German industry output is in free-fall, extending its crisis into the entire European Union.
Germany fell into recession for one stark reason. Its manufacturing sector, which makes Germany Europe’s powerhouse, is collapsing.
German industry output decreased by 2.1% in March compared to the previous month. In April, energy-intensive industry production dropped by 1.1%. In 2022, German chemical industry output declined by a whopping 8.2%, even more than during the Covid recession.
This industry collapse is the direct consequence of Russia’s illegal invasion of Ukraine. Germany, as well as the rest of the European Union, materially and morally supported Ukraine’s cause, causing Kremlin anger.
In the months immediately following the invasion, Germany pumped up its purchases of Russian gas and oil. As Germany’s largest energy supplier until 2021 was Russia, they knew their supplies would be inevitably cut off.
Indeed a few months later, just in time for Germany to fill up its winter reserves, Russia shut off the tap. When, in September, an underwater explosion destroyed the Nordstream pipeline, the die was cast. Nordstream I and II used to transport Russian gas directly to Germany.
The last gas supplies from Russia to Europe, ironically, flow through Ukraine due to a pre-war deal with Russia. As the agreement expires in late 2024, Germany might find itself without any meaningful gas source.
"There is no secure scenario for how things will turn out," Germany’s Economy Minister Robert Habeck said. He announced that if Russian gas were to stop flowing completely, Germany will be forced to actively shut down industries.
Europe-wide crisis
Germany’s industrial crisis extends to the rest of Europe as well. For example, Dutch industrial production fell by 12.1% year-on-year in May.
One week after Germany announced its recession, the Eurozone did as well following revised economic data. So far, the European Union continues to show sluggish growth, but likely not for long.
At the same time, inflation remains elevated. In May, EU consumer prices were +6.1% year-on-year, a value that European Central Bank President Christine Lagarde considers "too high".
This week, the ECB will hold its monthly meeting likely to announce another 0.25% rate increase. An EU-wide recession is not a possibility anymore, it’s becoming a reality.
Nevertheless, the European Union and the G7 are considering banning Russian gas altogether. While this decision will likely extend the energy crisis, it could prevent similar concerns in the future.
Today’s EU energy crisis was caused by Germany’s reckless foreign policy, giving Russia and Vladimir Putin a dangerous monopoly on European supplies.
A similar mistake must not happen again. Germany is losing its dominant position on the continent, and the European Union needs to rebalance.
