The week of February 3, 2025: Germany’s slide, AI & antitrust, credit card price controls, ESG, penny-pinching, and much, much more.
The, uh, greening of Germany’s economy continues.
Holger Zschäpitz posts on X:
[The] industrial sector continues to struggle. Industrial production fell 2.4% in Dec MoM, hitting lowest level since May2020, largely due to [a] sharp decline in automobile manufacturing. In energy-intensive industries, output dropped even further, down 3.1% MoM.
These numbers were below expectations of a decline of 0.7 percent, and return production to its pandemic nadir.
Production in energy intensive sectors is down 20 percent since 2017.
Private investment is down 10 percent since 2019.
Corporate insolvencies in 2024 reached a level unseen since the financial crisis.
Overall, the economy has now contracted for two consecutive years (the first time that this has happened since the early 2000s), and expectations are that it will only grow by 0.3 percent this year.
A report by economist Carsten Brzeski of Dutch bank ING makes grim reading:
Manufacturing capacity utilization is at lows comparable only to those seen during the financial crisis and the initial lockdowns. This paints a rather unflattering picture of a nation known as an industrial powerhouse. However, given the importance of industry for the entire economy, spillovers to other sectors – be it via sentiment or real economic channels – are already happening.
“A rather unflattering picture of a nation known as an industrial powerhouse.”
Ouch, very ouch.
The spillover referred to by Brzeski is detectable in the increase in the unemployment rate, which is creeping up and, at 6 percent, is at ten-year highs. The job losses extend beyond those in the auto sector (and its suppliers), to include those announced by other industrial giants such as Thyssen Krupp and other members of Germany’s A team, including SAP (software), Miele (domestic appliances), and Bayer (pharmaceuticals). According to a letter written by the VCI, the chemical industry’s trade body in late 2023, “deindustrialization” in the chemicals industry (which employs 480,000 people) is in full swing.
Olaf Storbeck and Patricia Nilsson, writing in the Financial Times:
The sector, which accounts for 8 per cent of Germany’s total energy usage, is fighting to survive following the dramatic increase in the cost of gas since Russia’s invasion of Ukraine. BASF, the largest employer, is lowering capacity in Germany and expanding production in Asia. The relocation of production is resulting in permanent damage to economic capacity.
The chances of that production capacity returning to Germany are slight.
The absolute number of unemployed is well below levels seen in the earlier years of this century, but, as Storbeck and Nilsson record, quantitative decay is being accompanied by qualitative. The manufacturing jobs that are vanishing are better paid than the new jobs that are replacing them in childcare, nursing homes, healthcare, and education.
And the immediate future offers little in the way of respite.
ING:
Inventories have continued to increase instead of turning around, and have now been at elevated levels for more than a year. At the same time, order books have not started to recover and the important turning of the inventory cycle has still not started.
On top of this, there is the prospect of Trump tariffs, a danger, which, as Brzeski points out, is twofold. Beyond the hit to sales, there is the likelihood that tariffs will encourage German companies to relocate production to the U.S., accelerating a process that has been underway for years.
And it’s worth keeping an eye on the price of natural gas, which in 2023 accounted for 26 percent of Germany’s energy, and has been moving up sharply. The European spot rate is now around €56/MWh, up from about €21 a year ago. That’s well below the peak (€339) seen in September 2022, a period when the Russo-German Nord Stream 1 pipelines remained closed, allegedly for “maintenance” purposes. Even so, it’s easily more than double the average between 2010-20. As Bloomberg’s Javier Blas has explained, that’s because much of Europe’s success in dealing with the (partial) cut-off of Russian gas was due to luck — favorable weather conditions and the lingering impact of the pandemic on Asian demand for LNG. Except for the U.K, which has barely any storage facilities, there is no danger of Europe running out this winter, but the need to rebuild stocks ought to put a floor under prices.
There has only been a partial cut-off of Russian gas? Yes. Remarkably, some Russian natural gas continued to flow into Europe through a Ukrainian pipeline until December 31. Its absence will add to the upwards pressure on prices. But wait, there’s more. According to Liechtenstein’s GIS, 17 percent of Europe’s LNG imports in 2024 came from Russia, much of which ended up in Germany. But how long will that continue with Donald Trump in the White House? Russian gas also continues to flow west through the Turkstream pipeline, which bypasses Ukraine.
Higher natural gas prices hurt Europe’s economies, not least by hitting its competitiveness, a blow that falls heaviest on Germany, with its concentration of energy intensive industries, and dependence on exports (over 40 percent of GDP, more than in any other major Western economy). Under the circumstances, its gas storage levy (Gasumlage) is merely another twist of the knife chain saw. This is designed to cover the costs of refilling gas storage sites and rose by 20 percent in January to €2.99/MWh.
The CEO of SKW Piesteritz, Germany’s largest producer of ammonia (most of which is used to make fertilizer), is quoted in a recent article in the Economist as saying that his firm is paying ten times more for natural gas than Russian fertilizer producers, with which it still has to compete (tariffs are slowly increasing), and seven times more than American rivals. Gas makes up 90 percent of ammonia’s production cost. Given high labor costs, the gas price and the CO2 certificates that companies are forced to pay to offset their emissions, SKW cannot, its CEO says, break even, and has slashed production, another example, incidentally, of the threat that chasing net zero poses to food security.
On Wednesday [November 20, 2024, the gas price] was about $14 per million British thermal units. The second is the cost of the same gas, but in the US, measured by the Henry Hub benchmark. On Wednesday, it was at $3 per mBtu. Now, put yourself in the shoes of the board of directors of a global energy-intensive manufacturing company. How long would it take you to decide that Europe isn’t a good location for future investment?
There are few bad mistakes that cannot be repeated. There has been speculation that a resumption of Russian gas deliveries to the West through a repaired Nord Stream could be part of a settlement with Moscow over Ukraine. The populist right (and Putin-sympathetic) AfD, currently running in second place in the polls ahead of the elections to be held on February 23, has already called for Nord Stream to be restored.
The damage caused by the pursuit of net zero — from soaring energy costs to a flailing auto sector to the extra heft it has given to Germany’s brutal regulatory burden — has been immense and will get worse.
On the other hand, “climate” played a somewhat more peripheral role in the creation of Germany’s reliance on “cheap” Russian gas. West and East Germany had been importing Russian gas since Soviet times.
Nevertheless, Berlin’s perception of natural gas as a bridge fuel between an early 21st century energy mix and a decarbonized future was one reason why (along with gas’s abundance and deceptively good value) Germany was willing to rely on Russia — even after Moscow initiated the first stage of its war against Ukraine in 2014 — for an essential fuel. Fifty-five percent of Germany’s natural gas came from Russia in 2021, a total that would have been topped, despite American warnings, had Nord Stream 2 ever opened. Berlin did not consider this relationship to be particularly risky. As the German establishment saw it, history had ended, the Russians were not so bad, and good business was good business. There was no Plan B: Germany did not have a single LNG import facility. Not one.
Meanwhile climate policy, above all a grotesquely expensive investment in renewables, had undermined the rest of Germany’s energy supply arrangements, making it even more vulnerable to a Russian gas shock, and thus to Moscow’s blackmail. Merkel’s decision to resume the scrapping of Germany’s nuclear power stations only made things worse. The Fukushima disaster had revived primitive but persistent German superstitions about nuclear power, and rather than argue back, Merkel, a scientist no less, shamefully went along.
Robert Bryce, commenting in the aftermath of another Dunkelflaute:
The latest wind drought provides more evidence of the foolishness of Germany’s Energiewende, an insanely expensive effort designed to force the country off hydrocarbons and onto alt-energy. In September, a study published in the International Journal of Sustainable Energy estimated that between 2002 and 2022, the Energiewende cost Germany $746 billion. Of that sum, more than half was spent on alt-energy production and distribution. The remainder was spent on subsidies. If Germany had spent about half that sum on nuclear energy, it would have achieved greater emissions reductions than it did by chasing the mirage of alt-energy.
As I mentioned in a Capital Letter from November:
In 2018, Germany’s Court of Auditors estimated that cost of the switch to renewables in the previous five years had been at least 160 billion euros. The spending, it said, was in “extreme disproportion to the results,” a conclusion that would hold for longer periods too. And this was at a time of underinvestment elsewhere. The opportunity cost of climate spending is too often forgotten. The actual cost (on top of those billions) was to leave Germany with extraordinarily high electricity bills, the last thing its heavily energy-intensive industrial sector needed, and a result hard to reconcile with frequently repeated claims of renewables’ cheapness. And all this was before Germany lost access to “cheap” Russian gas…
Last August, August Dercks, the deputy CEO of DIHK, Germany’s Chambers of Industry and Commerce was quoted by Reuters as saying that “while in the years before 2023 many companies also saw opportunities in the energy transition for their own operations, in their view the risks have recently clearly outweighed the benefits.” Back then, industry’s sentiment towards the energy transition was the second worst it has ever been. I’d be surprised if it were better now.
Adding to Germany’s woes is its industrial sector’s exposure to China, something that Merkel had encouraged. History had not only ended in Russia. An increasingly prosperous China would be increasingly friendly. More trade would speed up this welcome transformation (“Wandel durch Handel”). It was, Merkel said, a “win-win” proposition. The trade (Handel) worked out for Germany (for a while anyway), the change (Wandel), not so much.
And now the trade is souring too. Once again, opportunity has evolved into unhealthy dependence (in 2000 China accounted for 1 percent of Germany’s exports, a figure that had peaked at 7.5 percent in 2021), and one that is less and less rewarded. China currently accounts for about 6 percent of German exports. Calculated by value, Germany’s exports to China have fallen to pre-2018 levels, down 15 percent from their 2022 peak. Chinese customers have, as is their way, become competitors, while others cut back their spending as the domestic economy weakened.
German automakers have been hit by China’s domestic slowdown, but they have also lost market shareto Chinese manufacturers of both conventional cars and electric vehicles (EVs). Moreover, Chinese EV manufacturers have taken advantage of the opening offered by another aspect of climate policy, the coerced switch to EVs. Chinese EVs now pose a serious challenge to German automakers in European and other markets.
The morass in which Germany now finds itself is an indictment not only of its governments, but also of the way the country operates. How awkward then that, as Dominic Pino pointed out in a recent article, Germany has not infrequently been held up by America’s American critics as a reproach to what they regard as the short-sighted and sharp-elbowed U.S.
To take one example among those cited by Pino:
The Washington Post reported in June 2011, “The German government has been unafraid to pursue policies that induce companies to preserve high-paying jobs and boost exports, embracing two words that can make lawmakers in Washington recoil: industrial policy.” Industrial policy, which has become more popular among policymakers since then, involves close cooperation between government, businesses, and labor unions to structure the economy in the national interest.
Pino concludes:
As the failures of Germany’s economic planning become apparent, maybe it’ll click that there’s something to those dusty old ideas about free markets.
We’ll see.
In a fine review of Kaput: The End of the German Miracle, a book by the journalist Wolfgang Münchau, AIER’s Samuel Gregg investigates whether Germany’s problems stem from its corporatism. As a governing doctrine, corporatism, which evolved out of a premodern vision of society as an organic whole, functions (in its more benign forms) on the basis of cooperation between a country’s leading interest groups — labor, large companies, and so on — working together with and through the state.
Gregg:
Beyond the inherent collusion and cronyism associated with it, corporatism often generates groupthink and discourages critical reflection. As Münchau notes, “when a misjudgment is made” in a corporatist system, “there is nobody there to correct it.” Indeed, entrepreneurs who could fix those errors often give up and move to countries where they believe their ideas won’t be ignored or blocked.
One of those “misjudgments” has been devotion to the notion — rooted both in postwar exigency and Germany’s longer-standing mercantilist tradition — that exports must be über alles. This helped inspire the dash for Chinese business and, to no small degree, permitted a blind eye to be turned to the risks of depending on. Deutschland AG needed attractively priced energy. Besides, Russia was a promising market too. There would be things to sell there too.
Mercantilists, maintains Münchau, “like to trade physical goods” and “are suspicious of disruptive technologies.” If that is so, it’s unsurprising that Germany, a land where faxes still fly, underinvested in digitalization. It was another critical misjudgment.
If the establishment in America had not recognized what digitalization could mean, some outsider would have found the funding to explore what could be done. That is not what happened in groupthink Germany, a misstep made easier by how well its revitalized old economy was doing after about 2005. But being a digital laggard has left German automakers dangerously exposed. EVs are, in many respects, a digital product, unfamiliar territory for the old guard. And unless — it’s not inconceivable — a popular revolt overturns the European EV mandates, they will have the force of law behind them. The sale of new internal combustion engine cars will be banned in the EU from 2035. Given all that and the fact that China’s EV manufacturers have the backing of a deep-pocketed mercantilist state, a well-established supply chain, and a notable cost advantage, it’s clear that the benefits of incumbency enjoyed by Europe’s carmakers will not be worth much, unless their governments can get away with building some very steep tariff walls. Those in place now are not high enough to do the trick.
Scrapping, diluting, delaying, or reversing crippling climate laws would be difficult enough in Germany where environmentalist sentiment is still strong, but it would be harder still when, as is often the case, those laws are embedded in EU rather than German legislation. Friedrich Merz, the candidate of the center-right CDU/CSU appears set to be Germany’s next chancellor after the election. He has come out against the ban on combustion engine vehicles, but there is not much that he can do about it, unless the EU concurs.
He will also have to convince his probable coalition partners that this is the right course of action. As mentioned above, the AfD are running second in the polls with around 20 percent. The CDU/CSU are on 30 percent, but a coalition (or even an understanding) with the AfD remains taboo. Although the description of such parties as “far right” has become a cliché, it certainly applies to a sizable contingent within the AfD. Germany’s next government is thus likely to be an ideologically incoherent coalition between the CDU/CSU, the center-left SPD (16 percent), and/or the Greens (13 percent). The latter two parties remain committed to the 2035 ban, and other climate follies too.
Such a coalition will be unable to make much progress in tackling the country’s failings. If it is lucky the result will be stagnation. But stagnation is not stability, as Germany seems doomed to discover.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which is hosted by financier David L. Bahnsen, makes use of another medium to deliver Capital Matters’ defense of free markets.
In the 210th episode, David asks how we can have an honest conversation about tariffs as public policy, let alone one rooted in first principles, if the conversation changes every five minutes? David uses this podcast to focus the attention where it belongs, to separate categories, and to encourage thoughtful and siloed analysis about the American worker, about tax revenue, about trade deficits, about human rights, and about negotiating tactics — in a coherent and sensible manner. One may just find that the right policy decision on a given matter is easier to come by with good faith, logic, and conversation than bouncing around without focus or purpose.
In the 211th episode: It is amazing how, these days, the word “bipartisan” is always attached to Republicans doing something leftist in economic policy, and never Democrats doing something pro-market. And the bipartisanship of the Hawley-Sanders bill to cap credit card interest rates is a wonderful reason to not be yearning for bipartisanship. In this episode of Capital Record, David provides principle-based reasons for opposing this federal overreach, and it is a set of principles that have held up very well over time.
The Capital Matters week that was . . .
Sovereign Wealth Fund
Donald Trump signed an executive order to study the creation of a sovereign wealth fund for the United States. It’s a bad idea that shouldn’t go anywhere…
One of Donald Trump’s latest executive orders “directs the Secretary of the Treasury and the Secretary of Commerce to deliver a plan within 90 days for the creation of a sovereign wealth fund.” As the order tells us, “sovereign wealth funds exist around the world as mechanisms to amplify the financial return to a nation’s assets and leverage those returns for strategic benefit and goals.”
On the whole, this is a horrendous idea…
Corporate Welfare
American taxpayers are funding the competitors in the accelerating race between the states to the bottom of the corporate welfare swamp, and it’s time for that to stop. The Trump administration’s decision to undertake a comprehensive review of federal agency spending gives it an opportunity to make that happen…
Credit Card Price Controls
Back in September, Donald Trump said that if elected president, he would put a “temporary cap on credit-card interest rates” of “around 10 percent.” He said, “We can’t let them make 25 or 30 percent.”
A price is not just a price, it is (at least in reasonably well-functioning markets) a signal, a form of communication. Price control is a form of censorship. It suppresses information that would otherwise be of value to buyer, seller, or both…
Senator Josh Hawley (R., Mo.) is teaming up with Senator Bernie Sanders (I., Vt.) to introduce legislation capping credit card interest rates at 10 percent. A political ally of both senators is Teamsters union president Sean O’Brien. While praising Hawley for going after credit card companies, O’Brien said on his podcast Better Bad Ideas, “You’ve got a lot of our members, our constituents, who are paying 28, 29 percent on credit cards that they’ll never be able to pay off.”
If O’Brien thinks that’s unfair, then he should look in the mirror. The Teamsters-branded credit card offered only to members or their families has interest rates as high as 27.49 percent, and the union makes millions from it…
If unions want to make these cards available to their members, and their members want to use them, that’s perfectly fine with free-market proponents. But Sanders and Hawley, by their standard, must be alarmed that their buddies in organized labor are supporting loan sharks extorting their members. Or perhaps they could consider that credit card companies aren’t loan sharks and that banning cards currently offered as a membership benefit would encourage more people to turn to real loan sharks…
Tariffs
The bad news is, there are no permanent victories. The good news is, there are no permanent defeats. The advocates of protectionism are bold. Advocates of trade — enlightened trade, of course, in the national interest — should be equally so.
Yesterday, I wrote two posts about Trump’s tariff threats, one on Mexico and one on Canada, that did not contain any economic arguments. My point in both of them was to take the claim that Trump was using tariffs to negotiate and show that he actually got approximately nothing for the U.S. despite his claims to victory.
Now, it’s time for some economic analysis…
My objection to the analysis offered by Charlie and Noah is that it was premature, taking it as a given that Trump wanted to impose the tariff, that this kicked off a crisis, and that it was all over with nothing to discuss. As with Trump’s trade actions in the first administration, I will wait to see if anything substantive comes at the end of the process, rather than declare defeat at the beginning…
ESG & Stakeholder Capitalism
It’s easy to see, given this, how some people — voters, politicians, and retail investors — might be confused by ESG and the related controversy. If one side in this debate says one thing, and the other side says the exact opposite, how is one to know which side is telling the truth? How is one to know whom to believe?
Fortunately for everyone, the answer to these questions, as well as countless others, can be found in a new book by Andy Puzder, A Tyranny for the Good of Its Victims: The Ugly Truth about Stakeholder Capitalism, just out from Encounter Books…
Wind Energy
Donald Trump’s supporters and opponents alike are giving the president credit for “killing” an offshore wind farm project along the coast of New Jersey.
An executive order pausing permitting for offshore wind projects cast doubt on that project’s viability, New Jersey’s Board of Public Utilities indicated in a statement this week. It is indisputable that creating uncertainty in this market threw a wrench in the works. But as Politico confessed, the “challenges” that Governor Phil Murphy’s project encountered “include economic conditions beyond Murphy’s control and Trump.”…
Oil
The Norwegian oil company Equinor is publicly quoted, but its majority owner is the Norwegian state, which means that it is unusually vulnerable to political pressure. In 2018, it changed its name from the stolid, say-what-it-is Statoil to the fluffier Equinor. Bad sign!…
Welfare
In the United States, public welfare has become an unsustainable financial burden, with expenses soaring to $1.6 trillion annually across various means-tested programs. Medicaid, food stamps, cash assistance, housing support, Supplemental Security Income (SSI), and other initiatives collectively enroll nearly one in three Americans. This sprawling welfare system does not lift individuals out of poverty; instead, it entrenches many of them in dependency. Such an unsustainable structure places an enormous strain on hardworking American families, stifles economic growth, and diverts essential funding from critical services like education and infrastructure. As President Trump embarks on his second term, he must make structural welfare reform an urgent priority. This endeavor demands a dedicated team prepared to confront entrenched inefficiencies head-on…
Climate Policy
Opposition to Donald Trump’s decision to take the U.S. out of the Paris climate accord (again) arises mainly out of the belief that America is not doing its part to avert an existential threat to humanity. More practical, if optimistic, sorts maintain that the U.S. risks falling behind in the competition to harvest the riches that decarbonization will supposedly deliver. Some worry that the U.S. will lose its climate “leadership,” which, if it ever existed in the political sense (in the real world, U.S. per capita CO₂ emissions have been declining, save for a post-pandemic bump, since 2001), is being ignored by, among others, China, India, Russia, and Indonesia.
Then again, how well are the participants in the Paris accord living up to their obligations?…
Tax
The Tax Cuts and Jobs Act (TCJA) of 2017, which took effect January 1, 2018, included many noteworthy tax law changes, including significant middle-class tax cuts (discussed further below). The problem is that most of the changes were enacted on a temporary basis. They will expire at the end of 2025 if Congress does nothing. If the law does expire, those same Americans will see substantial tax increases…
Penny-Pinching
Trump is right to support abolishing the penny…
AI & Antitrust
To understand what went wrong with antitrust during the Biden administration, look no further than former Federal Trade Commission (FTC) chair Lina Khan’s take on DeepSeek’s launch of R1, an artificial-intelligence (AI) platform. Rather than see the moment for what it is — a competitor arising by bypassing what Biden’s supposedly insurmountable barriers to competition — she sees this as evidence that America’s tech companies are monopolies in need of regulation. Talk about willful blindness…
The War on Cars
As New York has recently demonstrated with its congestion tax, the war against cars has been relentless, although the arrival of a new administration in the White House may now change matters on this side of the Atlantic. One of this war’s many, many campaigns, especially in Europe, has been demonizing SUVs (and other larger or more expensive cars) for being (1) too big or (2) too dirty or (3) being owned by the rich or, sometimes (4) too American, or any combination of the forgoing…
Fiscal
Educational freedom, pro-growth tax reform, and personalized health care are priorities being held back by federal and state governments’ wasteful spending and excessive debt. Effective budget targets can help policymakers do better and unleash even more American potential…
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