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Is the economic area DACH in danger?

Energy prices and a shortage of skilled workers are putting pressure on the boiler. Numerous industries are discussing whether to scale down production or invest abroad.

A status report.

Energy prices and a shortage of skilled workers are causing considerable pressure – especially in energy-intensive industries such as metal processing or the paper industry. Is the DACH location at stake? (Image: blackday

Energy prices and a shortage of skilled workers are causing considerable pressure in the DACH region – especially in energy-intensive sectors such as metal processing or the paper industry. In many management levels, there are discussions: shutting down production, striving for relocation or only investing abroad?

A status report

The blind spot of climate policy

The European economy is in a transitional phase: The energy transition is intended to leave the "old automated world" of fossil fuels behind – and pave the way for the "new hyper-networked world" of renewable energies. What sounds so promising in the rhetorical speeches of many politicians has considerable weaknesses in practice. For as necessary as the step towards a climate-neutral economy is, as long as renewable energy sources do not generate enough capacity to supply entire industrial sectors, the countries – especially Germany – need a transitional solution with nuclear energy or fossil fuels. Otherwise, the costs for companies will rise immeasurably. This is currently the blind spot of important climate policy.

Still competitive in the future?

The war in Ukraine, or Russia's associated gas supply freeze, is an additional burden for the energy transition and for the economy. It is not surprising that the management of many companies is worried. DACH is an expensive location anyway. Energy-intensive industries in particular are asking themselves the legitimate question: Was it still worth staying in this region? Those who also have plants abroad, where energy prices are low, can compensate for the location risk. Those who do not have a global production network, on the other hand, must expect financial bottlenecks in the coming months. In a survey conducted by the Federation of German Industries (BDI) in February 2022, almost 90 percent of the companies surveyed stated that the additional costs due to increased energy prices represented a strong or even existential challenge. One in five (21 percent) is thinking about relocating production or parts of the company abroad. The PwC subsidiary Strategy& recently warned of the threat of deindustrialisation in Europe.

Low-cost countries attract companies

When it comes to the question of where energy-intensive industrial sectors could migrate, the first glance comes to the USA. Energy prices are much lower there, the huge US market offers great growth potential – and the current Biden administration lures in the enacted Inflation Reduction Act with tax advantages for companies that produce in the country. The fact that the USA is thus violating WTO law remains largely ignored there. The USA is an increasingly interesting location for German companies. A survey by the German Engineering Federation (VDMA) with 350 participants shows that three-quarters want to expand their business activities in the USA this year and next. Around two-thirds want to strengthen their own service and sales, 37 percent plan to expand their production and 18 percent also want to expand design and development in the USA. But it doesn't have to be just the US. North Africa with Tunisia or Morocco are also alternatives and not really far away, or areas partly developed by the car industry and open to new industries – apart from the tax advantages that also result from this.

Creeping deindustrialization is more likely

The VDMA survey suggests that even the energy-intensive industries will probably not leave the DACH region "head over heels" – simply because it represents a major challenge in practice. For example, in the case of chemical companies: According to a Spiegel report, the processes are too complex and the companies in the supply chain too interwoven to be able to remove individual energy-intensive process steps from them in the short to medium term and relocate them abroad. A petrochemical plant is also not as easy to close as, for example, a catering industry. What is clear, however, is that companies will no longer make any investments in the DACH region at current energy prices. This is simply not feasible for most companies. Instead, future investments will be made abroad. Thus, there is a danger of creeping deindustrialisation, which may only be perceived in its full extent when it is already too late. In addition to lower energy prices and tax advantages abroad, another factor forms the basis for decision-making for those responsible to relocate their business activities abroad: the shortage of skilled workers here.

Fluctuations in the labour market to be feared

According to the Nuremberg Institute for Employment Research (IAB), seven million workers will be lost in Germany by 2035 because the baby boomer generation will retire by then. This figure is alarming, although it should also be put into perspective: on the one hand, the figure can be reduced by increasing activity rates and by immigration. On the other hand, unfortunately, there are always companies that have to file for bankruptcy. According to Automobilwoche, the number of insolvency applications rose by 50 percent in the automotive supplier sector alone, according to Automobilwoche. And there are also companies in other industries for which the combination of supply bottlenecks and energy prices means the end of the market. This results in different conditions on the labour market, as affected skilled workers become free again. But are there enough vacancies in a recession if companies shy away from costs and investments? Is the swing of recession perhaps even the other way – and we are always oscillating back and forth between inflation and recession? Whatever happens, the location is currently not particularly attractive for companies in the DACH region.

Strengthening the location means securing prosperity

However, many medium-sized companies in DACH are still proud of their location – and deeply rooted in their regions. They feel a sense of responsibility for their employees and for society. They are more concerned with keeping DACH competitive as a business location. Political aid packages are important for this, but only a temporary solution. Business and politics must find a compromise to implement the sustainable energy transition in a reasonably cost-neutral way for companies – and to ensure social prosperity. If the industries in the DACH region are to be CO₂-neutral in the near future, nuclear energy or fossil fuels are first necessary until renewable energy has enough capacity for industry. Otherwise, there is a risk of a slow decline in industry in Europe – and a social decline of many people in the region.

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