Germany has long been admired for its economic achievements. At our Commodity/PROcurement Edge conference last week, Nucor, one of our sponsors, spoke of Germany’s industrial success as being built on its model of long-term investment. Regardless of which party led the government, Germany maintained a focus on manufacturing and technological development as a long-term goal for its economy, a position not followed by its partners in the European Union, despite what they may say.
That focus has kept Germany as the second most successful exporter in the world, with an account balance of $208,100,000,000 in 2012– which is just a whisker behind China’s $213,800,000,000, according to the CIA Data Book. Germany is a world leader certainly in technological sophistication and quality, along with machine tools, automotive, chemicals, steel, and machinery. Its economy is the fifth largest in the world and by far the largest in the EU. And Germany has achieved this while having the lowest unemployment and highest standard of living of any major EU country, with the former at 6.5%.
The German model has arguably been sustained in recent years by the formation of the single currency. If instead of the Euro, Germany still maintained the Deutschmark, the resulting strength of the mark would be causing immense problems for Germany’s export-led manufacturing economy, in much the same way as it is for Switzerland now and had been for Japan before they embarked on QE and currency depreciation. But these speculations miss the point, as Germany is part of the European Union, and if at times they seem reluctant to support their fellow members– whom their success in part depends on– who can blame them for not wanting to take on the rest of Europe’s debts?
Yet recent articles cast doubt on Germany’s ability to maintain this position of near unparalleled success. Like much of Europe, Germany has the creeping demographic challenge of an aging population and shrinking working-age population, but even China, its arch-rival in the export league tables, faces the same issue. More than that, Germany is at risk of undermining the core strength of competitive manufacturing on which its long-term success has been built, or killing the golden goose, if you like. Some 52% of German GDP depends on exports, and in some way all of the country’s high-value exports depend on energy, energy that is getting more expensive by the day and is making the country’s exports more expensive and less competitive as a result.
As the FT notes, the cumulative total that German consumers have spent subsidizing green energy is set to pass €100 billion ($135 billion USD) next year, as Germany aims to raise the percentage of renewables in its electricity mix to 35% by 2020 and 80% by 2050. Last year, Germany already produced 23% of its energy from renewable sources, which was funded by massive feed-in tariffs on wind and solar paid for through electricity bills. This week, Germany’s four network operators were quoted as saying that the annual cost to support German renewable energy feed-in tariffs is set to rise to €23.6 billion ($32 billion) in 2014, from €20.4 billion ($28 billion) this year.
We will examine the impact of Germany’s green energy programs on its manufacturing sector in a follow-up post.