Germany is suffering virulently from the effects of the war in Ukraine. Betting all its eggs on the Russian basket to obtain cheap energy has ended up costing it dearly. The International Monetary Fund (IMF) estimates that Germany will be the only industrialized economy to end this year in recession. In this skid of the European locomotive, the government led by Olaf Scholz has presented a macro fiscal stimulus plan, but has been unable to push through the tsunami of subsidies to energy companies, which threatens a strong industrial exodus.
The traffic light coalition, which was launched in 2021 by the Social Democrats, Liberals and Greens, stands out for its deep divisions on economic and energy issues. A clash of positions that materialized in Brussels after an unexpected veto by Berlin to the European legislation banning combustion cars from 2035. The internal upheavals are shaking the stability of the government and are reducing its popular support. A recent YouGov poll revealed that 69% of Germans do not trust their government's ability to solve the problems facing the country.
Now, the Liberals led by Christian Lindner have put the brakes on plans by their Green coalition partners to launch an energy state aid package. The stimulus aims to alleviate the impact of high electricity prices on businesses. The proposal unveiled by environmentalists in May involves imposing a reduced energy price of six cents per kilowatt hour. It would be in force until 2030 and would cost the national coffers some 30 billion euros. The threefold objective, outlined by its leader and Minister of Economy and Climate, Robert Habeck, was to give manufacturing companies a shot in the arm, to advance on the road to renewables and to promote the competitiveness of the country's industrial fabric.
But the two-day retreat of the members of the government at the Meseberg Palace did not serve to iron out the differences and move forward with a measure that Lindner's people consider contrary to the dynamics of the free market. The meeting held on the outskirts of Berlin did result in a package of tax incentives worth 7 billion euros for the next five years. The ten-point plan includes tax breaks for small and medium-sized companies, such as corporate tax cuts, or greater flexibility in taking on losses. "The current economic growth is not going as well as we would like, with these measures we want to encourage companies to continue investing," Scholz summarized.
But the measures may not be enough at a time when the world's fourth largest economy and the first in the EU is walking thefine line of technical recession. Many companies have sounded the alarm by threatening to leave for countries with lower energy prices. In the face of mounting pressure, the Social Democrat leader has argued that the cost of electricity is now much more contained than it was a few months ago. But the reduced pressure on energy bills has not calmed the waters. A recent survey conducted by the German Chamber of Commerce revealed that a third of firms were willing to expand abroad, motivated by rising pressure on electricity prices and the uncertainty of a future without gas, coal and Russian oil. This is twice as many as last year.
Germany's energy park blew up with the Russian invasion of Ukraine. Before February 24, 2022, more than half of all gas consumed in the country came from deposits in Moscow. For Germany, which with the annexation of Crimea not only failed to curb its energy dependence on the Kremlin, but actually increased it, to disassociate itself from this has been a litmus test. And all this has come in the midst of the ecological transition in a country still heavily dependent on coal. A Molotov cocktail that has sent electricity prices soaring.
Germany is by far the European country that has disbursed the most state aid in the context of the relaxation authorized by the European Commission in March. It accounts for half of all European aid and is twice as much as France. According to Reuters, its tax shield will increase between 2021 and 2024 with 30,000 million euros, a good part of them destined to boost the ecological transition.
The German 'macro tax shield' is raising a lot of dust in the European capitals, some of which fear atwo-speed EU between the countries that have a budgetary sleeve and the smaller ones. All this is already threatening to blow up the essence of the Internal Market, which is why Brussels is already calling on all countries to gradually put an end to all the emergency measures introduced in the context of the health and energy crisis. But Paris and Berlin are not prepared to jeopardize the competitiveness of their industry, while at the same time China and the United States are taking the lead with major boosts to their productive fabric.
In the face of global financial turbulence and growing Chinese assertiveness, Washington did not hesitate. Last year, the Biden Administration launched a law to reduce inflation, dubbed the IRA, which set off alarm bells in Brussels. With a brutal deployment of 369 billion euros in green subsidies, the occupant of the White House sought to attract foreign investment from his country, leaving his European allies in diapers and under a great risk, especially in Germany, of a chain exit of their firms to the other side of the Atlantic. Berlin and many capitals interpreted it as the same Trump protectionism, with different name and forms.
Germany is suffering virulently from the effects of the war in Ukraine. Betting all its eggs on the Russian basket for cheap energy has ended up costing it dearly. The International Monetary Fund (IMF) estimates that Germany will be the only industrialized economy to end this year in recession. In this slippage of the European locomotive, the government led by Olaf Scholz has presented a macro fiscal stimulus plan, but has been unable to push through the tsunami of subsidies to energy companies, which threatens a strong industrial exodus.