The bilateral treaty signed between France and Germany on 22 November 2022 made it clear that the European Union had finally taken note of its progressive loss of competitiveness as a net exporter of high value-added manufactured goods,
prompting the governments of the two most developed EU economies to commit themselves to a series of radical transformations to relaunch European industry.
The final part of the communiqué emphasises state support for green industrialisation, which would eventually guarantee the energy and industrial independence of the signatory countries.
[Recibe los análisis de más actualidad en tu correo electrónico o en tu teléfono a través de nuestro canal de Telegram]
While France has always had the issue of energy autonomy at the forefront of its mind -
which is explained, among other things, by the massive investment in nuclear energy or the high degree of state intervention during the second half of the 20th century - Germany has historically been more reticent to implement ambitious industrialisation or energy-sufficiency plans, not even after reunification in 1990, when it inherited an advantageous trade relationship with post-Soviet Russia that guaranteed it access to raw materials and fuel under quite advantageous conditions. Although we know the reasons for this change in direction -
such as the post-2008 loss of competitiveness or the deterioration of relations with Russia - it is likely that
the enactment of the Inflation Reduction Act in the US has had much to do with it, as it attempts to correct the problem at its root, turning the state into a dynamic agent of the economy that directs industrial policy wherever it can be implemented in a more efficient and profitable way in the long run.
If one looks at the behaviour of the German government over the last year and a half,
one can observe a clear shift in the institutional message from conservative pragmatism to an active role within the EU, showing a Germany that, aware of its weaknesses, intends to play a central role in the construction of the new EU economic and industrial framework. But, beyond words, of what does this change consist? It focuses on two highly correlated axes: energy independence and the transition of national industry towards self-sufficiency in order to reduce production costs to a minimum. Achieving the first point became a clear priority once war broke out in Ukraine, prompting the German government to drastically reduce its imports of Russian gas throughout 2022, culminating in a cap on gas prices as of 1 March this year to protect consumers and small producers.
Figure 1.- Revision of the December 2022 forecasts for the sources of price growth in Germany
Source: Bundesbank Monthly Report, March 2023
As can be observed, the new estimates predict a substantial reduction in the contribution of gas to inflation, as well as placing it below last Christmas’ estimates, made before the announcement of the gas cap. Although this measure has been in place in Spain since much earlier thanks to the
Iberian exception, the fact that such regulations have come into play in a country as reluctant to do so as Germany is indicative that something is changing. Furthermore,
SMEs have received subsidies to cover the rising costs of energy used in their production.
However, what is truly relevant is the recent
massive state investment plan to promote the energy transition of its domestic industry in the coming decades.
According to early reports, the German government aims to achieve energy autonomy by the end of the 2030s by financing the electrification of heavy industry and progressive decarbonisation through subsidies and tax incentives. This will be accompanied by a series of measures to minimise households’ dependence on gas, especially heating consumption during the harsh German winters. Within the same plan, further steps would be to ensure a full transition to green hydrogen by 2037, which would ensure industrial independence and create the conditions for remaining competitive on a global scale. An example of this is the
National Hydrogen Strategy, which outlines a plan that is likely to withstand a change of government in the next elections.
Clearly, this is highly related to current events and especially to the war in Ukraine, but it represents a turning point in Germany’s historical economic conservatism, for while German industry enjoys high levels of competitiveness and the national economy has hardly felt the effects of recent events in terms of productivity and unemployment, the crisis has highlighted the country’s geopolitical vulnerability in a multipolar world. In other words, the current production model has begun to show signs of burnout through rising production costs (
high inflation and bottlenecks in 2021-22) and the German government is determined to confront the facts head-on by piloting the transition from above. There is therefore a more or less general consensus among the political class (perhaps excluding the far-right
AfD) on the need to integrate private actors in the green transition,
challenging the historical Ordoliberal conception of the state and relaxing deficit targets, at least in the energy field. In a country so unfavourable towards radical changes in politics and economics, whose institutions have clung to conservative pragmatism, this is practically putting its foot down and at the same time a declaration of intent in EU terms: Germany intends to lead the change in the European production cycle over the coming decades, including changing its own conception of the role of the state if necessary.
