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The Rising Threat of Deindustrialization in Germany

The looming threat of deindustrialization has cast a long shadow over Germany, a nation that has historically been a powerhouse of manufacturing and economic prowess. The seismic shifts in geopolitical landscapes, particularly following Russia’s aggressive invasion of Ukraine in 2022, have exacerbated existing issues, particularly as energy prices surged. Compounding this situation is the deceleration of the Chinese economy, which happens to be Germany’s largest trading partner. Furthermore, the intensifying competition from Chinese automotive manufacturers has made life significantly more challenging for Germany’s dominant carmaker, Volkswagen (VW). As a result, the previously abstract concern of deindustrialization is now manifesting itself in very concrete ways.

Alarming Developments for Volkswagen and the Automotive Sector

The most disconcerting news emerged recently when Daniela Cavallo, the primary representative of VW’s labor force, announced impending closures of at least three factories in Germany. This decision is poised to affect tens of thousands of jobs, with estimates suggesting up to 30,000 positions could be eliminated, alongside pay cuts of up to 10%—with some workers facing reductions as drastic as 18%. While VW’s management has been in ongoing discussions with labor representatives, no official confirmation has been released regarding these closures. Should they proceed, they would mark the first factory shutdowns in VW’s home country, an alarming milestone for the 87-year-old automotive giant. This news was compounded on October 30th when VW reported a staggering 64% decline in net profit year-on-year for the third quarter, primarily driven by disappointing vehicle sales in China.

Manufacturing Job Cuts: A Broader Trend

The struggles of VW are not isolated. In recent months, several other notable companies have announced significant job cuts and factory closures. For instance, in February, the appliance manufacturer Miele revealed plans to shift some of its production operations to Poland, impacting approximately 700 jobs in Gütersloh, North Rhine-Westphalia. Similarly, Continental, a key automotive supplier, is set to lay off 7,000 employees and shut down various sites. Michelin, the French tire manufacturer, is reported to be cutting 1,500 jobs in Germany and closing several factories. Meanwhile, ZF Friedrichshafen, another major auto supplier, has indicated it will eliminate 14,000 jobs by 2028.

Disturbing Insights from Recent Surveys

A recent survey conducted by DIHK and led by Martin Wansleben revealed disturbing statistics regarding the outlook of German businesses. It indicated that one-third of the surveyed companies, along with nearly two-fifths of industrial firms, are planning cuts to their investments in Germany. Only 19% of industrial enterprises characterized their current situation as “good,” while a significant 35% termed it “bad.” This prevailing pessimism has drawn comparisons to the severe economic crisis experienced in 2002-03, during which the government undertook a major legislative reform initiative known as Agenda 2010.

The Possible Shift in Economic Paradigms

Moritz Schularick, the head of the Kiel Institute for the World Economy—a reputable research organization—has previously stated that only a crisis within a major car manufacturer would compel the current government to reconsider the traditional manufacturing-driven economic model that Germany has relied upon. "Perhaps VW’s challenges are finally the wake-up call we have anticipated," remarks Schularick, now seemingly hopeful for a paradigm shift.

Government Intervention: Questions and Controversies

In light of these alarming developments, Chancellor Olaf Scholz convened a "summit" on October 29th, aiming to address the challenges facing the industrial sector. The summit included key business leaders like VW’s Oliver Blume, as well as officials from Siemens and BASF, major players in engineering and chemicals, alongside union representatives. However, little has emerged about the discussions, aside from a focus on aiding industries grappling with elevated electricity costs and a proposed reduction of red tape—which includes the scrapping of regulations requiring oversized firms to ensure worldwide compliance with human rights and environmental standards.

While there is a growing need for comprehensive measures to facilitate decarbonization and digital transformations, the governing coalition—which includes Scholz’s Social Democrats, the Greens, and the liberal Free Democrats—has displayed significant dysfunction, raising doubts about the feasibility of effective interventions.

The Fragmentation of Governance in Germany

Chancellor Scholz’s summit was notably convened without prior consultation with either Christian Lindner, the liberal finance minister, or Robert Habeck, the Green economy minister. In response, Lindner organized a parallel summit on the same day, while Habeck expressed his frequent engagement in similar discussions but floated a proposal for a debt-financed investment fund for businesses that had not been shared with the Chancellor.

The select committee is scheduled to reconvene on November 15th, right after the critical deadline for agreement on next year’s budget. Yet the negotiations among the coalition parties have been fraught with conflict, leading some analysts to believe that the precariousness of their partnership could lead to its dissolution. Given this chaotic backdrop, it appears increasingly unlikely that any initiatives comparable to the transformative Agenda 2010 reforms will materialize.

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© 2024, The Economist Newspaper Limited. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com

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