What’s next for the industry in Europe?

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The impact of the energy crisis on European industry is still hotly debated. When I highlighted at the free lunch last week how well industrialization was working on the continent, reactions varied from denial to surprised delight. as economics professor Daniela Gabor he said in a tweet Echoing how I feel, “I was so gloomy about carbon shock therapy—and so far, so wrong. That’s nice.”

This, of course, is not how many European leaders see this. Instead, high energy prices are seen as an existential threat to the industrial base, which, moreover, is being lured away—the argument goes—by unfair US green subsidies. (“We wanted you to take climate change seriously but not so much that your companies are producing green technology in competition with us,” seems to be the view of some). In order to leave the European industry unharmed, and to commit more subsidies at home.

As the controversy continues, it couldn’t hurt to dive back into the data and what it should mean for policy.

Start with Europe’s remarkable resilience to rising natural gas prices. My colleague Shotaro Tani added to the evidence, reporting on Monday that European users cut their consumption by a quarter in both October and November, compared to five-year averages. This is largely due to lower industrial demand for gas.

Some of the reactions to my celebration of this success have come from the angle of climate change. They argue that the gas cuts were only achieved at the cost of consuming more oil, or replacing coal with gas in power generation. So I went to look at the data, and I can reassure the skeptics. The chart below shows EU oil imports, which appear to be fairly flat this year and, if anything, below pre-pandemic levels.

Monthly EU imports of crude oil

And while there have been reports of increased coal use, the numbers are clearly not enough to move the needle across the economy as a whole. Below is a graph of coal consumption in electricity generation in the European Union; Again, it is still below pre-pandemic levels.

Monthly use of coal in electricity generation in the European Union

Others resist the explanation that European industry has weathered the crisis well, as I argued last week. There are certainly reports of some production being halted. [German chemicals group BASF is a case in point.] But this must be seen against a general background growth in production in factories in nearly every European country, as I documented last week.

For more details, take the latest industry figures from Germany. Industry excluding energy and construction – which relies heavily on manufacturing – produced 0.8 percent more in October than a year earlier. Within this, the “energy-intensive branches” recorded a decline of 12.6 percent over the year (these are five sectors that account for a fifth of the value added in the industry but three-quarters of its energy use). So manufacturing that uses a lot of energy has shrunk sharply, other manufacturing has grown, combined growth has been positive — it all sounds like exactly how we want an adaptive capitalist market economy to behave.

Finally, some object to comparing factory production today to last year, given how the pandemic has turned our economies upside down. fair enough. But taking a long view certainly means focusing on the fact that I highlighted last week, which is that EU manufacturing output is greater than ever. If this is a crisis, it is not a bad crisis.

Admittedly, it was an unexpected situation. So it’s only natural to be overwhelmed by a better-than-you-think-the-stats-telling story (I certainly was, as I expected things to be worse). But it is not healthy for public discussion to be confused with ideas about what (as I have directed Mark Twain in another context) we know for sure it is not.

Take the widespread concern (described prominently by my colleagues in the Energy Source newsletter, whose chart is reproduced below) that the US is stealing Europe’s bacon, or at least its investments in batteries and other technologies of the future.

Bar chart of estimated capital investment ($billion) showing EU investment in US electric vehicles and battery manufacturing by year

But there seems to be a similar concern about Chinese companies building too many battery factories in Europe. Can you really complain about both things at the same time? Maybe this is just a story about business leaders building batteries wherever there’s a demand for them – which now includes the US, and obviously hasn’t stopped including Europe. The most and the merrier.

Of course, one might think that for reasons of “strategic autonomy” European demand for batteries would be better met by European-owned or European-controlled battery production located in Europe. But if that’s the case, it’s a little rich to complain about the US trying to do just that with the clumsy discriminatory tax breaks that European leaders stir up.

What is the most obvious way to think about the future of the green industry in Europe? I took a stab at my column on Monday, arguing that the EU should draw a conclusion from being a fossil-energy-poor continent: namely, not trying to sustain a fossil-energy-intensive industry. Instead, focus on accelerating the green transition, massive expansion of renewable energy generation and transmission, and developing an industry that can thrive in the renewable energy system. This could mean pursuing production methods that are adaptable to the vagaries of renewable energy – from adapting production stages to different energy needs with energy price fluctuations to integrating thermal storage and energy storage into plant facilities.

I was pleased to read an editorial in our pages by Fatih Birol, head of the International Energy Agency, arguing in the same direction: Europe must face structurally higher fossil fuel prices, but it has a chance to build an industry geared towards a decarbonized economy. But this requires a “master plan for the future that goes beyond survival mode”.

Finally, read the careful analysis by George Riklis and Philip Losberg of the Center for European Policy. They call for a new €1 trillion EU financing mechanism based on co-borrowing. One can argue about the details. But this is the level of ambition required.

Other readings

  • Ukraine’s President Volodymyr Zelensky is the Financial Times’ Person of the Year. Our editor went to meet him.

  • This week, the European Union began banning the import of Russian oil, and the Union and the Group of Seven countries imposed a ceiling on the prices of Russian oil sold anywhere in the world with the help of their companies. EU announcement here and US Treasury fact sheet here.

  • The cost of living crisis is driving more women into sex work.

  • The EU-Western Balkans summit took place in Tirana this week. In a new report, the Vienna Institute for International Economic Studies shows that it is time for the European Union to start taking the region seriously and accelerate its integration with the bloc.

  • The Bank for International Settlements warns that a market crash could complicate monetary tightening.

news figures

  • New research finds that the share of multinational corporations’ profits poured into tax havens did not decline after policymakers began to address the problem after 2015. As global profits continued to rise, so did associated tax losses.

  • Sarah O’Connor writes that the healthy life expectancy of Britons is getting worse.

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