Competition economist Jens Südekum on the transformation of the German economy, the effect of the gas price cap and the new relationship between state and market.
What is your current description of the state of the German economy?
Jens Südekum: In terms of energy prices for industry: dramatic. If the state hadn’t introduced the gas price cap now, we would be facing unprecedented de-industrialization. The double boom was urgently needed. We are at the beginning of a severe recession. Without the gas price cap, that would have been a real hit. The middle class would have looked in the tube, many large corporations would have relocated their production, the consequences for the economy would have been irreparable. These dangers are not gone now, but they have decreased.
Energy is important, but ultimately it is just one means of production among many. Do you think energy prices are having such a dramatic impact on production?
Südekum: That’s right, energy is just one production factor, but it’s an important element in a whole bundle. Europe already has several problems: I’ll just mention the shortage of skilled workers and demographics, which are leading to an aging population. If there are locations where the demographic conditions are better and energy prices are lower, then these have clear advantages. That is why Europe had to act now.
Prof. Dr. Jens Südekum is a university professor for international economics at the Düsseldorf Institute for Competition Economics (DICE) at Heinrich Heine University. In his research he deals with the labor market effects of globalization and digitization as well as with international trade, urban economics and regional politics. Among other things, Südekum worked as a consultant for international institutions such as the EU Commission, the International Monetary Fund and the World Trade Organization. He is a member of the Scientific Advisory Board of the Federal Ministry for Economic Affairs and Energy and a close advisor to the Federal Government and various parties on economic policy issues. Jens Südekum is also a research fellow at the Center for Economic Policy Research (CEPR) in London, the CESifo Institute in Munich, the Institute for Labor Market and Vocational Research (IAB) in Nuremberg and the Institute of Labor Economics (IZA) in Bonn.
Now you’re praising the gas price cap, but ultimately it’s a tax-financed government expense that is second to none. is that so great
Südekum: It certainly didn’t go optimally. Ultimately, things had to be done in no time at all, and the government initially put 200 billion euros in the shop window without explaining in detail how they should help. In retrospect, a lot should have happened sooner. It was already foreseeable in February that we would slide into an energy crisis. Even then there were suggestions as to how gas prices could be capped and savings incentives promoted at the same time, but these were ignored by politicians. Winter seemed far away. Things were better on the supply side. The Federal Government has made a lot of progress here in a very short space of time. The liquid gas terminals, for example, will be connected to the grid in 2023, which was a huge achievement. But the demand side was badly neglected, and now everything had to be done over the knee.
Does our tax money end up as additional profit with the mineral oil companies?
Südekum: That can be described very soberly: If one supplier fails, others win. Russia is out, so the others will concede well. Gas suppliers from Norway and the US are making a fortune right now, and even an excess profit tax won’t get to them. The money from the gas price cap will ultimately end up with them. It is now important that the price cap is designed in such a way that not only does energy remain affordable, but that there are also incentives to save. We need 20 percent savings. The more we save, the smaller the recession and the less money goes abroad.
Despite the gas price brake, you are assuming a recession. How long will the crisis last?
Südekum: You can’t rely on anything these days. A lot can happen. Acts of sabotage of the infrastructure could follow. The gas storage could run empty faster in a cold winter. However, I am optimistic that the gas price on the wholesale markets is already falling again. Before the war it was 20 euros per megawatt hour of gas, then it shot up to 350, now it’s back to 150. Putin has shot his gun in this respect. Since the destruction of the Nord Stream pipelines, he can no longer create as much uncertainty in the markets. And until the summer of 2024, according to the will of the EU, no gas at all will be accepted from Russia. There are new suppliers for that. That is why all projections for the next year and the year after next predict falling gas and electricity prices …
… but not at the old level. After all, transporting liquefied gas across the world’s oceans is more complex than conducting it through a tube.
Südekum: The price level is not clear. It could level off at 50 euros per megawatt hour of gas. Although that is significantly more than before the crisis, many companies could cope with it. The current drama in energy prices is likely to reverse. And with that, inflation will also recede. We may have to get through two years.
But we now need an economy that is less dependent on fossil fuels. Can the transformation succeed?
Südekum: I warn against overly pessimistic scenarios. The swan song for German industry is quickly told: It got cheap energy from Russia, used it to produce and sold its goods in China. One is over, the other could also be over sooner rather than later, and the German economic model would be finished with it. But there is an optimistic scenario, and it looks like this: Just as Corona was a booster for digitization, the war is a booster for the energy transition because it is the necessary consequence. Fossil energy prices are becoming less relevant. The advantage: Europe has already taken action, while most of the others are just talking about it.
We are still a long way from the energy transition, only 17 percent of the primary energy requirement comes from renewables.
Südekum: Things are looking a lot better when it comes to power generation. But of course, we now need a lot more speed in the expansion of renewables. Because what is the alternative? The European industrial model can only survive if we don’t cling nostalgically to the past, but arrive first in the future. Unfortunately, the bridge technology now consists of more expensive liquefied gas. But that can also be an incentive to leave this bridge behind even faster.
Is Germany hit harder than other EU countries?
Südekum: Yes. Germany has the highest industrial share in Europe and thus the highest energy demand. And we had a higher dependence on Russia.
And got out of nuclear power.
Südekum: That was the wrong order. We should have gotten out of coal first and then out of nuclear power. In the meantime, however, the contribution of nuclear energy in Germany is no longer worth mentioning. The dispute over this is more of a political symbol.
What about European solidarity?
Südekum: We won’t get through this crisis without European solidarity. The demands of the left to end electricity exports to France in order to have more gas are therefore extremely dangerous: If the winter gets cold, Germany could suddenly be dependent on gas from other EU countries.
Can Germany even afford to support the people who use gas? Also with regard to the interest we pay for loans?
Südekum: We have to afford it. The cost of action is high, but the cost of inaction would be far greater. It would be a real social catastrophe. I don’t even want to imagine the political consequences if there hadn’t been a gas price cap now. But we can also afford it. Interest rate reactions on Bunds were modest. This signals that the markets have confidence in us.
What about the debt brake?
Südekum: The debt brake is only a facade. Whenever the state needs money in a crisis, whether for the army or for the gas market, it will find a way. Nevertheless, it has its advantages: After all, money is not borrowed and simply pumped into the household, but money is specifically borrowed and used for the Economic Stabilization Fund. That’s a pretty good compromise.
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What should the way back from all these aid packages look like?
Südekum: First of all, we are on the way there. I reckon there could also be trade sanctions against China in the near future. Then the next companies will falter and call for government help. The state will play a more important role in the future than it did in the past because uncertainties have increased. It probably can’t be prevented. But I believe that the state as a whole can make better decisions and be more in line with the market. For example: With the large investments for the transformation, the state and the private sector must split the costs and risks sensibly. In this way, private capital can be directed through state action.
What will Germany look like when the transformation is complete?
Südekum: Hopefully it will be a country that is at the forefront internationally when it comes to sustainable business models, because in future money will only be made with such business models. And it has to become a country that gets its demographic problem under control. The only solution I see is more immigration of skilled workers.
From an investor’s perspective, where do you see the long-term winners and losers?
Südekum: Economics professors should better not give any investment tips.
The article first appeared on fondsmagazin.de.