German Vice-Chancellor and Minister of Industry Robert Habeck has joined the fight to save the German economy, which is falling into recession. High energy prices are a fundamental problem for German households and businesses. Habeck therefore proposed massive state subsidies for German industry, which accounts for 23 percent of the country’s GDP.
The main measure to start the German industrial engine is supposed to be state-subsidized energy. The green politician promises that selected sectors of German business will pay only six cents per kilowatt-hour consumed. In conversion, this means less than 1,500 crowns per megawatt hour, which is the price that Czech companies last encountered in April 2021.
German industry now pays an average of four times the price for energy, i.e. 24 cents per kilowatt-hour (in conversion, this means 5,858 crowns per megawatt-hour), wrote the website of the German television station Deutsche Welle.
In the Czech Republic, which is strongly linked to the German economy, the price of electricity in the first half of 2023 reached an average of 7,607 crowns per megawatt hour for the most common tariffs, the Czech Statistical Office reported.
Biden is heavily subsidizing American industry
Habeck argues with the example of the United States, in which the Biden administration decided last year to support low-carbon technologies (including nuclear) with a subsidy program with a total value of 740 billion dollars spread over the next ten years. American energy is to become less dependent on energy imports, and local companies can count on comprehensive tax breaks.
But the surprise on the German political scene was mainly caused by the fact that the Minister of Industry and Energy did not discuss his idea in advance with his coalition partners in the government – the Social Democrats from the SPD and the liberals from the FDP. A number of ministers were therefore surprised by the proposal for massive electricity subsidies for German businesses.
Mainly politicians from the FDP perceive Habeck’s proposal as an attempt to improve the image of the German Ministry of Economy, which is criticized by the public for the new heating law. From next year, it is forbidden to use gas sources and heating oil boilers for heating in new buildings. And from January 2024, heating systems will have to use at least 65 percent renewable energy.
Cheap gas from Russia is a thing of the past
At the same time, low energy prices were a competitive advantage of German industry in past decades thanks to cheap natural gas from Russia. Production costs were relatively low, but industrial enterprises sold their products with the Made in Germany brand at a high margin all over the world. Thanks to this, Germany has become a successful export economy.
However, the invasion of Ukraine by Russia meant a fundamental revolution and a change in the established order for the German energy sector (in fact, it concerned the whole of Europe). It had to very quickly reorient itself from dependence on Russian gas to supplies of more expensive liquefied natural gas (LNG).
The German Chancellor Olaf Scholz of the SPD has not yet been able to be convinced for state-subsidized electricity. It is feared that this will significantly increase the demand for electricity and that Germany will have to import electricity from neighboring countries to a greater extent than before.
Domestic electricity production fell as a result of the country’s final shutdown of nuclear power plants in mid-April. Scholz’s other argument is that the pressure on energy-intensive industrial operations to change their production towards greater sustainability will disappear.
The FDP is against further spending
The FDP and its leader and Minister of Finance, Christian Lindner, are also fundamentally opposed, who, according to his statement, cannot imagine that additional billions of euros would go to support the industry. Habeck reckons that electricity prices would subsidize the industry if necessary until 2030. The total bill for taxpayers is estimated at 25 to 30 billion euros, i.e. up to 732 billion crowns.
The funds for this are to be taken from the so-called economic stabilization fund, which is supposed to help German companies. It was created in 2020 and was originally intended to cover the economic complications associated with the covid pandemic.
But Lindner objects that subsidizing energy prices would contradict current German legislation, as the stabilization fund is not intended for payments for electricity.
Another objection is that only certain industries, such as chemists and steel producers, are to receive subsidies. Economist Oliver Holtemöller of the Leibniz Institute for Economic Research in Halle emphasized that market prices have a function in the economy. In the case of high prices, they indicate a shortage of the given commodity. Market prices also influence the behavior of economic entities.
“If the government suppresses price signals by capping prices, it will lead to economically inefficient outcomes,” he said. Clemens Fuest, president of the Ifo Institute in Munich, holds a similar opinion. According to him, subsidies from taxpayers’ money do not provide incentives for companies to invest in reducing energy consumption.
Support for trade unions and industry
However, Habeck has the support not only of traditionally influential German trade unions, but also of industry representatives. They fear that some sectors that consume large amounts of energy will disappear and thousands of people will come to work. The minister warns that the entire supply chain of German production could fail. The Confederation of German Industry (BDI) claims that some companies will move production to countries where energy is cheaper.
Expensive energy costs are already affecting medium-sized family businesses, which were the backbone of the German economy in the past. Jürgen Kerner from the leadership of the IG Metall trade union emphasized that smaller operations such as aluminum plants, foundries and forges are cutting back on production due to high energy prices, and the first bankruptcies and layoffs are also coming.
A current survey commissioned by the Association of German Employers’ Associations (BDA) shows that fully 85 percent of the companies surveyed are worried about the future of doing business in Germany. And 88 percent of respondents add that the government in Berlin does not have a well-thought-out strategy for solving the economic crisis.