Energy costs are skyrocketing and putting large and medium-sized companies under pressure. The consequences could be devastating.

US Treasury Secretary Henry Morgenthau proposed in his 1945 book Germany is our Problem that post-war Germany should be deindustrialized and turned into an agricultural state.

Although his radical proposal after Hitler’s defeat had some influence on Allied plans for the occupation of Germany, it was never carried out.

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Almost 80 years later, Vladimir Putin could succeed in implementing part of Morgenthau’s plan, whose parents were both born in Germany. By weaponizing the natural gas much-needed by Germany’s mighty industry, the Russian president is rocking the world’s fourth-largest economy and its third-largest exporter of goods.

To make matters worse, Germany’s biggest trading partner China, which last year bought €100 billion ($101 billion) worth of German goods, including cars, medical equipment and chemicals, is also in a deep crisis.

A national business model that relies in part on cheap energy from one autocracy and strong demand from another faces a severe test.

The consequences could be fatal for Deutschland AG: the German blue chips have suffered more from the market turbulence this year than their competitors abroad.

They have fallen 27 percent on a dollar basis over the course of this year, almost twice as much as the British benchmark index FTSE 100 or the American stock index S

Many companies perceive the situation as threatening, he said. And through globalized supply chains, it could also pose a threat to the rest of the industrialized world, which is highly dependent on German manufacturers.

Germany’s biggest problem is the exploding energy costs. According to the BDI, the electricity price for the coming year has already increased fifteenfold and the gas price tenfold. In July, industry used 21 percent less gas than in the same month last year.

However, this is not due to more efficient energy use by companies, but rather a “dramatic” reduction in production.

The Kiel Institute for the World Economy, a think tank, has revised downwards its forecast for GDP growth in 2022 by 0.7 percentage points to 1.4 percent since June. It now expects the economy to contract in 2023 and inflation to surpass this year’s at 8.7 percent.

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Smaller companies are hardest hit. According to a study conducted by the management consultancy FTI-Andersch in July among 100 multinational German medium-sized companies, smaller companies are struggling harder than larger ones.

Almost a quarter of companies with fewer than a thousand employees have canceled or refused orders or are planning to do so, compared to 11 percent of companies with more than a thousand employees.

In a country with over 3,000 different types of bread, around 10,000 bakeries are fighting for their existence like never before in post-war Germany. They need electricity and gas to heat the ovens and run the kneading machines while struggling with higher costs for flour, butter and sugar, as well as labor.

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A saleswoman at the 127-year-old Wiedemann bakery chain in Berlin reports that the company is dramatically understaffed and is trying to save energy, for example by keeping ovens in the branches cold and only baking all bread at the headquarters.

Another survey conducted by the BDI among 600 medium-sized companies showed that almost every tenth company stopped or reduced its production due to the high input costs. More than nine out of ten companies stated that the exploding energy and raw material prices represent a major or existentially threatening problem.

Every fifth company is considering relocating all or part of its production abroad. Two-fifths indicated that investments in more environmentally friendly production methods have to be postponed.

Larger energy-intensive companies such as chemicals or steel face a similar predicament, compounded by the fact that they face competition from competitors abroad where energy costs are lower.

Chemical giant BASF, which uses natural gas as both an energy source and a raw material, has already ramped down production and may need to reduce it further. Thyssenkrupp, another major steelmaker, has lost half of its market value since January.

Large multinational companies often have factories in other countries where energy is cheaper. But many, including BASF with its huge city-like company complex in Ludwigshafen, continue to produce a lot in their own country.

Even if the cost of raw materials falls, as some are, and the government subsidizes energy supplies as promised, the cost pressures will not go away.

Above all, the companies have to be prepared for tough rounds of wage negotiations with the powerful German trade unions. Negotiations between IG Metall, the largest German trade union, and employers in the powerful automotive industry are about to begin.

“IG Metall will not accept wage increases of less than 8 percent,” predicts Ferdinand Dudenhöffer from the Center Automotive Research, a think tank.

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It is becoming increasingly difficult to pass the higher costs on to consumers. Hakle, a major manufacturer of toilet paper, has filed for bankruptcy after failing to pass on soaring production costs to customers.

After several fat years, automakers’ order books will thin as inflation puts a dent in car buyers’ wallets. According to Dudenhöffer, the next two or three years will be very lean.

Automakers cannot simply change production processes. Instead, they will lower costs through cuts in administration, research and development.

As with the middle class, the auto industry’s belated attempts to reposition itself for the era of electric and self-driving cars are likely to suffer a setback. It is likely that some will shift production to lower-cost countries.

Holger Schmieding, chief economist at the private bank Berenberg, predicts that in view of the high energy costs that will probably persist for a while, two to three percent of German industrial companies with energy-intensive manufacturing processes will relocate their production abroad. A large part of the industrial companies will reduce their production this winter and next.

ArcelorMittal, another steel giant, has announced that it will close two of its plants in northern Germany and put employees on furlough. The Piesteritz nitrogen works, Germany’s largest producer of ammonia and urea, two important chemical raw materials, have closed their ammonia plants in Saxony-Anhalt.

The closure has led to a shortage of AdBlue, a BASF product vital for cleaning the engines of diesel trucks that connect Germany to foreign markets.

This example illustrates how such measures affect supply chains. Stefan Kooths from the Kiel Institute for the World Economy warns that “an economic avalanche is rolling towards Germany”. Before long, customers of German companies around the world will feel the repercussions.

The article first appeared in The Economist under the title “Germany faces a looming threat of deindustrialisation” and was translated by Andrea Schleipen.

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The article “Putin implements Morgenthau Plan and Germany faces deindustrialization” comes from The Economist.