The loss of cheap gas from Russia played a role, but decisions made in the boom years are now being called into question.
For much of this century, Germany achieved one economic success after another, dominating global markets for high-end products such as luxury cars and industrial machinery, and selling so much to the rest of the world that half the economy was dependent on exports.
Jobs were plentiful, government coffers grew as other European countries sank into debt, and books were written about what other countries could learn from Germany.
Not longer.
Germany is now the worst-performing advanced economy in the world, and both the International Monetary Fund and the European Union expect it to contract this year.
This comes after the Russian invasion of Ukraine Losing cheap natural gas in Moscow – An unprecedented shock to Germany’s energy-intensive industries, which had long been Europe’s industrial powerhouse.
The surprising poor performance of Europe’s largest economy has sparked a wave of criticism, concern and debate about the way forward.
Germany risks “deindustrialization” because rising energy costs and government inaction to solve other chronic problems threaten to send new factories and high-paying jobs elsewhere, said Christian Kuhlmann, CEO of major German chemicals company Evonik Industries AG.
From his 21st-floor office in the western German city of Essen, Coleman points to past symbols of success across the historic Ruhr Valley industrial region: metal factory smokestacks, giant piles of waste from now-closed coal mines, a massive BP oil complex. Evonik’s sprawling refinery and chemicals production facility.
These days, the former mining area has become a symbol of the energy transition, dotted with wind turbines and green spaces.
Coleman said the loss of cheap Russian natural gas needed to power the factories had “painfully damaged the business model of the German economy.”
After Russia cut off most of its gas supplies to the European Union, the German government asked Evonik to keep its 1960s coal-fired power plant running for a few months longer.
The company is converting the plant to two gas-powered generators that can later be powered by hydrogen, amid plans to become carbon neutral by 2030.
One solution discussed is a government-funded cap on industrial electricity prices to help the economy shift to renewable energy.
The proposal, put forward by Vice Chancellor Robert Habeck of the Green Party, has faced resistance from Chancellor Olaf Scholz, a Social Democrat and coalition partner of the pro-business Free Democrats. Environmentalists say this will prolong dependence on fossil fuels.
Coleman agrees: “It was poor political decisions that primarily led to and affected the development of these high energy costs. “German industry and German workers cannot now remain committed to paying the bill.”
The price of gas has nearly doubled what it was in 2021, hurting companies that need it to keep glass or metal hot and molten 24 hours a day to make the glass, paper and metal coatings used in buildings and cars.
The second blow came as China, a major trading partner, suffered a slowdown after several decades of strong economic growth.
These external shocks have exposed cracks in Germany’s foundations that had been overlooked during years of success, including a lag in the use of digital technology in government and business and a long process to get approval for much-needed renewable energy projects.
Another clear fact is that the money the government had came in part because of delays in investment in roads, the railway network and high-speed internet in rural areas. A 2011 decision to close Germany’s remaining nuclear power plants has been questioned amid concerns about electricity prices and shortages. Companies are facing a severe shortage of skilled workers, with job opportunities reaching a record high of just under two million.
Relying on Russia to reliably supply gas via Nord Stream pipelines under the Baltic Sea – since closed and damaged amid the war – the government has admitted was a mistake.
Now, clean energy projects have been slowed by extensive bureaucracy and indirect resistance. House spacing limits keep annual construction of wind turbines at single digits in the southern Bavaria region.
A €10 billion power line transporting wind power from the north to industry in the south has faced delays due to political resistance to unsightly towers above ground. Burying the line means completion in 2028 instead of 2022.
At the same time, energy-intensive companies are looking to weather the price shock.
Drewsen Spezialpapiere, which makes passport papers and stamps as well as paper straws, has bought three wind turbines near its factory in northern Germany to cover about a quarter of external electricity demand as it shifts away from natural gas.
Specialist glass company Schott AG has trialled the replacement of gas with emission-free hydrogen in a factory where it produces glass in tanks at temperatures of up to 1,700 degrees Celsius.
It has worked, but only on a small scale, with hydrogen supplied by truck. Large quantities of hydrogen produced with renewable electricity and delivered via pipelines would be needed, which does not yet exist.
Schultz called for the energy transition to take on board the urgency used to create four floating natural gas plants in months to replace lost Russian gas. LNG arriving at terminals by ship from the United States, Qatar and elsewhere is more expensive than Russian pipeline supplies, but the efforts showed what Germany can do.
However, a row between the coalition government over energy price caps and a law banning new gas ovens has angered business leaders.
Holger Schmieding, chief economist at Berenberg Bank, says Germany became complacent during the “golden decade” of economic growth in 2010-2020. Schmieding, who once called Germany “the sick man of Europe” in an influential 1998 analysis, believes that description may be exaggerated today, given low unemployment and strong government finances. This gives Germany room to move, but reduces the pressure to make changes.
Schmieding said the most important step immediately would be to end uncertainty about energy prices. Whatever policies are chosen, “it would be a really big help if the government could agree them quickly so companies know what they intend to do and can plan accordingly rather than delaying investment decisions.”