Energy crisis: Keeping energy-guzzling operations alive should not be priority

Germany is the euro zone’s economic powerhouse, accounting for 30 per cent of its output. It is one of the most successful and best-off regions in Europe. Germany’s economic achievements are built, among other things, on its advanced manufacturing sector, specialising in engineering and chemicals. Complex supply chains that have developed over the years mean the German economy is now intertwined with the wider EU, and their progress is mutually interdependent.

The latest EU forecast is that output in the German economy will see a fall of more than 0.5 per cent over the coming year, a slightly bigger loss than that anticipated for the rest of the EU. Ireland, by contrast, is expected to grow next year, albeit at a very much reduced rate.

With Germany’s heavy dependence on Russian gas, the fallout from the Ukraine war has hit it particularly hard. Weaning itself off this supply, and coping with the dramatic rise in gas prices, has significantly impacted upon both households and businesses. As in Ireland, many German households use gas for heating their homes, and families have also felt the impact of the big rise in the price of electricity. In Ireland, while we have suffered from soaring gas prices, we are less exposed to the dramatic reduction in Russian energy supply, so the impact here has been less extreme.

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Prior to this crisis, Germany had levied all the cost for development of renewable wind energy on households, exempting business from contributing. This approach had hit poorer households, and also reduced the incentive for industry to become more energy-efficient.

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Now the German government has reacted to the energy price crisis by introducing a massive support package of €200 billion. As with many other countries, a lot of this money will go on insulating household bills to some degree from the high energy prices. However, the supports are not very well targeted at the most needy. Compared to Ireland, more of the money will go to richer households, who traditionally spend more on energy.

Given how poorly targeted this energy package is, Prof Ulrike Malmendier of the German Council of Economic Experts has recommended that the burden of paying for this support should fall on richer households through raising taxes. While the Social Democrats have welcomed this advice, their coalition partner, the liberal FDP, are totally opposed to such a solution.

Basic chemicals and fertilisers, along with mechanical engineering – all with heavy energy requirements – form a vital part of Germany’s manufacturing sector. In the past these industries could rely on cheap Russian gas, making them competitive with firms producing outside of Europe. However, not only do German firms now face much higher energy prices than their international competitors, but those price differences are likely to persist well into the future. As a result, German companies such as BASF, the world’s largest chemicals business, have announced that they will relocate production to the US or Asia, where energy will likely be cheaper in the long term, and downsize their German operations.

In addition to its support for households, the German government plans to spend a lot on subsidising energy-intensive industries, and to take advantage of a short-term dispensation from state-aid rules. Other EU countries with energy-intensive industries that cannot afford to subsidise their home producers as generously as Germany, are understandably upset, as the help from Berlin makes its firms relatively more competitive.

Without ready access to cheap and abundant fuels, Irish manufacturing has focused on less energy-intensive sectors, such as tech, health-care devices and pharmaceuticals

Such subsidies, whether high as in Germany or moderate as elsewhere in the EU, are masking a long-term loss in competitiveness of European energy-intensive industries. Gas prices in Europe will not fall to previous levels, because of the need to rely on imported liquefied natural gas from around the world. Those firms which cannot survive without significant energy subsidies should be allowed to shut down, with production shifting elsewhere in the world where energy is cheaper. Keeping zombie firms going through subsidies does not make sense. That’s the principle underpinning EU rules on state aid.

Most of Irish manufacturing is not very energy-dependent, in contrast to Germany’s. Without ready access to cheap and abundant fuels, Irish manufacturing has focused on less energy-intensive sectors, such as tech, health-care devices and pharmaceuticals. This leaves our economy less exposed to the fallout from the Ukraine war. Where we may have a few entities which cannot survive with higher energy prices, they should be allowed to shut down. We should promote a greener, less energy-intensive economy rather than keeping energy-guzzling operations artificially alive. Public money would be better spent on the green economy and on tackling our housing crisis rather than on subsidising the wrong kind of production.