Germany’s manufacturing sector, the backbone of its economy, has been struggling of late. It is having to contend with slow domestic demand, and exports, a key element in its success, are running into headwinds. Manufacturing is an energy-intensive sector, and Germany’s high energy costs are hurting its competitiveness. These costs have been driven higher by the withdrawal of “cheap” Russian gas, by Angela Merkel’s decision to resume the country’s reckless abandonment of nuclear power (which is now complete) and by another project eagerly backed by Merkel, massive investments in renewables. Climate policy makers boast about green jobs (and there are some, although many more in China), but the statistic that matters will be the net jobs number. Is the energy “transition” creating more jobs than it is destroying?
German manufacturers must contend with another, growing problem. Cheered on by Merkel (“everybody wins”) they turned their attention to China. That worked well for a while, but, now, having taken and learned what they wanted, Chinese manufacturers are increasingly competing with their former suppliers. And then there’s the small issue of what increasingly assertive Chinese auto manufacturers might mean for Germany’s all-important auto sector.
Both Germany and China “under consume” domestically, meaning that exports are unusually important for the health of their economies.
Euraktiv quotes Sander Tordoir, chief economist at the Centre for European Reform:
“The two countries, and in particular [their] car and machine industries, are on a collision course,” he said, due in large part to “massive, industry-wide subsidisation” in China.
“China’s overproduction is quite staggering at this point,” said Tordoir, pointing to the country’s high industrial output in the face of persistently low domestic demand.
“The number of loss-making industrial firms in China reached a peak of almost 180,000 in March 2024, much higher than at any point in the last 25 years,” said Tordoir, arguing these companies would have been kept afloat by the Chinese government by propping up exports.
State funding would have particularly targeted “‘new quality productive forces” in recent months, said the analyst, in particular “the higher end of the [industrial] value chain” – such as cars, machines, chemicals, and computer chips.
This would mean that China’s industrial subsidies and overall industrial strategy have focused “precisely on the sectors where Germany tends to be strongest, both as a producer and as an exporter,” he pointed out.
Some Chinese leaders are denying this description of their economy, but they would, wouldn’t they? Ulrich Ackermann, managing director for foreign trade at German machinery maker association, VDMA, is having none of it:
“China produces as many machines as the next four countries combined,” Ackermann said, noting that despite domestic demand weakening over the last few years, “production continues as usual.”
Ackermann believed the Chinese government maintains “factories that are not viable, creating huge over-capacities that are now increasingly pushing onto the export markets.”
“Every province, every city and in some cases even every district is trying to keep people in work and subsidise everything they can at all levels,” he said.
“The urge to enter export markets has risen sharply, and the Chinese government is also promoting this,” Ackermann said. For instance, the state would be creating stockpiles to meet “the global [annual] demand for excavators,” he said.
According to a recent VDMA analysis, Chinese exports in machinery have grown their market share from around 3% in 2001 to 18% in 2022 globally, overtaking Germany as the world’s largest machinery exporter in 2020.
Euraktiv also quotes Alicia García-Herrero, a senior fellow at Brussels-based think tank Bruegel and chief economist for the Asia-Pacific region at French investment bank Natixis, She agrees with the overcapacity thesis (and, by implication that it is being subsidized), urging the EU to put pressure on China by using the anti-dumping and anti-subsidy remedies open to it (essentially, punitive import duties). It should, but there’s a problem. German and other European companies (like quite a few of their American counterparts too) have unwisely invested heavily in China, encouraged by the likes of Merkel (although Berlin has now warned about over-exposure to China).
Each Western plant in China is, like it or not, a hostage, as are Western exports to China. The West is also unhealthily dependent on China, a state somewhere between a rival and an enemy, for its goods and materials. That said, I doubt (sadly) that China would cut the West off from the supposedly cheap, supposedly “green” goods that are facilitating the West’s climate-induced self-harm. Selling the West those goods really is a win-win for Beijing,
García-Herrero warns that “China is so big that it can continue to do this for very long, given its size and economies of scale.” It could risk “destroying [European] industry.”
Meanwhile, the Wall Street Journal reports (August 26):
Sentiment at German companies edged lower this month, as Europe’s largest economy shows little sign of a recovery amid a persistent manufacturing slump.
The Ifo Institute’s business-climate index fell to 86.6 in August, from 87.0 in July, data showed Monday. It marked the fourth decline in as many months.
“The German economy is increasingly falling into crisis,” Clemens Fuest, president of the Ifo Institute, said.
Companies assessed their current situation as worse, and expectations for the future were more pessimistic, he said.
Winter is coming.
Oh yes (via Reuters, August 30):
The far-right Alternative for Germany is predicted to come first in at least one of two elections in eastern states on Sunday, piling pressure on Chancellor Olaf Scholz’s federal coalition over the economy, immigration and support for Ukraine.
The 11-year-old AfD, which has greater support in the formerly communist-run east, will be unlikely to be able to form a state government even if it does win, as it is polling short of a majority and other parties refuse to collaborate with it
But it will be the first time a far-right party has the most seats in a German state parliament since World War Two and its strength will complicate coalition building and could allow it to block constitutional changes and appointments of some judges.
The AfD is polling 30% in Thuringia, nearly 10 points ahead of the conservatives in second place, while tying with them in Saxony on around 30-32%. The newly-created far-left Sahra Wagenknecht Alliance (BSW) is set to come third in both states.
Keep an eye on how the Sahra Wagenknecht Alliance does. In various areas its policies overlap with those of the AfD, an example of the horseshoe theory in operation. In that context, it’s a considerable stretch, but not an uninteresting one, to look at the story of Ernst Niekisch and the National Bolsheviks during the Weimar years.
The rise of radicalism of left and right in today’s Germany (particularly in the country’s east) has many causes, of which the economy is only one, but it’s still one that matters.