Germany’s Habeck blames Putin, world trade for industrial slump

9 months ago 37

Germany’s current economic weakness is mostly to blame on a slowdown of global trade and the aftermath of Russia’s attack on Ukraine, Economy Minister Robert Habeck said while presenting economic forecasts on Wednesday (21 February).

Habeck (Greens) officially presented the economic outlook for 2024 and the coming years, in which the government significantly had to slash its forecast, expecting an economic growth of only 0.2% this year, down from 1.3% previously projected.

Global trade “developing at a historically low level”, as well as the phase-out of Russian gas following the start of the war in Ukraine and an insufficient political answer to the ageing society, which had led to significant worker shortages, were highlighted as key drivers of the downward correction.

“The growth of German GDP in particular is extremely dependent on global trade,” he said. “This is one of the main reasons why we have to make such significant cutbacks compared to the autumn forecast”.

In reference to Ukraine, Habeck said that “the war is still weighing heavily on the German economy, even though we have successfully taken steps to fend off the attack on the economic order and thus also on the country’s order of freedom”.

Meanwhile, gas and electricity prices had returned to levels close to the ”pre-crisis level,” he stressed, after spiralling upward following the Russian invasion in Ukraine, and are expected to further decrease.

“Energy prices are not yet where we want them to be, but they have come down faster and more significantly than we expected just a few months ago,” he said.

Keeping energy-intensive industries in the country

While energy prices are expected to remain significantly higher in Germany than elsewhere, even after the current transition to renewable energy, Habeck said he does not want to let go of any domestic industry that might be tempted to relocate and produce cheaper elsewhere.

“Industries change, of course. But I don’t want to let go of any industry, especially not as a political programme,” he said.

Asked by Euractiv, he doubled down on the need to build green production sites for steel in Germany, “because steelworks are location factors, employment takes place there, [and] we want to build up a hydrogen market”.

Among other products, steel is particularly sensitive to energy prices, as energy costs will account for up to 50% of overall production costs for green steel (produced with green hydrogen instead of fossil fuels such as coal or gas), according to German producer ThyssenKrupp.

Green steel plants in Germany will be needed to create demand for green hydrogen, Habeck continued, “because the European market as a whole has to become green in order to then pull the global market into the green.”

Last week, Brussels approved a €4 billion German support scheme for energy-intensive industries, after already greenlighting massive subsidies for several German steel producers – including ThyssenKrupp – over the course of last year.

However, Habeck said he had “nothing at all” against also importing green steel from other places in Europe, such as Spain or Norway, where energy costs are expected to be lower.

Overall, his analysis of the country’s disappointing performance stands in stark contrast with that of other observes – including European Central Bank’s chief Christine Lagarde, who last week commented that the German economic model needed to be reformed.

Economist criticises ‘dirigiste’ approach

Given Germany’s quite unfavourable conditions for producing renewable energy, many economists are sceptical that energy-intensive industries, such as the production of steel or chemical base materials, can have a future in the country.

“In case of doubt and given the current situation, we will lose some of the energy-intensive production,” Stefan Kooths, director of the business cycles and growth research centre at the Kiel Institute for the World Economy, told Euractiv.

“We will not be able to simply continue all the industrial structures that have developed in the past in the future anyway,” Kooths continued, “simply because we lack certain workers for this and, incidentally, because new needs are also arising due to the ageing of society”.

While more workers would be needed for instance in the care sector in the future, these workers could not simultaneously work in industries such as green steel, he said.

Kooths criticised Habeck’s economic policy as too dirigiste, blaming the current approach for “distrusting market processes and the players within the markets and therefore trying to prescribe all kinds of things to them”.

“Not all industries that have provided us with our income base in the past will continue to do so in the future – that’s structural change”.

“The moment we stop reacting to changing conditions, the moment we somehow try to stop structural change, that’s when the problems begin,” he said. “That’s when we start sawing at the branch of prosperity.”