EU to backtrack to de-industrialization due to energy crisis

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Businesses in the EU are finding themselves in a pickle: not only are they cutting down on energy use while conducting business as usual, but factories are simultaneously being shut down or downsizing as Europe goes back in time to de-industrialization. 

With a recession now closer than ever, manufacturing activity plunged to the lowest since May 2020 during the Covid pandemic. S&P Global’s Purchasing Manager's Index (PMI) indicating the coming of a recession as this marks the fourth monthly reading below 50 - signaling an economic decline or contraction.

The EU inflation rate hits a new record high as economic growth for the Eurozone plunged to 0.2% in the third quarter of 2022 as energy prices soar. According to Eurostat, the EU's statistics agency, a massive 41.9% jump in energy prices led to a hike in consumer prices, which hit 10.7% in October compared to 9.9% in the previous month of September.

Last month, German chemical giant BASF said it would permanently decrease operations in Germany and expand in China - coming as a blow amid Berlin's struggle with energy shortages, meeting climate goals while attempting to cut back on extending nuclear power plants.

The Wall Street Journal reported in June that BASF - with nearly 40,000 employees -  may be forced to halt production at the world's largest chemicals plant in Ludwigshafen due to a lack of cheap and abundant Russian gas. BASF has been using Russian natural gas for years to generate power and as a feedstock for products such as toothpaste, medicine, and automobiles.

BASF’s chief executive, Martin Brudermueller said this month, according to the FT: “The European chemical market has been growing only weakly for about a decade [and] the significant increase in natural gas and power prices over the course of this year is putting pressure on chemical value chains,” 

Tighter EU regulations that seem to be on the rise also contributed to this decision, Brudermueller said.

The US as offshore for EU companies 

The trade committee for steel and aluminum industries recently proposed a plan with its new Cross-Border Adjustment Mechanism (CBAM), or the import carbon tax, to be taken up by the EU, which is regarded as a relief for EU industries suffering from emission regulations, causing production costs to become more expensive. 

According to investment company Jefferies, a tenth of Europe’s crude steel production has already been idled, all zinc smelters have decreased production and half of the primary aluminum production has shut down, not to mention diminished production by plastics and ceramics and chemical plants. 

The deindustrialization process is becoming a phenomenon across Europe as companies continue to relocate and go offshore to cheaper countries with wider availability of energy. Seemingly, the US is among those countries that companies are relocating to, due to gas reserves, rising production, and friendly investment climate policies. 

German chancellor Olaf Scholz and French President Emmanuel Macron convened last week to discuss joining European forces to fight US economic dominance. The EU cannot stand by, the leaders agreed, if the US goes ahead with tax cuts and energy benefits for companies investing in the US under the Inflation Reduction Act.

In light of that, Macron made the first warning public in an interview with TV channel France 2: “We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers,” he referred to state subsidies for electric cars specifically. 

The gas price cap the EU agreed on may alleviate a little, but as it is intertwined with lower consumption, it may not be a solution for all businesses. 

The #energy crisis is expected to be further aggravated with winter on the doors, will the #European people bear the consequences of their government’s unconditional support to #Ukraine? pic.twitter.com/c5KHoFHWvk

— Al Mayadeen English (@MayadeenEnglish) September 25, 2022