Yahoo Finance Anger in Germany’s industrial heartlands as Putin cuts off the gas
Few of the 34,000 inhabitants in Saarlouis can remember what it was like before the Ford plant opened on the outskirts of town.
The carmaker has been one of the largest employers in Saarland – a tiny German region on the border with France – for 50 years. Its presence has been a source of well-paid jobs and local pride.
“I convinced my whole family to buy our cars. My cousin bought a Ford, my brother bought a Ford, my father bought a Ford. I even talked my wife who was then my girlfriend into buying a Ford,” says 31-year-old Michael Bartuew.
Bartuew has worked for the car manufacturer since he was 17. In June, he learned that he will be out of a job by 2025 along with more than 5,000 others. Ford would not keep both of its locations in Saarlouis and Valencia for its planned electric vehicle production, which tends to require fewer workers.
The decision was met with disbelief: “Everyone's really angry. A lot of my co-workers sold their cars and bought new ones from another brand,” Bartuew said.
The problems in Saarland, one of the poorest and most manufacturing-heavy regions, highlight the issues facing Germany at large.
While Berlin appears to have secured enough gas for the winter, the lasting loss of cheap energy has plunged the powerful industrial sector into crisis. It has also accelerated a painful structural shift across the economy that will force whole industries to reinvent themselves or become redundant.
Germany imports nearly two-thirds of its energy. Before the invasion of Ukraine, 55pc of gas, around half of hard coal for steel production and a third of crude oil came from Russia.
Moscow was even the fifth largest buyer of German goods outside the EU. As the world’s third largest exporter, more than two-fifths of Germany’s value generation comes from energy-intensive manufacturing and industry.
There was some Schadenfreude in the country, as Britain descended into chaos in the wake of the mini-Budget.
When Germany launched its own energy package, finance minister Christian Lindner said they “explicitly” decided not to follow the UK’s example with an expansionary fiscal policy. But the troubles are also mounting at home. The International Monetary Fund predicts Germany will face the steepest contraction among the G7 next year, shrinking by 0.3pc.
The energy crisis and Russia’s war in Ukraine have become the issues defining chancellor Olaf Scholz’s leadership.
The social democrat succeeded Angela Merkel in December last year. While she had long been a symbol of unity across the EU, Germany’s role had to be redefined for the new era.
Scholz quickly carved out his space as a wartime leader. His Zeitenwende speech in February marked a historical shift in Germany’s foreign and security policies. He announced that €100bn (£87bn) would go towards higher military spending, breaking the previous tradition of a cautious defence policy.
Succeeding Merkel was always going to be a tough act, and Scholz’s honeymoon period was short.
Critics blame him for being too indecisive and lacking in communication skills. While he has launched a sizeable help package to deal with the energy crisis, opponents lambast the huge scheme for coming too late.
The measures include a €200bn euro “defensive shield” to protect households and businesses, announced at the end of September. They will benefit from a gas brake, which will subsidise basic consumption until 2024.
Sales taxes on gas have also been slashed to 7pc, down from 19pc. The package is so generous it has created tensions within the EU. Poorer nations in the block say it unfairly advantages German businesses.
“This government has wasted time, money and avoided taking decisions from the beginning,” says Daniel Caspary, an MEP for the Christian Democratic Union, Merkel’s old party.
Scholz finally decided on Monday to extend the operation of Germany’s last three nuclear power plants until next spring after a disagreement between the coalition parties delayed the decision. The move is widely regarded as a snub to the Greens, who are ideologically opposed to nuclear power, while the third coalition party, the Liberals, would like to see them extended for longer.
The delay in reaching an agreement has done little to help Scholz’s image, however.
“The problem is that while the government has now announced the €200bn help package, it is failing by not procuring more energy. They didn’t pick out a nuclear power plant. They didn’t buy additional gas from Qatar like Italy. Normally you can debate whether a strategy is wrong or right but they don’t have a strategy at all,” says Caspary.
Car industry swansong?
The near-term implications also worry Nicole Hoffmeister Kraut, minister of economic affairs for the state of Baden-Württemberg. The car industry-heavy area is where companies like Porsche and Mercedes-Benz have their headquarters.
“It comes already too late because we hear from our partners that some companies have already given up. They are not insolvent but they see no prospects due to the high energy prices,” she said.
Further southeast in Munich lies BMW’s main plant in Germany, where a new car is made every minute. Automated machines stamp thin sheets of steel into shape, bright orange robotic arms do the welding and the paint gets sprayed on in a careful process, which wastes as few drops as possible. At the end of the process, workers check and drive away the cars which then go on trains and get transported to customers.
The plant, which is Munich’s largest employer, is so big that it has its own doctors and fire engines on site. The operation requires vast amounts of energy – two-thirds of which come from natural gas.
“We are confident that our production will not be impacted directly,” says finance chair Nicolas Peter. “A different question is what is happening on the supplier side. We are in close contact with our most critical suppliers. They are those who need gas in particular for their industrial process, in particular for heating.”
BMW is in close contact with the German government. Peter says he feels confident that contingency plans would provide a solution if there was too much pressure on the gas supplies this winter.
The carmaker has already reduced its gas needs by 15pc ahead of winter.
The employees have had training in energy reductions and temperatures in buildings have been turned down (all in line with employment laws, Peter assures).
Unlike smaller companies that have less capital to withstand shocks, BMW benefits from a strong order book and global revenue streams.
“It’s an extremely volatile environment because on one side we are still impacted by semiconductor issues. Of course, inflation is also rising, interest rates are hitting our business and there are still some Covid restrictions. But nevertheless, we are well on track to achieve our profit targets for the year,” says Peter.
While raw materials have become a lot more expensive, the company hedges those changes against currency fluctuations. It has also passed on some price rises to consumers.
Asked whether the end of cheap gas could prompt BMW to move its production abroad, Peter waves it away as nonsense and says it’s “definitely not the plan”.
“You have to take into account that to develop a product, we need four to five years. So it's an industry with a very long-term perspective. It would not make any sense now based on the development of the last couple of months to already take decisions to move into other regions. You also need the employees, you need to train the workforce,” he says.
The car industry is highly reliant on a skilled workforce, which makes staying in Germany attractive. In turn, the presence of the automotive industry also means there’s demand for domestic steel production.
“I’ve heard many swansongs on the German car industry now over the last years and it's still there,” says Carsten Brzeski, global head of macro for ING in Frankfurt.
The outlook is gloomier for other highly energy-intensive industries such as the chemicals sector. 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 somewhat more optimistic although he expects that some companies will leave – especially fertiliser producers.
“The biggest chemical plant BASF alone uses as much energy as several major cities throughout the year. When we had the discussion ‘should we impose an embargo on Russian energy’ just after the start of the war, [CEO Martin Brudermüller] was the one saying that would be impossible. It would be the death of German manufacturing.
“But now six months later they have already decreased their dependency on gas by something like 50pc. So they have understood the message and tried to rearrange the business model.”
Other economists are less optimistic. “I think the manufacturing sector companies will ask, especially the chemical industry, is Germany really the right place to be?”, says Peter Bofinger, an economist and a former member of the German Council of Economic Experts, which evaluates government policies.
“You can see in the chemical sector a decline in production since January by about 10pc. So it’s the most seriously affected. I think that’s also the kind of industry that might leave Germany because to them energy price matters the most.”
It’s a view shared by Berenberg bank chief economist Holger Schmieding: “It’s probably a lasting shift that the most energy-intensive part of that will now relocate to the US where gas prices are cheaper and will probably not return one three to five years from now.
“That will likely lead to some permanent losses but permanent losses are part of structural change. Structural change with a record demand for labour, which is what we’re having, is much less painful than structural change when you already have unemployment.”
But much like we’ve seen in the past across declining industrial areas, the pain from structural change is usually concentrated in specific regions. The different energy provisions across Germany could even shift the economic order, believes Südekum.
“I expect the crisis to hit the traditional manufacturing areas in the south more and in relative terms benefit East Germany,” he says.
Southern regions with large manufacturing industries like Bavaria, Baden-Württemberg and Saarland will feel the impact the most, he believes. Some of these regions are wealthy while East Germany has historically been poorer.
“Bavaria has no coal power plants and they are behind in the schedule for renewables. So their dependency on gas is much higher than in other regions. So if there are local shortages or blackouts of electricity that’s going to affect the south more than other regions,” he says.
“On the other hand, if you look at these major investments in the car industry, you observe a slow shift actually towards East Germany. Tesla is close to Berlin, all these new battery production facilities are in the area, there's major investment in the Magdeburg area for semiconductors. Slowly a kind of German regional economy starts to adjust to this new reality.”
Economists take different views on what the energy crisis will mean for Germany in the long term. While there has been some talk of the beginning of a deindustrialisation process, the more common view is that it has accelerated a structural change, which will crown winners and losers.
The challenges are especially noticeable in Saarland, one of Germany’s most manufacturing-heavy regions. Its growth has slugged well below the German average for nearly a decade.
In terms of GDP per head, it ranks ninth among the 16 states, while in absolute terms it is the second lowest.
Saarland’s forest-clad hills were once a prime location for coal mining but a decade after the last mine shut, locals fear the car and steel industries could follow.
Jacob von Weizsäcker says he realised “more or less on the first day” he entered his new office in Saarbrücken that preventing a downward spiral in the area would take drastic steps.
The former chief economist for Scholz arrived from Berlin in May at the onset of the energy crisis. He was taking up the post as Saarland’s new finance minister in the government of social democrat Anke Rehlinger.
The challenges called for a new – and for Germany – unorthodox approach: lots of borrowing.
Using a constitutional clause for emergencies, he plans to push through a €3bn transformation fund. The money will be channelled into three areas: industry, infrastructure and innovation.
“It’s of course nowhere near enough to meet the challenges”, says von Weizsäcker. The idea is that it will provide enough incentive to spur private sector investment and unlock money from Brussels.
“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 car industry. It also has the highest concentration of jobs in the metal industry, including steel, among all 16 states in Germany. So we're particularly exposed to the challenges.”
While €3bn is a small figure compared with the total size of the German economy, it will be spent on an area with only one million inhabitants. If all of the other federal states were to adopt the same approach, the total cost would be closer to €250bn, von Weizsäcker says.
The fund will have to strike a balance between helping existing industries adapt and fostering new sources of growth, he believes.
“Some economic activity is not going to take place anymore, say in the car industry. Politically, one very important point is that we must not fall into the trap of simply saying transformation is only about incumbent industries. It’s also about helping new sectors emerge and generate growth,” says von Weizsäcker.
Easing off Berlin’s debt brake
Germany’s strict rules on borrowing, known as the debt brake, normally prevent such measures.
The Schuldenbremse, as the Germans call it, was written into the constitution in 2009 and came into effect for the federal states in 2020.
The war in Ukraine and the energy crisis are an emergency however, von Weizsäcker says, which means a legal argument can be made for circumventing it. As a result, this is the first time a federal state will test the approach of a transformation fund.
“It might be surprising when looked at from a UK context, but as we prepare the transformation fund, we not only commission some studies from distinguished economists but also lawyers looking at the constitutional question,” he says.
While the ministry has already been selling the idea in Berlin, the Regional Assembly will vote on it in December, the federal government then needs to scrutinise it and there will also be a grilling by ministers from the other 15 federal states.
Von Weizsäcker is confident that he will be able to convince neighbouring Bundesländer that borrowing will prove to be cheaper than not intervening.
“If you look at market expectations for the price of natural gas it's going to be significantly higher for the remainder of its use. Germany also wants to become climate-neutral by 2045. What this does to our economy in Saarland and across all of Europe is to accelerate the transition to climate neutrality,” he says.
While the more immediate €200bn energy help package from Berlin aims to help consumers and businesses through the winter, the transformation fund will be used to target the long-run challenges.
Many investment decisions that were going to be made in 10 years are instead happening now, he says.
“These decisions are clustered around the next couple of years. Then the question becomes, is a plant going to shut down? Is it going to refurbish its production but keep the product that they have? Or are they going to rethink their business model perhaps?”
The economic and fiscal arguments for the fund are clear, von Weizsäcker says. If jobs continue to disappear across the region, young people will leave, tax revenues will go down and life will get worse. But there is also a politically undesirable outcome, which he says can be seen across the border.
Just over an hour on foot from Saarbrücken is the French region Lorraine, which is home to cities like Metz and Nancy. Like Saarland, it has seen a decline in the coal industry – but there were fewer jobs in other industries to pivot into.
In the first round of the presidential election in France in April, far-right candidate Marine Le Pen had the largest vote share in the Grand Est region. She narrowly lost the second round.
In Saarland, only three of the 51 members of the Landestag are from right-wing populist party AFD, von Weizsäcker points out. The remainder are from moderate parties.
“I fear if one were to go down that route there could also be political repercussions,” von Weizsäcker says.
Electric shock
The planned closure of the Ford plant gives a glimpse of what life in the leafy region could become like without any intervention. The mayor of Saarlouis, Peter Demmer, says that the company leaving is nothing short of a disaster.
As a well-paying employer, replacing the jobs will be tricky. In its heyday, the plant employed 8,000 workers, so there has already been a gradual decline.
“Ford’s decision to leave the region raises the fear that not only those jobs will be lost but also many others that rely on the auto industry. For example, bakeries selling food to the workers and so on. If the people can’t make a living here they will also stop spending money in town.”
He has no doubt about why Ford chose Valencia over Saarland: “Because it’s cheaper. That’s of course a criterion. We’ve done the maths.” The decision came before the full effects of the energy crisis were clear at the end of June.
It highlights the tension between protecting jobs and prioritising climate goals such as the EU’s 2035 ban on combustion engines and Germany’s net zero target in 2045. Several people interviewed for this article highlighted that producing electric vehicles requires fewer workers.
The German car industry employs more than 700,000 workers.
Many companies specialise in creating specific components and chemicals that feed into auto manufacturing.
Electric vehicles don’t need gearboxes, unlike combustion engine cars. This will make whole companies redundant in the future, forcing them to find ways to adapt or close down.
Keeping up with these structural economic changes is a “massive challenge” for places like Saarland, says Lars Desgrange. He represents Germany’s largest union, IG Metall.
“Saarland has always lived off coal and steel. The coal mines have closed. In the steel sector we have slumped significantly in terms of jobs. We are trying to convert our steel industry to green production [meaning without the use of fossil fuels]. That requires huge infrastructure investments,” he says.
“When there is no more coal, no automobile industry and the steel sector is also declining, the question is: where can people here work? We need solutions from politicians. It’s good that we want to reduce CO2 in Europe. But the fact that tens of thousands of people could be left without an income and without a job would result in a very difficult political development that none of us would want.”
In Saarlouis, mayor Peter Demmer remains defiant. The area has already seen many transitions.
“We are used to dealing with crises here in Saarland. That's why I'm confident that somehow things will work out,” says Demmer.
But Ford worker Bartuew feels less reassured. With two young kids and a new mortgage, the future now looks much less secure than half a year ago.
“There are not many other opportunities to earn this kind of money,” he says. “My whole family lives here. My wife and I just bought a house a few months ago. I don’t want to move away but I don’t know if I’ll have to.”
The pressure is now on Jakob von Weizsäcker to turn his €3bn transformation fund into jobs for people like Bartuew.
