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22 Feb 2024, 13:35
Benjamin Wehrmann
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Germany

Germany strives for green boost to economic recovery as energy price pressure eases

Heat pump production at a factory by German heating system producer Viessmann: decarbonisation technologies are a key element of the government's recovery plans. Photo: Viessmann
Heat pump production at a factory by German heating system producer Viessmann: decarbonisation technologies are a key element of the government's recovery plans. Photo: Viessmann

Two years after Russia’s invasion of Ukraine and the ensuing energy crisis, Germany continues to struggle with its full economic recovery – even if energy prices are losing in relevance for the country’s growth prospects. Presenting the government’s reduced growth forecast for 2024, economy minister Robert Habeck said the country’s energy system has proven resilient throughout the crisis but argued that a string of reforms and investments in green technologies is needed to get the economy on a solid growth track again. Meanwhile, a government proposal on boosting recovery has been held up by the conservative opposition, which ties its consent to taking back decarbonisation measures in the farming industry.

The German economy’s recovery from the slump triggered by the coronavirus pandemic and the energy crisis is taking longer than expected, economy minister Robert Habeck said as he presented the government’s annual economic report for 2024. “We’re leaving the crisis slower than we were hoping,” Habeck said, adding that the government had adjusted its economic growth forecast from 1.3 percent down to 0.2 percent this year. The minister said there are several reasons for the slow recovery, including historically low global growth levels and lower demand for German exports, ongoing inflation and high interest rates that stall investments especially in the construction sector, as well as the war on Ukraine, which is entering into its third year at the end of this week.

However, Habeck stressed that the pressure of energy prices on companies caused by Russia’s weaponising of fossil fuel supplies had significantly waned in recent months, even if prices are still too high. Russian president Vladimir Putin “has failed with his attempt to throw Germany into an energy shortage and an economic catastrophe,” the minister said. Gas storages are filled in the second winter after Russia’s invasion and gas prices had fallen back to a level comparable to that before the outbreak of the war, he stated in parliament on Thursday, n-tv reported. “Germany has proven to be very resilient here,” Habeck argued, adding that the successful expansion of the country’s renewable energy share gives further cause for optimism.

In a joint declaration on the government’s economic report, Germany’s leading economic research institutes said the assessment was accurate and in line with observed trends. Driven by a downward trend in global oil prices, the institutes said energy supply should generally have dampening effects on prices in the near future. Economic research institute IW said the string of crises in the past four years had cost the German economy about 545 billion euros in losses, meaning the country took a bigger hit than comparable economies in the global market turmoil. The important sector of energy-intensive industries had suffered particularly during the energy crisis, which was compounded by a 155 billion euro shortfall of investments in the past years. High energy prices and other factors had also severely impacted consumption, which was reduced by 4,800 euros per capita in the crisis years, IW said.

Green Party minister Habeck said the country needs “a reform boost” to get back on a more solid growth path, adding that last year’s court ruling on the German debt ceiling continued to pose a challenge for the government’s recovery efforts. “Part of the truth is that Germany suffers from structural problems” that are becoming a challenge for its competitiveness as an industry location, he said. This included a lack of skilled workers, which in the longer run posed the greatest risk for sustained growth. This had to be addressed by targeted migration and other measures, he argued.

Moreover, companies required a comprehensive reduction of bureaucracy, meaning the federal government, the states, municipalities and the EU all had to cut red tape to facilitate companies’ own ability to recover and to spur private sector investments. The government’s proposed Growth Opportunities Act would be an important instrument in this regard, Habeck said. The law would provide incentives for investments in key technologies, such as batteries and semiconductors, and improve the rollout of renewable power and grid modernisation, the minister said. Moreover, the government was determined to improve environmental protection and social cohesion in its recovery plans, he added.

Conservatives tie consent to recovery efforts to low diesel prices for farming industry

However, there’s still considerable disagreement within the coalition government about the law’s details and funding. Habeck has proposed taking on new debt to finance a wide range of measures he considers crucial for stabilising the economy’s performance in the long run. This includes subsidies for green technologies to counter similar support measures in other regions of the world, for example in China or the U.S. Finance minister Christian Lindner from the pro-business Free Democrats (FDP), on the other hand, rejects this approach and favours tax rebates for climate investments instead. However, Lindner also advocated for adopting the law.

The Growth Opportunities Act is currently held up in parliament due to opposition by the conservative opposition Christian Democratic Union (CDU) party, which is able to block it through the Council of States (Bundesrat). The CDU points to the difficulties for the states and municipalities to shoulder costs for support programmes and tax rebates. The leading opposition party under chair Friedrich Merz also insists on fulfilling the demands of the agricultural industry to reduce costs for decarbonisation measures. Moreover, the conservatives called for reducing Germany’s electricity tax permanently to the European minimum and slash EU efforts for a Supply Chain Law, arguing this would create further bureaucracy for companies.

The head of the Federation of German Industries (BDI), Siegried Russwurm, called the blockade of a recovery package “catastrophic” for industry. In an interview with public radio Deutschlandfunk, Russwurm said the CDU’s argument to link the package to farmers’ protests against higher diesel price was “difficult” to comprehend and presented a danger to growth prospects.

Economy minister Habeck criticised the opposition’s blockade of the law, arguing it had not tabled any alternative solutions for triggering growth and unleashing more investments. He urged the conservatives to heed the warnings of industry groups, and to greenlight the proposal.

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