Germany’s Habeck calls for ‘Zeitenwende’ on industrial subsidies

In a plea to coalition partners and the European Commission, German Economy Minister Robert Habeck (Greens) called for more subsidies to secure industrial production and jobs.

Amid fears of a deindustrialisation of Germany, Habeck on Tuesday (24 October) underlined the necessity of subsidies, calling for a broad debate on the role of the state in the industrial transformation.

The German economy, once an industrial powerhouse, is under enormous pressure due to geopolitical tensions, the necessity to reduce carbon emissions and neglected framework conditions such as bad infrastructure and bureaucratic procedures, he stressed when presenting the new industrial strategy.

“We are in a ‘Zeitenwende’,” Habeck said, in reference to the ‘turning point’ declared by German Chancellor Olaf Scholz (SPD/S&D) after the beginning of the war in Ukraine.

“From my point of view, that means not only the specific, terrible, still raging war of aggression by Russia against Ukraine, but also the accompanying geopolitical and socio-political challenges and changes that are simply not priced into our regulatory framework,” Habeck said.

Given the new situation, the state should take a more active role in securing industrial production and jobs, including by taking on more debt, Habeck said, while recognising that this was disputed within his own government coalition.

“We have to think about whether the rules we gave ourselves in another time of eternally smiling globalisation, of friendly togetherness, of cheap Russian gas, fit for the new time,” Habeck said.

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Doubling down on electricity subsidies

The phasing out of Russian gas has seen many German industries faced with higher energy prices than before the start of the war, a situation that is expected to persist over the coming years.

Similarly, electricity prices in Germany are higher than in other countries, such as the US or China, but also France, the strategy paper lays out.

Habeck thus repeated his call for a subsidised electricity price for certain energy-intensive industries, which he sees as a “bridge” until cheap electricity can be provided with newly built wind and solar power plants.

So far, this is opposed by both liberal Finance Minister Christian Lindner (FDP/Renew Europe) and Chancellor Olaf Scholz, who argue that given the current inflation, government expenditure should not be increased to not further fuel pressure on prices.

Similarly, many economists question those plans, pointing out that due to the country’s unfavourable conditions for renewable energy, electricity prices in Germany are likely to remain higher than in other countries over the long term anyway.

In such a situation, it would be better to let some industries move abroad, notably for primary products such as steel and certain chemicals, the argument goes.

Think-tank Dezernat Zukunft, among others, has argued that while energy-intensive industries account for 76% of energy demand in overall production, they only account for 15% of the jobs.

For Habeck however, having the whole of the value chain in Germany was one of the key factors of the success of German industries in the past, which is why “we want to keep the basic industries here if possible,” he said.

Some industries might have no future in Germany, economists say

Not all energy-intensive industries will be competitive in Germany and might therefore not be worth subsidising with a cheaper electricity price, experts say, warning that such a subsidy scheme could be a waste of money.

Questioning EU subsidy rules

Habeck’s remarks are also a plea towards the European Commission to ease the green light of national subsidies, which so far are often complicated by fears of distorted competition within Europe.

“We have come up with a jumble of procedures there, all from the internal view of the internal constitution of the European single market,” he said.

However, given the competition with China and the US, “we suggest that certain procedures be bundled and concentrated more strongly at the European level, so that the notification process can be completed more quickly,” he added.

In Habeck’s view, the new situation more generally necessitates questioning the policy of fiscal restraint, which is championed by Finance Minister Lindner. In the next electoral cycle at the latest, which starts in 2025, policymakers should explore ways to widen the “fiscal leeway” of the government, Habeck said, arguing for more public expenditure and investments.

His call for a more active state was however quickly criticised by conservative opposition CDU/CSU (EPP), who called for more private initiative instead of state support.

The strategy was “based on the misunderstanding that a policy of framework conditions needs a state that intervenes in the economy, that shapes it and transforms it in its own interests,” CDU’s speaker for economic affairs, Julia Klöckner, said in a statement.

“According to Mr Habeck, the state sees itself as a well-meaning dressage master over the economy,” she said, adding that “that is the wrong way to go”.

Instead of handing out subsidies to individual companies, she called for a “policy of relief and simplification in order to strengthen the competitiveness of the entire economy.”

[Edited by János Allenbach-Ammann/Nathalie Weatherald]

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