The automotive industry is highly dependent on a skilled workforce, which makes staying in Germany attractive. In turn, the presence of the automotive industry also means that there is a demand for domestic steel production.
“I’ve heard many swansongs about the German auto industry in recent years and it’s still there,” says Carsten Brzeski, global macro head at ING in Frankfurt.
The outlook is bleaker for other energy-intensive industries like chemicals. Chemicals are among the country’s most important exports after vehicles and machinery.
A new economic order
Economist Jens Südekum, who advises the German government, remains a bit more optimistic even though he expects some companies to leave, notably fertilizer producers.
“BASF’s largest chemical plant alone consumes as much energy as several major cities throughout the year. When we had the discussion “should we impose an embargo on Russian energy” right after the start of the war, [CEO Martin Brudermüller] was the one who said it would be impossible. That would be the death of German manufacturing.
“But now, six months later, they have already reduced their dependence on gas by around 50%. So they got the message and tried to revamp the business model.
Other economists are less optimistic. “I think companies in the manufacturing sector will ask themselves, especially the chemical industry, is Germany really the right place to be?” says Peter Bofinger, an economist and former member of the German Council of Economic Experts, which assesses government policies.
“You can see in the chemical sector a drop in production since January of around 10%. So that’s the most affected. I think that’s also the kind of industry that could leave Germany because for them, the price of energy is the most important.
It’s a view shared by Berenberg bank’s chief economist, Holger Schmieding: “It’s probably a lasting change that the most energy-intensive part of this will now move to the United States where oil prices gas is cheaper and probably won’t come back in three to five years. .
“It will probably lead to permanent losses, but permanent losses are part of structural change. Structural change with record labor demand, which we know, is much less painful than structural change when you already have unemployment.
But just as we have seen in the past in declining industrial areas, the pain of structural change is usually concentrated in specific regions. The different energy supplies across Germany could even change the economic order, Südekum believes.
“I expect the crisis to hit the traditional southern manufacturing areas more and benefit in relative terms to East Germany,” he says.
Southern regions with large manufacturing industries such as Bavaria, Baden-Württemberg and Saarland will be hardest hit, he believes. Some of these regions are rich while East Germany has always been poorer.
“Bavaria has no coal-fired power plants and is behind schedule for renewables. Their dependence on gas is therefore much higher than in other regions. So if there are local shortages or blackouts, it will affect the south more than other areas,” he says.
“On the other hand, if you look at these major investments in the auto industry, you’re actually seeing a slow shift to East Germany. Tesla is close to Berlin, all these new battery production facilities are in the region, there are major investments in the Magdeburg region for semiconductors.Slowly, a sort of German regional economy is beginning to adapt to this new reality.
Economists have different views on what the energy crisis will mean for Germany in the long run. While there has been talk of the beginning of a process of deindustrialization, the most common opinion is that it has accelerated a structural change, which will crown winners and losers.
The challenges are particularly visible in Saarland, one of Germany’s most manufacturing regions. Its growth has been well below the German average for nearly a decade.
In terms of GDP per capita, it ranks ninth among the 16 states, while in absolute terms, it is the second lowest.
The forest-covered hills of Saarland were once a prime location for coal mining, but a decade after the last mine closed, locals fear the car and steel industries will follow.
Jacob von Weizsäcker says he realized “more or less the first day” he walked into his new office in Saarbrücken that preventing a downward spiral in the region would take drastic measures.
The former chief economist at Scholz arrived from Berlin in May at the start of the energy crisis. He was the new Saarland Finance Minister in the government of Social Democrat Anke Rehlinger.
The challenges called for a new – and for Germany – unorthodox approach: a lot of borrowing.
Using a constitutional clause for emergencies, he plans to push through a €3 billion transformation fund. The money will be channeled into three areas: industry, infrastructure and innovation.
“That is of course far from enough to meet the challenges,” says von Weizsäcker. The idea is that this will provide enough incentive to stimulate private sector investment and unlock money from Brussels.
“The energy transition was always going to be a litmus test for Germany, leaving no region behind,” he says.
“Saarland is the region with the highest proportion of people working in the automotive industry. It also has the highest concentration of employment in the metal industry, including steel, among the 16 German states. We are therefore particularly exposed to challenges.