Europe Macro – January 12, 2022

| January 12th, 2022

The BoE is expected to start quantitative tightening this year while the ECB continues to avoid addressing inflation. The good news is that German import inflation could fall due to lower Chinese producer prices and lower credit creation. Meanwhile, Germany is risking deindustrialisation as the Greens are doubling down on their goal to make 80% of its energy supply renewable in less than eight years. 

1.  CENTRAL BANKS

1.1 Thirteen years on from the rise of QE, prepare for the great reversal – The Times

After massive amounts of QE, get ready for a little QT. It took a bit of getting used to but quantitative easing has become familiar as an economic policy tool. So it should be. We are approaching the 13th anniversary of the moment the Bank of England embarked on it, in the depths of the financial crisis.

QE was undertaken when the Bank thought it had run out of room to cut interest rates, having taken Bank Rate down to 0.5 per cent in early 2009. The Bank later discovered that it could cut rates even lower, with Bank Rate for much of the pandemic at 0.1 per cent. It also established that, if necessary, it could adopt negative interest rates.

That did not happen, and rates are now on the way up, having risen to 0.25 per cent last month. This is why we may soon have to get used to another term, quantitative tightening, and not just in Britain. This could be the year of QT.

Why? The City expects the Bank to raise interest rates again at the next monetary policy committee (MPC) meeting, with an announcement on February 3. That could take Bank Rate to 0.5 per cent, one of two trigger points for beginning the process of reversing its QE; or in other words, switching to QT.

QE, as readers will know, was the policy of creating central bank reserves to purchase assets, mainly UK government bonds (gilts). QE supplemented conventional policy by, according to the Bank’s own explanation, increasing the price of the bonds it buys, “which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down. The lower interest rate on UK government and corporate bonds then feeds through to lower interest rates on loans for households and businesses.”

[…] The significance of a 0.5 per cent Bank Rate was set out last August, in the Bank’s quarterly monetary policy report, when it issued its QT guidance. After a preamble, it said: “The MPC intends to begin to reduce the stock of purchased assets when Bank Rate has reached 0.5 per cent.” It would do so initially, it said, “through ceasing the reinvestment of maturing assets, to allow the reduction to occur at a gradual and predictable pace”.

[…] As always, as far as the Old Lady of Threadneedle Street is concerned, guidance comes with caveats. Switching to QT when Bank Rate reaches 0.5 per cent would not be automatic but would occur only “if appropriate given the economic circumstances”. You might think that the circumstances next month, with inflation roaring ever higher towards its likely peak in the spring, could hardly be more appropriate.

But George Buckley, an economist and seasoned Bank watcher at Nomura, the investment bank, thinks the Bank might find reason to delay. A largeish balance sheet reduction in combination with a further increase in interest rates might be too much for the MPC if the growth numbers they are looking at are affected by Omicron. QT might thus be delayed until the summer.

We shall see. One thing, however, is clear. We will never go back entirely to a pre-QE world. “In steady state, the Bank’s balance sheet is likely to be materially larger than it was before the financial crisis,” it said last year, because the level of central bank reserves required by the system will be permanently bigger. QT, when it happens, will be a lot less than the £895 billion of QE that the Bank has carried out.

Comment: There are two things worth mentioning. The first one is the comment regarding a pre-QE world. We are indeed unlikely to go back anytime soon. Mainly because the economy has changed.

According to The Telegraph, “perhaps the biggest concern, though, is that the culture of low rates has exacerbated inequality. They have fed rampant asset price inflation. This is not just of stocks and bonds, but also of house prices. While there are other factors at play, cheap finance has been a key driver. Even though mortgage rates are low, buyers have had to take on more borrowing, burdening themselves with debt. This has fed imbalances between home-owners and renters, between the asset rich and asset poor. Pensioners who rely on bank deposits have suffered, but it is the young who are impacted most.”

There is more debt in the system because low rates make servicing debt easier. This goes for corporates, countries, and individuals. 

Meanwhile, the BoE needs to act because of inflation.

Britain is likely to suffer far higher inflation than the eurozone as the cost of living crisis intensifies this spring. Inflation will surge to a peak of almost 7pc in the UK in April, according to Jari Stehn, chief European economist at Goldman Sachs. Goldman expects that inflation will still be at 4% at the end of 2022, which means inflation is strong enough to grow on top of last year’s inflation to end the year at double the BoE’s 2% target.

Meanwhile, the British pound continues to appreciate versus the euro as the BoE is already acting. The ECB is not. This uptrend is unlikely to end unless the ECB starts taking emergency measures. And even then, it risks significant instability due to the dependency of southern countries on cheap financing. 

1.2 ECB Director Schnabel warns of inflation – and could thus initiate the monetary policy turnaround – Handelsblatt

A comment on Isabel Schnabel’s (changing) view that greenflation is making it harder for the ECB to control inflation.

There have been warnings for some time that the fight against climate change could drive up energy prices and thus inflation. Until now, however, this has been seen more as a longer-term future issue and less linked to the short- and medium-term inflation problem created by the corona pandemic.

Isabel Schnabel, German Director of the European Central Bank (ECB), has now established this link – and thus indirectly changed the coordinates of monetary policy. At the same time, Schnabel has thus moved closer to the camp of the hawks, the supporters of a stricter monetary policy. Because she is one of the most high-profile figures in the ECB’s Governing Council, this shift cannot be valued highly enough.

Around the world, central banks tend to base their monetary policy primarily on so-called core inflation. This excludes food and energy prices because they fluctuate relatively strongly and therefore, according to the rationale, blur rather than clarify the fundamental trends. But precisely this exclusion of energy prices can no longer be the rule because of climate policy and the resulting longer-term price trends – Schnabel made this clear in a speech at the weekend. And this is precisely what shifts the coordinates.

Of course, it may happen that energy prices calm down again in the coming years, while the aftermath of the corona pandemic has not yet been overcome. In that case, Schnabel’s announcement would not change much. However, if energy persistently becomes more and more expensive, the ECB would have to react more clearly than previously expected if the view of the German ECB director prevails.

The challenge that arises in this case is considerable. For if energy prices rise due to higher costs in production or simply due to scarcity, from an economic point of view this is initially a problem on the supply side – just like the production bottlenecks being felt today due to Corona. Monetary policy, however, primarily affects demand. If one reads Schnabel’s proposal carefully, she recommends paying more attention to energy prices in two cases in particular: if expensive energy should lead to a general expectation of higher inflation, or if new investments also give the economy as a whole more of a boost. But it may be difficult for the ECB to make too subtle a distinction in its communication: Once it decides to take energy more into account, it will also be judged on that.

And that is not the only communication problem the central bank and its president Christine Lagarde will encounter. One of the ECB’s mantras so far has been that inflation becomes dangerous above all when so-called second-round effects occur, i.e. when higher prices lead to higher wages and salaries, which in turn drive up costs and prices. In the coming years, many economists assume that wages and salaries will increase significantly, if only for demographic reasons. Such an increase in labour costs need not be a second-round effect. But when it does, the ECB’s critics will promptly reproach it for no longer hesitating or for having reacted too late.

Comment: The ECB cannot impact supply. That is true. However, the ECB’s task is to guarantee price stability. It doesn’t matter why inflation is occurring, the ECB needs to act. The BoE on the other side of the channel understood this as it hikes rates last year. The change in communication is a start, although Lagarde continues to believe that inflation is temporary. The ECB is backing itself into a corner until it is unable to get out. At that point, it has to act regardless of negative consequences, which will not help the stability of the euro, as it emphasises the difference in stability between euro area countries.

And it’s not just Lagarde. French central bank governor Villeroy believes that inflation will be back below 2% next year. He too is following Lagarde’s words and indirectly hoping that energy inflation is coming down. Essentially, hoping for lower energy prices is now a cornerstone of the ECB’s “plan” to fight inflation. 

1.3 New Bundesbank boss warns high inflation could last longer than expected – POLITICO

Eurozone inflation could remain high for longer than the European Central Bank currently projects, incoming Bundesbank President Joachim Nagel warned Tuesday as he delivered his inauguration speech. “The medium-term price outlook is exceptionally uncertain,” Nagel said. “I currently see a greater risk that the inflation rate could remain high for longer than currently expected. In any case, monetary policy must be on guard.”

The comments suggest that Nagel’s position may not in fact deviate significantly from his predecessor, Jens Weidmann, who was a leading hawk on the ECB.

Nagel underscored three key questions for policymakers: How persistent high inflation rates will be; whether the ECB’s loose monetary policy is still appropriate (and if so, for how long); and how policymakers should deal with the high level of uncertainty.

Even though eurozone inflation hit a record high of 5 percent in December, the ECB is standing firm on its view that inflation will drop and come in below its 2 percent target in 2023 and 2024, making any interest rate hikes this year unlikely. 

The ECB’s conundrum is that inflation has repeatedly surprised on the upside, forcing the central bank to revise up its quarterly inflation projections six consecutive times. The traditionally hawkish Bundesbank, by contrast, has warned repeatedly not to underestimate risks of inflation staying above target for longer.

The generally more hawkish policy positions created frequent tensions between the majority position on the ECB and Weidmann, who left the central bank after ten years at his own request for personal reasons. 

Still, Nagel tried to strike a tone of reassurance. “The people in Germany rightly expect the Bundesbank to be an audible voice of the stability culture,” Nagel said. “I can assure you: it will stay that way. We will confidently bring our expertise and convictions into the debates.”

At the same time, Nagel pledged to play a constructive role on the ECB’s governing body, the Governing Council. Promoting a position with commitment doesn’t mean disrespecting other views, Nagel said, telling ECB President Christine Lagarde that he’s looking forward to fruitful discussions.

Comment: Joachim Nagel is looking forward to “fruitful discussions” while making clear that he is looking for three key things: whether inflation is persistent, if the ECB’s loose monetary policy is still appropriate, and how to deal with uncertainty. He should be a voice of reason as he represents a country with a high savings rate, low participation in the stock market, a high percentage of renters, and a general fear of inflation.

Handelsblatt asked economic researcher Achim Truger a key question: “Many citizens expect the Bundesbank president to get inflation under control. How is Nagel supposed to do that within the ECB Governing Council, where the Bundesbank has recently been isolated?”

The answer wasn’t surprising: “The Bundesbank is no longer responsible for monetary policy, but of course Joachim Nagel can exert influence in the Governing Council. And of course the Bundesbank can make a contribution, for example the very well-positioned research department with its studies.”

What this basically means is that he can communicate his issues and bring in research to make a better case for rate hikes. However, as he has just as much influence as other countries (it’s not GDP or population weighted), nobody should make the case that he can change the ECB’s view on inflation without support from his peers.

2.  INFLATION

2.1 Highest value since 1974: wholesale prices rise – Handelsblatt

Last year, wholesale prices in Germany climbed more sharply than they had in almost 50 years. According to the Federal Statistical Office, the last time there was a higher increase than the annual average of 9.8 per cent within a year was in 1974 during the first oil crisis, with a plus of 12.9 per cent.

One reason for the development last year: the high demand for raw materials and intermediate products in view of the economic recovery after the Corona low. Especially the prices for petroleum products (plus 32 per cent) as well as ores and metals (plus 44.3 per cent) rose strongly in wholesale trade compared to the previous year, as the Federal Office announced on Wednesday.

In addition, a base effect comes into play: In the crisis year 2020, the price level for many raw materials was comparatively low, so that the difference is now even more significant.

According to the Wiesbaden-based authority, wholesale selling prices rose by only 0.2 per cent from November to December 2021. However, they were 16.1 per cent above the level of December 2020.

Wholesale is one of several economic levels in Germany at which the general price level is formed. In addition, there are the prices for goods imported into Germany and the prices that manufacturers receive for their products, the producer prices. They all have an effect on consumer prices, which the European Central Bank uses to guide its monetary policy.

In Germany, consumer prices in December were 5.3 per cent higher than in the same month of the previous year. The inflation rate in Europe’s largest economy thus reached its highest level since June 1992.

For 2021 as a whole, the Federal Statistical Office has calculated in a first estimate for Germany the highest inflation rate since 1993: Energy prices, supply bottlenecks and the reversal of the temporary reduction in value-added tax drove annual inflation to 3.1 per cent.

Comment: On January 20, we get the next important inflation number: German producer price inflation for the month of December. For now, it looks as if non-energy inflation has peaked. One reason is lower Chinese producer price inflation of 10.3%, which is down from 12.9% in November. German import price inflation tends to run in lockstep with Chinese PPI as the graph below shows.

For now, we can expect Chinese producer price inflation to fall if the country’s credit impulse data is any indication. This would give Germany a much-needed break – at least when it comes to non-energy imports.

However, peak inflation does not mean the ECB is out of the woods yet. As we have often explained, inflation is set to run at above-average rates for a prolonged period of time. Inflation (rate of change) does not need to be at multi-year highs to do damage. Long-term inflation close to 3% (or higher) is enough to do damage in a ZIRP economy.  

3.  ENERGY/CLIMATE

3.1 Pressure grows for carbon tax at border – The Times

An influential right-wing think tank has backed calls for a carbon border tax to prevent British manufacturers that invest in decarbonisation being undercut by cheap imports.

The tax would be levied on goods imported from countries with lower environmental standards to make them account for the extra costs they would have faced if they were subject to Britain’s stricter climate policies.

The Centre for Policy Studies says that such a tax on energy-intensive imports would help both the government’s net-zero and levelling-up agendas by ensuring a level playing field for carbon-intensive industries in areas such as the north and the Midlands.

The idea of a carbon border tax has gained in popularity in recent years as countries seek to clean up their domestic industries without putting them at a competitive disadvantage that drives manufacturing and emissions overseas, a problem known as carbon leakage. The Climate Change Committee, the government’s official climate adviser, said in its 2020 report on achieving net zero that “work should begin immediately to develop the longer-term options of applying either border carbon tariffs or minimum standards to imports of selected emissions-intense products”.

The EU has also proposed a “carbon border adjustment mechanism” to prevent carbon leakage. The Centre for Policy Studies was founded in 1974 by Sir Keith Joseph and Margaret Thatcher and is one of the most influential think tanks among Conservative MPs. Its report sets out a series of recommendations for “how net zero can revitalise the UK’s industrial heartlands”.

[…] It argues: “A carbon border adjustment mechanism would provide a level of insurance against carbon leakage, and give British industries the reassurance they need that taking steps to decarbonise will not mean they are unfairly undercut by cheaper yet dirtier imports.”

The report insists that the measure “is not about protectionism” but rather “about ensuring free and fair competition, by ensuring foreign producers are not able to offer artificially cheap goods because they are not accounting for the costs their emissions impose on society and the planet”.

Comment (CAPX): […] But it’s naive to imagine that the perceived tension between levelling up and decarbonisation really is just that – a perception. Even with the vast opportunities on offer, the journey to a Net Zero economy will not be painless. From previous economic transitions, they know that even if the country as a whole benefits, there can still be people and places that lose out.

To prevent this happening, the Government must assess how it can support the transition and guard against a repeat of the past. That does not necessarily mean a larger role, but a smarter one. In the Centre for Policy Studies’ latest report – ‘Levelling Up and Zeroing In’ – they set out a series of policies which would boost levelling up by allowing such areas to better capture the economic benefits on offer from the Net Zero transition.

Tweaking the tax system would be a good place to start. In particular, they look at how to improve the tax landscape for businesses making investments in the sort of capital equipment which will be necessary to decarbonise various industrial processes, or retool factories to make zero-emission versions of the carbon-intensive products they’re currently churning out.

In last year’s March Budget, Rishi Sunak announced a ‘super deduction’ to allow businesses to write off 120% of the value of investments against their tax bills, effectively bringing down the cost of capital expenditure. From a Net Zero perspective, this makes investing in newer, cleaner equipment and machinery cheaper and speeds up the green transition. It also works from a levelling up perspective, given that many of the manufacturing businesses which will make use of the super deduction are located outside of the south-east.

But the super deduction is due to expire in 2023. After that, the country goes back to the previous system, tilted against capital investment, which risks slamming the brakes on both levelling up and decarbonisation. For that reason, we urge the Treasury to make the policy permanent, even if it means making it slightly less generous. (A deduction of 100% – also known as ‘full expensing’ – would still be a gamechanger for capital-intensive businesses.)

This report makes several other recommendations, from holding the Government to account on its plans to boosting R&D investment, to ensuring the Apprenticeship Levy is delivering the sorts of green skills which businesses will increasingly demand. There’s a mixture of carrots and sticks, which can combine to drive decarbonisation and spread economic opportunity.

The relationship between levelling up and cleaning up is not always straightforward. Such is the ambition behind both that frictions will inevitably arise at the margins. But they are overwhelmingly mutually compatible agendas. With a little extra careful thought, the two can be further galvanised – and ensure that decarbonising the economy really can revitalise Britain’s industrial heartlands.

3.2 Diesel price rises to all-time high – Handelsblatt

The temporary relief at the pump is over. Diesel drivers currently have to pay more for their fuel than ever before, as the ADAC announced in Munich on Monday. On a nationwide daily average on Sunday, a litre of diesel cost 1.584 euros, the highest value ever measured by the transport club. Super petrol of the E10 variety came in at 1.659 euros per litre, still 5 cents away from its record value from 2012.

“For people who have a diesel and have to drive to work, the prices are already hefty,” said ADAC fuel market expert Jürgen Albrecht. “With the diesel price, everything is coming at the same time at the moment. The typical seasonal increase, the expensive oil and the increase in the CO2 levy at the beginning of the year.” The increase in the CO2 price accounts for about 1.5 cents per litre of fuel. The oil price had recently increased, among other things, against the background of the unrest in the producing country Kazakhstan.

Comment: German diesel prices are just one example of consumers getting hit by energy inflation. It’s a broad topic as most people have figured out by now. Hence, it’s always good to get Jeremy Warner’sview on things as he once again explains that this is the price we have to pay for going green.

“[…] Eventually, mass hydrogen production should provide the energy storage needed to deal with the intermittent nature of much renewable power generation, but the technology is still in its infancy and it is still some distance off. In the meantime we’ll be as dependent as ever on gas to provide backup for when the wind doesn’t blow and the sun doesn’t shine.

In recognition of this reality, the European Union has amusingly seen fit to class natural gas as a “green” energy source for investment purposes. Just as well, for the political pressures to go green are now so intense that few would otherwise bother to sustain it.

Continued use of carbon, then, is unavoidable, but the demands of the energy transition require that it comes at an ever greater cost. Modelling by the IMF suggests that carbon prices are going to have to be considerably higher still to force the level of investment in renewables required to meet net zero targets.

With improved technology and economies of scale, the cost of renewables, once almost prohibitively expensive, is admittedly coming down in leaps and bounds. Recent auctions of offshore wind have achieved strike prices far below that currently charged for hydrocarbon-based generation. But there is a long tail of persistently high carbon prices before these gains are recognised in what people actually pay through their bills.

[…] Yet it will be a long wait before we get there. The eventual prize is that of a more secure, more dependable, more environmentally friendly and yes, eventually a less costly form of power generation, one moreover which is not constantly hostage to the likes of Vladimir Putin.

It’s getting from here to there that is the problem. The idea that it would be cost-free was always for the birds, and so it is proving. The famous Juncker curse has it that the politicians know what has to be done; they just do not know how to get re-elected afterwards. Quite so.”

3.3 Habeck wants comprehensive immediate measures for more climate protection – WELT

The new Federal Minister for Economic Affairs and Climate Protection, Robert Habeck (Greens), wants to increase the pace of climate protection and initiate comprehensive immediate measures. A first package of urgent laws and projects is to be adopted by the cabinet by April, as the Deutsche Presse-Agentur learned from the ministry. Overall, an “immediate climate protection programme” with all laws, ordinances and measures is to be completed by the end of 2022, so that all measures can take effect from 2023. Accordingly, the goal is to bring Germany onto the “climate target path”.

Habeck presented an “opening balance sheet” on climate protection in Berlin on Tuesday. This balance sheet shows how much climate protection in Germany is behind expectations, the ministry said. In all likelihood, the 2022 climate targets would be missed, and it would also be difficult for 2023. The ministry speaks of a “drastic shortfall”.

[…] At the beginning of December, Habeck had described the planned significantly faster expansion of renewable energies as a major effort. This will not be possible “without an imposition”.

The previous black-red government had decided last year to become climate-neutral by 2045, i.e. to emit only as many greenhouse gases as can be recaptured much earlier than planned.

Habeck’s ministry now said: “If we get it right and trigger a dynamic, we can experience a boom in new technologies, with new industrial value creation and jobs.” Climate protection requirements should also be designed in a socially acceptable way.

Comment: Today, we have two articles on Robert Habeck, the German economic and climate minister. The Greens are serious about the way they want to change the economy. They are openly talking about deindustrialisation. In this case, it wouldn’t be a side effect of high energy prices (among other reasons), but an actual goal of a governing party. Currently, industrial production has a share of 20% of GDP. Green energy policies are not compatible with an economy dependent on industrial production.

Within eight years, Habeck wants to increase the share of renewable energy from 40% to 80%. The coalition wants to use natural gas as a bridge technology, but eventually move to 100% renewable energy.

Habeck is planning two pieces of legislation in the next six months. The first is the reform of the renewable energy law, with the goal of increasing the number of public tenders for renewable energy projects dramatically. Renewable energy will be anchored as a fundamental principle in German law, which gives the government the right to expand the network, even at the expense of other goals. Currently, 0.5% of the country’s area is covered by wind farms. The government was to raise this to 2%. This will invariably lead to criticism that this reduces biodiversity and destroys landscapes as we discuss in the next article.

One example of deindustrialisation risks is Germany’s Thyssenkrupp steel company. It emits roughly 20 million tons of CO2. That’s ten times as much as the entire domestic air traffic in Germany. The goal is to switch the input energy source for steel from coal to hydrogen. In order to produce green hydrogen, the company would require 3,800 wind turbines.

On top of deindustrialisation risks, Germany increases its dependence on Russia for natural gas. While other European countries like France and the Netherlands move to nuclear energy to become carbon neutral, Germany will have to boost natural gas imports. Moreover, in years with less wind, the country will have to import energy made from non-sustainable sources, which would just shift the pollution problem to other countries. 

Germany is slowly realising that their energy transition isn’t working. Becoming sustainable is a great goal, but it cannot risk economic suicide. 

3.4 “In the national interest” – green electricity now gets special status – WELT

With an “opening balance sheet on climate protection”, the new Federal Minister for the Economy and Climate, Robert Habeck (Greens), presented the outlines of an immediate energy policy programme to the public for the first time. With far-reaching privileges for producers of wind and solar energy, the aim is to triple the pace of CO₂ reduction in Germany by 2030. To this end, green electricity production will be given special legal status in future.

“We will enshrine the principle that the expansion of renewable energies is in the overriding public interest and serves public safety,” Habeck told the press. This legal regulation will have the consequence that green energy projects will be given preferential treatment in approval procedures in the future.

If, for example, wind power projects were to have an adverse effect on local residents due to emissions, visual restrictions or noise, these protected interests would in future be “given lower priority”, said Habeck. “Then approval can also be granted more quickly”.

A similar attempt to elevate the expansion of green electricity to the rank of an overriding national interest had failed in 2020 due to resistance from conservationists and opposition politicians. The criticism was that this would make it impossible for the courts to weigh up controversial wind farm projects.

The climate policy spokesman of the FDP parliamentary group, Lukas Köhler, warned that the acceptance of the energy transition could suffer if controversial green energy projects could simply be pushed through in court with reference to national security interests.

Habeck wants to reduce or abolish the existing distance regulations between residential areas and wind turbines in agreements with the federal states. In future, wind turbines will also be allowed to move closer to the rotating radio beacons of air safety and to weather radars.

“If distance rules are only used for prevention planning, they cannot remain in place,” said Habeck. Until the summer break, he wants to visit all federal states to initiate the necessary changes – also in Bavaria, where particularly far-reaching distance regulations are in force with the so-called 10-H regulation.

The Minister of Economics explained that the regulations were necessary to catch up with Germany’s “backlog” in climate protection. It had taken 30 years to build up wind power capacities of 40 gigawatts in Germany, and now the same had to be achieved in eight years.

Comment: Germany is about to miss its 2022 climate targets after missing its 2021 targets as well. After deciding to phase out coal by 2030 instead of 2038 and shutting down all nuclear reactors before the end of 2022, Germany is now set to accelerate investments in wind turbines. Robert Habeck isn’t messing around anymore and is about to pick a fight with German states as he wants them to abolish the so-called 10-H rule, which means wind turbines can be built closer to residential areas. In order to accelerate wind energy generation, the Greens are willing to pick a fight with environmental organisations (ironic, isn’t it?) and their coalition partner FDP. All of this to avoid investing in nuclear energy. Even worse, the Greens are joining the Austrian Greens in suing the EU Commission for its plans to include nuclear in the green taxonomy. 

This story is far from over as Germany desperately needs to find ways to fill the nuclear (and future coal) gap.

4.  GERMANY

4.1 “Germany faces fundamental problems” – share of exported high-tech goods slumped – Handelsblatt

[…] Chips are just one example. Cutting-edge technology as a whole has been suffering a decline in Germany for decades. Germany’s share of high-tech goods exported worldwide has almost halved since 1990. This is the result of a study by the federally owned Gesellschaft für Außenwirtschaft und Standortmarketing (GTAI), which is available to the Handelsblatt.

Germany’s decline is due on the one hand to the strengthening of China, which was able to increase its share of high-tech exports from one to 24 per cent in the same period. “But above all, Germany is showing the effects of structural problems. We are not good at high-tech,” says Holger Görg, President of the Kiel Institute for the World Economy (IfW). The data basis of the study, which is based on figures from the United Nations, is very robust, he says: “This shows us that Germany is facing fundamental problems.”

The Federal Republic was once known as a nation of explorers and pioneers who developed and manufactured products at great expense that transformed economies and societies in countries almost all over the world. But for some time now, this trend has been reversed. High-tech products come less and less from Berlin or Bavaria and more and more frequently from Shanghai or Shenzhen.

According to the GTAI, this trend has recently intensified. Germany is not only losing out in international comparison. High-tech exports in this country have been almost stagnant since 2011 and most recently stood at the equivalent of 181 billion dollars.

Total exports have risen significantly in the same period. Germany seems to be moving further and further away from being a high-tech location, warns economist Görg. This is not only a problem for the industries concerned.

Comment: This is one of the most important articles today for one major reason: Germany is going through a secular change, which could not only hurt itself, but also its European business partners. Ignoring the risks of deindustrialisation caused by its failing energy transition, Germany is seeing contraction in high-tech exports. 

Germany was one of the world’s biggest beneficiaries of China’s economic boom of the past few decades. Germany’s exports soared to more than EUR 1.5 trillion after 2005, which is roughly 45% of its GDP. In the 1990s, exports were far less significant. This trend could now reverse. The main risk Germany is facing is China. China is now building its own high-tech products and looking to become an export nation in this area itself. Germany’s customer is now becoming its competitor.

A study by the IfW identifies poor framework conditions in the areas of digital infrastructure, further education and venture capital as core problems for the high-tech sector. GTAI expert Schaaf adds: “High labour costs and rising energy costs are making it increasingly unattractive for high-tech producers to research and produce in Germany.”

The graph below shows German high-tech exports (NOT total exports). High-tech exports haven’t gone anywhere since the Great Financial Crisis. Meanwhile, China has ramped up exports in this area to roughly $760 billion in 2020.

Prior to the holidays we noted that Germany’s economy needs to become more service-oriented if it fails to maintain its position in the global export market – and it’s looking like it. The export share of GDP is likely going lower in the years ahead. The same is likely for high-tech exports, which is even worse considering that automotive and machinery industries are increasingly becoming high-tech as well. Autonomous driving, AI-applications, etc. 

Germany needs to act now. Unfortunately, the new “traffic light” coalition is mainly focused on the environment, which will make it close to impossible to catch up with China. We discuss this in today’s newsletter as well.

“The most important mission for the traffic light is the climate turnaround in industry, energy and mobility as well as combating the consequences of climate change and sustainability. Other goals it lists are a crisis-proof health system that also uses biotechnology, digitalisation and artificial intelligence and quantum technology.”