1. Possible closure of some VW factories in Germany raises questions about the future of European industry
Earlier this month German automotive giant Volkswagen announced that it was considering closing one of its plants in the country for the first time in the company’s 87-year history. More recently the company has announced that it will stop production at one of its plants in China. Clearly the company is experiencing major problems. None of this is surprising to those who have been following the macroeconomic picture in Germany since the beginning of the Ukraine war in February 2022. In response to the war, the German government made strong commitments to sanctions Russia.
2. Europe’s core problem is that it no longer has access to cheap energy, which has serious consequences for both businesses and consumers
The core problems that Europe, and hence Germany face, is that Europe no longer has access to cheap Russian piped gas, and this is giving rise to increased energy prices. Russia used to be a major provider of raw materials for Germany, especially energy in the form of oil and natural gas. It became clear how the sanctions would do tremendous damage to the German economies after only weeks of being imposed. European natural gas futures, which predict the cost of natural gas, went from around €70 per megawatt-hour before the war to as high as €335 per megawatt-hour in the summer of 2022. Futures prices have since come down but the signal that they were sending is clear: after the war and the sanctions, energy prices in Europe were set to be very high in the future. The futures markets made the right prediction. Since 2021, the cost of electricity for European businesses after taxes and subsidies has risen 125% – even more than household prices which have risen around 50%. While futures prices have fallen, electricity prices have remained elevated and show no sign of coming down. It is electricity prices themselves that matter, not the futures price, because these are the actual prices that businesses pay.
3. High energy prices are leading to higher labor costs in Europe, while the price of labor is falling elsewhere, further weakening European competitiveness
The above is not the only hit that the sanctions-induced energy crisis has done to the European economy. Higher household bills have fed into inflation which has led to workers demanding higher pay to make ends meet. This higher pay is feeding into higher labour costs across the continent. Before the war, labour costs in Europe typically rose around 2% annually – roughly in line with the European Central Bank’s inflation target. But since the war it is not unusual to see annual increases of 5% or 6%. These rising labour costs come at a time when the labour costs of competitor countries are falling. Commentators sceptical of the Chinese economy often highlight the fact that the country has very low inflation or even outright deflation and say that this is evidence of economic weakness. In fact, it is due to a flood of extremely cheap high-tech products – like Chinese-made electronic vehicles (EVs) – hitting the Chinese domestic market. These low rates of inflation mean that Chinese workers do not demand higher wages and so, as labour costs rise in Europe, they fall in China.
4. European policymakers have panicked and imposed tariffs on Chinese goods, but these tariffs are further damaging the continent’s competitiveness by cutting off access to affordable goods
Such a competitiveness differential is further exacerbated by the European Union’s misguided protectionist policies. The European Commission recently announced that it will impose tariffs of anywhere from 9% to 36% on Chinese-made EVs. This is on top of the 10% tariff applied to all EV imports into Europe. Without access to these cheap goods, European workers require higher wages to consume the same amount of goods – further damaging Europe’s competitiveness. These protectionist policies can only be understood considering the competitiveness crisis unleashed by the war and the high energy prices. Prior to the war, there were certain problems in the European economy with regards to competitiveness. But they were largely long-term problems, such as the lack of a developed digital sector on the continent. When the war hit and the energy prices rose, however, policymakers saw a very real, very immediate crisis in front of them. Their reaction has been to panic and impose self-defeating tariffs on China.
5. The European elite is in denial about the root causes of Europe’s problems—the demolition of the Grafenrheinfeld nuclear plant in Germany in the middle of an energy crisis is just one example
Everywhere we look we see crises and lying behind each crisis, from rising labour costs to falling industrial production to the panicked embrace of protectionism, we see the high energy prices caused by the war. We might expect that since the root cause of all these problems is so simple that politicians and policymakers would be focused on it. But this is not the case. Because of the ideological fervour surrounding the war a taboo has been imposed on discussing high energy prices. The situation regarding energy prices is like the children’s story of the emperor’s new clothes. Politicians and policymakers stand in front of the emperor, in this case high energy prices, as he parades naked through the streets unable to point out the problem for fear of the response from their peers. The damage that this collective lie is doing to Europe is immeasurable – and it is Europe’s industrial powerhouse, Germany, that is suffering the most. The German public, like the child who finally calls out the emperor’s nakedness, is coming to realise that there is a serious problem with their leadership – which seems intent on destroying themselves and their country. This explains the stunning electoral success of alternative political parties like the Alternative für Deutschland on the right and the Bündnis Sahra Wagenknecht on the left in Eastern Germany. These parties are associated with dissident opinions in Germany but increasing shares of the population are starting to realise that the present political class does not have the best interests of the country at heart. Much was East Germany quietly rebelled against the Soviet satellite state thirty years ago, they are now rebelling against similar levels of economic mismanagement coming from Berlin today.
Written by Philip Pilkington
Photo credit: Volkswagen Slovakia