1960s.
None of this takes away from the fact that *relative* high energy costs are the immediate and existential threat to manufacturing in Europe. And it is important to use the word *relative* – the UK and EU have had almost identical energy policies for 30 years and this has created a huge differential with North America and Asia. Those high costs impact short term profitability and survivial, and erode medium and long term investment needed to sustain industry. It is obvious to anyone wishing to build a chemical plant that it will now never be economic in the EU or UK because energy policy is explicitly designed to stop such investment, as too are social, environmental, tax and education policies.
You can’t have a policy of chopping noses off and complain that blood on the floor is an unexpected consequence. The UK and EU have a deliberate policy of deindustrialisation to achieve Net Zero. The only issue is no one has explained this to the voters or sought democratic consent. But those driving this change know that doesn’t matter: once an industry is gone voters getting angry won’t bring the industry back. Which is precisely why “leading beyond authority” is how the terrible decline in European living standards necessary for Net Zero will be achieved. The last step of which will be closing European consumers’ access to Asian goods on the pre-text of carbon emissions or confected global crises. Then, with no home industry and no access to Asian industry, Europe’s ordinary people will be left with no option but to survive a Net Zero existence.
A brave new no-industrial future awaits those who choose to come to Europe or remain in Europe.
We should all pray for a Trump victory in 2024. It’s the last hope for a return to sane energy policy in the West.
‘Drill baby, drill.’
And Starmer proposes to ban further drilling in the North Sea. That alone should loose him the election
And Starmer proposes to ban further drilling in the North Sea. That alone should loose him the election
One of the best comments I’ve ever read on this forum. Deindustrialization has been happening for decades. Energy is the single most important driver of economic growth. When you purposely cripple yourself in this regard, there is no workaround.
Seconded
Seconded
Excellent comment.
Great insights, thanks!
Excellent comment. Nothing I can add. You’ve saved me trying to write something.
Great analysis of long term trends but I wish you could try to explain why Western leaders would follow the path you describe?
What is in it for them?
I am not quite convinced that some of the problems you outline are result of some long term plan.
For example Europe stop innovating at scale long time ago.
Most industries like chemicals and pharma are living on past glories.
It was mad to help industrialise your likely competitors like China but my feeling is that no one expected China to develop so quickly and allure of short term profits took precedence over long term interests.
Degrowth Agenda?
Degrowth Agenda?
We should all pray for a Trump victory in 2024. It’s the last hope for a return to sane energy policy in the West.
‘Drill baby, drill.’
One of the best comments I’ve ever read on this forum. Deindustrialization has been happening for decades. Energy is the single most important driver of economic growth. When you purposely cripple yourself in this regard, there is no workaround.
Excellent comment.
Great insights, thanks!
Excellent comment. Nothing I can add. You’ve saved me trying to write something.
Great analysis of long term trends but I wish you could try to explain why Western leaders would follow the path you describe?
What is in it for them?
I am not quite convinced that some of the problems you outline are result of some long term plan.
For example Europe stop innovating at scale long time ago.
Most industries like chemicals and pharma are living on past glories.
It was mad to help industrialise your likely competitors like China but my feeling is that no one expected China to develop so quickly and allure of short term profits took precedence over long term interests.
European de-industrialisation has been happening for as long as UK de-industrialisation. Consumer electronics: competely gone. Electronics and computing: mostly gone. Telecoms: significantly smaller. Metals: dramatically shrunk. Shipbuilding: now tiny. Textiles: mostly gone. Chemicals: stagnant in a world of rising production. European automotive market share: in decline in the face of Asian imports since the 1970s. Etc. etc.
German manufacturing had a partial stay of execution (and it was only partial – see above) because:
1. Mercantalist policies of its government, for example forcing consumers to pay higher electricity costs to subsidise industrial electricity and 500 euro jobs. Those policies have been slowly unwound by EU policy makers over the last 2 decades.
2. Large specialisation in machine tools, providing the tools for the 1st and 2nd wave industrialisation of Asia. That industrialisation is now largely complete, and it seeded competitors to German industry. Earlier failures in innovation mean German industry does not have equivalent specialisation in modern equivalents such as semiconductor fabbing to supply the 3rd and 4th wave of Asian industrialisation.
3. Strong brands, securing existing market share. Unfortunately, this does not work in new markets for new technologies, e.g., EVs.
The rot has been present for decades, but only when the last of the trees start falling do you see the forest has gone. Much like the collapse of coal mining in the UK which is perceived to be a 1980s phenomena but in fact started in the late 1960s.
None of this takes away from the fact that *relative* high energy costs are the immediate and existential threat to manufacturing in Europe. And it is important to use the word *relative* – the UK and EU have had almost identical energy policies for 30 years and this has created a huge differential with North America and Asia. Those high costs impact short term profitability and survivial, and erode medium and long term investment needed to sustain industry. It is obvious to anyone wishing to build a chemical plant that it will now never be economic in the EU or UK because energy policy is explicitly designed to stop such investment, as too are social, environmental, tax and education policies.
You can’t have a policy of chopping noses off and complain that blood on the floor is an unexpected consequence. The UK and EU have a deliberate policy of deindustrialisation to achieve Net Zero. The only issue is no one has explained this to the voters or sought democratic consent. But those driving this change know that doesn’t matter: once an industry is gone voters getting angry won’t bring the industry back. Which is precisely why “leading beyond authority” is how the terrible decline in European living standards necessary for Net Zero will be achieved. The last step of which will be closing European consumers’ access to Asian goods on the pre-text of carbon emissions or confected global crises. Then, with no home industry and no access to Asian industry, Europe’s ordinary people will be left with no option but to survive a Net Zero existence.
A brave new no-industrial future awaits those who choose to come to Europe or remain in Europe.
Living in Germany, it’s astonishing how many people here don’t seem bothered by the fact that their country is experiencing deindustrialisation. They’ll sneer at the UK over Brexit while ignoring the very real problems they are experincing themselves.
Germany’s mittelstand gets it.
Germany’s mittelstand gets it.
Living in Germany, it’s astonishing how many people here don’t seem bothered by the fact that their country is experiencing deindustrialisation. They’ll sneer at the UK over Brexit while ignoring the very real problems they are experincing themselves.
It’s not like something just happens overnight. Like suddenly you have a big pipeline that gives you cheap energy, then suddenly it’s all gone…
This made me chuckle.
This made me chuckle.
It’s not like something just happens overnight. Like suddenly you have a big pipeline that gives you cheap energy, then suddenly it’s all gone…
Maybe Europe really does need to go down this path. Let it all fall in a heap. Let the countries go broke, let the welfare system fail. Let Asia and the Middle East rise back to their former glories.
What will be the end result? Mass migration into Europe will stop, then reverse. People will not come when the welfare tap is turned off. The extortion racket will stop too.
Those that remain will probably have to live with a more authoritarian government. Better that than to be constantly told that you are responsible for all the evils in the world. We might even get the extremely lucrative indigenous status in Europe if we become so poor.
The bread baskets of Eastern Europe, Central Asia and Africa are a much better prize than a grey wet has been that is Western Europe.
Become so poor that you vanish. A cunning plan indeed – worthy of Baldrick.
Baldrick: Well, I have a cunning plan, sir.
Edmund: All right, Baldrick — for old time’s sake.
Baldrick: I have a plan, sir.
Edmund: Really, Baldrick? A cunning and subtle one?
Baldrick: Yes, sir.
Edmund: As cunning as a fox who’s just been appointed Professor of Cunning at Oxford University?
Baldrick: Yes, sir.
Voice: On the signal, company will advance!
Edmund: Well, I’m afraid it’ll have to wait. Whatever it was, I’m sure it was better than my plan to get out of this by pretending to be mad. I mean, who would have noticed another madman round here?
Love Blackadder!
Love Blackadder!
Baldrick: Well, I have a cunning plan, sir.
Edmund: All right, Baldrick — for old time’s sake.
Baldrick: I have a plan, sir.
Edmund: Really, Baldrick? A cunning and subtle one?
Baldrick: Yes, sir.
Edmund: As cunning as a fox who’s just been appointed Professor of Cunning at Oxford University?
Baldrick: Yes, sir.
Voice: On the signal, company will advance!
Edmund: Well, I’m afraid it’ll have to wait. Whatever it was, I’m sure it was better than my plan to get out of this by pretending to be mad. I mean, who would have noticed another madman round here?
Another de facto Putin fan-boy, and 18 nod-alongs.
Become so poor that you vanish. A cunning plan indeed – worthy of Baldrick.
Another de facto Putin fan-boy, and 18 nod-alongs.
Maybe Europe really does need to go down this path. Let it all fall in a heap. Let the countries go broke, let the welfare system fail. Let Asia and the Middle East rise back to their former glories.
What will be the end result? Mass migration into Europe will stop, then reverse. People will not come when the welfare tap is turned off. The extortion racket will stop too.
Those that remain will probably have to live with a more authoritarian government. Better that than to be constantly told that you are responsible for all the evils in the world. We might even get the extremely lucrative indigenous status in Europe if we become so poor.
The bread baskets of Eastern Europe, Central Asia and Africa are a much better prize than a grey wet has been that is Western Europe.
I can’t believe that Germany has done this to itself. While the path to Netzero is laudable, no-one expected this to happen overnight and that the change would be gradual and orderly.
The NordStream destruction has obliterated this planning, with narry a complaint from the German leadership. It would appear that they were complicit in the destruction of their economic and industrial base.
There seem to be some very surprising moves in Germany. They have been extremely quick to build LNG plants – well done them. They were insane to shut down Nuclear. They are now madly digging up Lignite. The utter lunacy of the rushed moves to Netzero without mitigation of the risk of unexpected global events has really been exposed. Who could ever imagine undoing Brexit with this dog’s dinner on the continent?
More like the road to Hell is paved with good intentions!
If you look at current oil and gas prices and compare to historical trends they are not that high.
So it has nothing to do with Nordstream destruction.
Main problem is shutting down nuclear and mad drive for net zero.
There seem to be some very surprising moves in Germany. They have been extremely quick to build LNG plants – well done them. They were insane to shut down Nuclear. They are now madly digging up Lignite. The utter lunacy of the rushed moves to Netzero without mitigation of the risk of unexpected global events has really been exposed. Who could ever imagine undoing Brexit with this dog’s dinner on the continent?
More like the road to Hell is paved with good intentions!
If you look at current oil and gas prices and compare to historical trends they are not that high.
So it has nothing to do with Nordstream destruction.
Main problem is shutting down nuclear and mad drive for net zero.
I can’t believe that Germany has done this to itself. While the path to Netzero is laudable, no-one expected this to happen overnight and that the change would be gradual and orderly.
The NordStream destruction has obliterated this planning, with narry a complaint from the German leadership. It would appear that they were complicit in the destruction of their economic and industrial base.
The slow COVID rebound in China is not helping given the large trade relationship between the two countries. The increasing amount of EVs made in China could also be a factor as the German car makers lose some sales there
The slow COVID rebound in China is not helping given the large trade relationship between the two countries. The increasing amount of EVs made in China could also be a factor as the German car makers lose some sales there
There is no need for advanced countries to “deindustrialize” just because it’s now cheaper to make steel in Asia. Germany could replace its steel mills with semiconductor fabs that could provide more and still better jobs.
But no – industrialization requires reliable baseload power, and Germany has opted to transition from nuclear to lignite, which is too toxic and carbon-intensive to burn in the quantities that would be needed.
There is no need for advanced countries to “deindustrialize” just because it’s now cheaper to make steel in Asia. Germany could replace its steel mills with semiconductor fabs that could provide more and still better jobs.
But no – industrialization requires reliable baseload power, and Germany has opted to transition from nuclear to lignite, which is too toxic and carbon-intensive to burn in the quantities that would be needed.
The problem is not only with the energy market but with the anti-industrial policies of EU in general and Germany in particular, which are rooted in group thinking about the causes, and consequences, of the climate change. I recently had a chance to discuss the topic of energy with a sociology college professor from Stuttgart. I asked her about the recent report which states that if Europe implements its plan to go to net zero by 2050 without nuclear energy it will have to completely forgo food production. She answered that one can place solar panels vertically and thus allow the fields to be used for agriculture to continue. She also believed that France’s nuclear reactors are mostly idle because the rivers got to hot due to global warming to provide cooling. She further thought that one can produce solar electricity in Namibia deserts, use that to produce hydrogen which could satisfy Europe’s energy needs. This is the nonsense most German voters believe in, which in one way or another shapes Germany industrial policies.
Wow.I know I shouldn’t be surprised, but the ignorance of the so-called educated class always shocks me.
Wow.I know I shouldn’t be surprised, but the ignorance of the so-called educated class always shocks me.
The problem is not only with the energy market but with the anti-industrial policies of EU in general and Germany in particular, which are rooted in group thinking about the causes, and consequences, of the climate change. I recently had a chance to discuss the topic of energy with a sociology college professor from Stuttgart. I asked her about the recent report which states that if Europe implements its plan to go to net zero by 2050 without nuclear energy it will have to completely forgo food production. She answered that one can place solar panels vertically and thus allow the fields to be used for agriculture to continue. She also believed that France’s nuclear reactors are mostly idle because the rivers got to hot due to global warming to provide cooling. She further thought that one can produce solar electricity in Namibia deserts, use that to produce hydrogen which could satisfy Europe’s energy needs. This is the nonsense most German voters believe in, which in one way or another shapes Germany industrial policies.
It is nothing that after every difficult time there comes a good time. Good luck
Pilkington at it again – “see, what bad things happen when you are nasty to the Orcs”.
Pilkington at it again – “see, what bad things happen when you are nasty to the Orcs”.