Berlin Industrial policy was frowned upon in Germany for a long time, but it is experiencing a renaissance in the geopolitical turning point. A glance at the list of speakers at the Day of German Industry shows that the state is claiming a new role. Chancellor Olaf Scholz (SPD) and Finance Minister Christian Lindner (FDP) will speak this Monday and Economics Minister Robert Habeck (Greens) on Tuesday.
The government’s route is clear: industrial policy should create independence, especially in future technologies such as solar energy or batteries. Support comes from the EU Commission. Europeans fear being dependent on Chinese companies for the energy transition. At the same time, there is growing concern that the US government is luring European companies to the USA with generous subsidies. Europe’s answer: entry into the subsidy race.
The EU Commission has drawn up a list of several “strategically important” future technologies, including key components for the energy transition such as heat pumps, photovoltaics, batteries and electrolysers. Faster approvals, but above all more subsidies, are to be made possible for these technologies. 40 percent of the European requirement is to be produced in European plants.
What is being forgotten according to leading economists: An economy can also avoid dependencies if the technology is imported from different supplier countries. And with some of the technologies, that’s entirely possible.
Therefore, the President of the Kiel Institute for the World Economy (IfW), Moritz Schularick, considers the EU list to be too extensive. “We should concentrate on sectors in which major geoeconomic dependencies and externalities can arise if we don’t steer politically and don’t make any industrial policy wishes,” he told the Handelsblatt.
Gabriel Felbermayr, head of the Austrian Institute for Economic Research (Wifo), warns of the “high risk” that subsidies are too high and that more and more have to be paid because companies are threatening to emigrate.
Concerned tones are even coming from the industry. You have to look at the areas much more closely, says the chief economist of the Federation of German Industries (BDI), Klaus Deutsch. “Otherwise you end up with an endless list of things that should all be encouraged.”
Experts have analyzed the most important technologies on the EU Commission’s list. The extent to which independence has to be bought by the state depends on the product. An overview:
Heat pumps: “Confidently left to the world market”
At the end of April, an outcry went through Germany when it became known that the Hessian company Viessmann would sell its heat pump division to a US competitor. Many people got the reflex: what if we lose access to the most important technology for climate protection in the building sector?
Economics Minister Habeck warned against scaremongering, but also announced that the sale would be examined. He wants to ensure that Viessmann’s heat pump production stays in the country. The Green politician referred to the list of the EU Commission: Heat pumps are therefore “strategically important”.
From an economic point of view, however, there would not even have to be panic if Viessmann heat pumps were no longer manufactured in Germany. “Heat pump production can safely be left to the world market,” says IfW President Schularick. It is a mass product. The global market shares are distributed accordingly, so that dependencies on individual supplier countries are unlikely.
China is the market leader with 36 percent of global manufacturing capacity, according to data from the International Energy Agency (IEA). But the EU has long been competitive. Their global market share in heat pump production is still only half as large. But many projects are already planned, so that by 2030 the EU will be the global market leader anyway – even without new industrial policy measures. 36 percent of all heat pumps will then be manufactured here.
According to another IEA analysis, this is enough to cover the demand for heat pumps in the EU and produce a surplus. In 2030, even heat pumps worth three billion dollars more would be manufactured in Europe than needed.
Photovoltaics/solar: “Cheaper abroad”
Meyer Burger is already further than Viessmann. Based in Thalheim, Saxony-Anhalt, the company is currently the only industrial manufacturer of solar cells in Europe. But Meyer Burger recently threatened to give up the location in a letter to Federal Finance Minister Lindner. The USA is luring with massive subsidies as part of its “Inflation Reduction Act” (IRA). Europe must catch up. “Otherwise Europe and Germany as a business location will suffer massively,” said CEO Gunter Erfurt of the Handelsblatt.
But economists think that’s a misjudgment. “Mass-produced goods such as photovoltaics can be produced more cheaply abroad,” says Nils Redeker, Deputy Director at the Jacques Delors Center in Berlin. Bringing this production to the EU on a large scale would cost a lot of money without bringing much added value or jobs to Europe.
One could argue that there is a risk of dependency on photovoltaics. In fact, 79 percent of global manufacturing capacity is currently located in China. Redeker also admits this, but points out the crucial point: trade diversification. Europe has the reduction of dependencies in its own hands, not only through its own factories, but also through a stronger trade policy rapprochement with other countries.
“They would certainly be able to significantly expand their production if demand were higher,” says Veronika Grimm.
Batteries: “Don’t do without them completely”
At Northvolt, the warning calls have already been heard in politics. The Swedish battery manufacturer had planned a factory in Schleswig-Holstein, but put the plans on hold because of the prospect of US subsidies. The federal and state governments then announced financial support – and it currently seems as if Northvolt is coming to northern Germany after all.
At first glance, there is reason to believe that government money is not well invested there. According to figures from the IEA, Europe could have an oversupply of batteries worth 30 billion euros by 2030. The Northvolt factory seems substitutable with imports.
However, the global battery market hardly allows for diversification when looking for new trading partners. China occupies almost three quarters of the global market.
And the USA could become the vacuum cleaner for the settlement of battery plants. According to an analysis by the Jacques Delors Center, the IRA subsidies will cut battery production in the States by a third. By 2030, the US share of the global battery market is expected to double.
At the same time, 68 percent of all planned battery investments in the EU could be at risk, according to calculations by the non-governmental organization T&E. The EU and the US are allies. But it cannot be ruled out that the next US President will be Donald Trump again, including possible trade conflicts.
Prioritizing battery imports could be dangerous for Europe. According to the IEA 2030, only six percent of foreign production capacities should not be in China or the USA. “Europe does not have to produce all green technologies itself. With batteries, however, we shouldn’t do without them entirely because of the major role they play in the automotive sector,” says economist Redeker.
Electrolysers: “There is no alternative to imports anyway”
Economics Minister Habeck went to Thyssen-Krupp in Duisburg last week to assure 12,000 steel workers: “You can count on our financial support.” The federal and state governments want to provide two billion euros to make the transition to green steel easier for the group. In the future, Thyssen-Krupp also wants to produce hydrogen itself with its own electrolyser at the site. A smart investment for all sides?
Green hydrogen is to become the central building block for the transformation of European industry. There is nothing wrong with promoting your own electrolysers with state support to a certain extent, says Veronika Grimm. “But the focus should be on a smart, diversified hydrogen import strategy.”
The reason: the IEA predicts that a quarter of global electrolysis capacity will be in the EU by 2030. “But even with the even more significant increases in capacity, we will not be able to cover the demand on our own,” explains Grimm. There is no alternative to imports anyway.
Safe import options are definitely available. According to the IEA, by 2030 more than half of the global electrolyser market will be located neither in the USA nor in China. Large regions of the world will build up massive hydrogen production, including Africa, Australia, South America. And that would be more economical too. With their large areas and many sunny days, the regions mentioned have significantly better conditions for hydrogen production than Europe.
The economic analysis shows that industrial policy is no longer taboo – but it is also not a panacea. Building your own factories is expensive, and the risk of waste is real. Berlin and Brussels would be well advised to develop just as great an ambition to forge new trade partnerships.
Collaboration: Kevin Knitterscheidt
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