Eric Reguly European bureau chief Rome Published Nov 29, 2024

Germany is a lesson to the world on how to transform yourself from a manufacturing and export superstar into an exercise in deindustrialization and value destruction in a few short years. Its slide will continue if president-elect Donald Trump makes good on his promise to blanket all imports with punishing tariffs. There are lessons for Canada and other wealthy countries who thought the mighty German economic model was to be emulated.

Workers at Volkswagen are set to go on strike next week because the company is demanding a 10-per-cent wage cut and has plans to close three German factories; in 87 years, VW has never closed a domestic plant. Germany is bound to see more strikes, not just in the ailing auto sector, which is being battered by high energy prices and intense competition from cheap Chinese electric vehicles, but across the industrial landscape.

Virtually every day, the German media is full of headlines about layoffs, closings, restructurings, production cuts or output shifting to cheaper countries. Early this week, ThyssenKrupp, Germany’s biggest steelmaker, said it would eliminate 11,000 of its 27,000 jobs. At least one plant is to be closed in a rapid shrinking exercise as domestic and foreign demand fall and European steelmakers endure an onslaught of inexpensive Chinese imports. The IG Metall union has promised “fierce” resistance.

Tens of thousands of jobs are to be eliminated at automotive suppliers Bosch, Schaeffler and ZF Friedrichshafen. Miele, a maker of luxury home appliances, is shifting production to Poland and the United States. Jobs in coal mining and the photovoltaic industry are disappearing too. The list of shrinking companies will get longer.

Germany is in a bad position. Its economic model was based on ever-rising, high-value exports while minimizing imports – classic mercantilism. After the reunification of West and East Germany in 1990, exports were boosted by suppressed wages. Over time, a dearth of investment, in good part owing to the country’s legendary aversion to debt, saved money but ultimately hurt competitiveness. Germany’s infrastructure, from its roads to its digital backbone, are not up to par.

The model worked for a while, and “Made in Germany” became the global mark of quality for everything from BMWs to Continental tires. Also beer.

Exports kept rising, and the market share for German products overseas – especially in China, where German cars became best sellers – hauled in riches. The model has not proven resilient. Exports to European Union countries are falling as those economies lose momentum. Exports to China are slowing and market share inside China is declining fast. China is moving up the value chain and no longer needs as many pricey German cars and machines as it once did – it is making them itself.

Even worse for Germany, higher-quality Chinese exports are displacing German products in Europe. The market for inexpensive EVs is owned by China. Germany stuck with diesel technology far too long and is years behind in battery cars. Any Trumpian tariffs will only accelerate Germany’s industrial deterioration. The next German government – Chancellor Olaf Scholz’s bickering coalition collapsed early this month and snap elections are to be held Feb. 23 – will have to figure out how to prevent China from wreaking further havoc.

Exports are so built into the German model that there is no easy or quick solution to the economic disease. But there are options, some of which are relevant to Canada and other countries that also face accelerated deindustrialization once Mr. Trump storms the White House.

The first is to scrap, or at least dilute, the German “debt brake” that limits deficit spending to 0.35 per cent of GDP, except in emergencies such as the COVID-19 crisis. The extra spending would boost public investment to stimulate domestic demand and the launch of new technologies. Germany’s debt-to-GDP ratio and its borrowing costs are low by European standards, so it can afford to spend more to make itself competitive. Cutting taxes to make the rich richer will not do the job.

Energy costs also need cutting (less so in Canada, but every little bit helps). Germany’s industrial and consumer electricity prices are atrocious, thanks to its own stupidity. Past governments had made the country nearly wholly dependent on Russia for natural gas. Those imports ended after Russia’s full-scale invasion of Ukraine in early 2022, triggering an energy crisis that sent German manufacturers into panic mode. Then, to appease the Green Party, the government recently closed the country’s last three nuclear generating plants, even though they were fairly modern and worked well.

Germany needs to re-evaluate, and probably slow down, its green agenda. It is overly expensive and ambitious and could destroy the crucial car industry, which accounts for 5 per cent of GDP. The EU wants to ban the sale of cars with internal-combustion engines by 2035. Germany is too much of a laggard in the EV game to make that deadline. Were it to stick, the only winner would be China, which would be happy to dance on Germany’s manufacturing grave.

https://www.theglobeandmail.com/business/commentary/article-german-manufacturers-are-on-the-run-the-trump-tariffs-will-accelerate/

This is an economics story. However, we all know that the catalyst for the current malaise was the Russia Ukraine war starting and followed by Western sanctions that jacked up fuel cost in Europe. Now we are seeing the consequences, which are irreversible, for years and years. One day, they will recovery, just not any time soon.