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Can a green energy transition plan help revitalise the German economy?

A new German subsidy scheme to help industrial producers decarbonize their processes may bring broader benefits for the German economy, such as keeping key-players in Germany and adding jobs.

Published: 22 February 2024 12:31 CET

Steel workers stand in front of the blast furnace (Hochofen) at the steel works of Thyssenkrupp in Duisburg, western Germany. (Photo by Ina FASSBENDER / AFP)

Germany’s Ministry for Economic Affairs and Energy (BMWK), led by Robert Habeck, plans to provide more than €20 billion for climate protection contracts over the coming years, with an initial round worth €4 billion, beginning soon.

The novel subsidy program, approved by the European Commission on Friday, is part of Germany’s stated plan to become climate neutral by 2045. Funding is to be awarded to industrial manufacturers for projects that would help them decarbonise their production processes.

Germany’s economy minister Habeck lauded the plan, calling it a “Groundbreaking decision for energy-intensive industry.” Habeck began promoting the idea of creating climate protection contracts as early as 2022.

Basic material industries, such as steel, cement, paper, glass and chemicals make up a big part of the German economy.

Decarbonizing these sectors is especially difficult because production of these materials has been powered by fossil fuels, and switching to renewable power requires the development of new and expensive production methods.

According to a summary by Clean Energy Wire, projects supported under the scheme could include the construction of melting tanks for electricity powered glass production or hydrogen-powered direct reduction plants for steel production.

Can Green-transition funding help revitalize the German economy?

The plan comes amid gloomy forecasts for the German economy – on Wednesday the German government cut its growth forecast for the German economy in 2024 down to 0.2 percent.

The decline of the country’s industrial sector, due partly to fossil fuel price increases which have been felt since Russia’s invasion of Ukraine, is one of the primary contributing factors to Germany’s sluggish economic growth.

Additionally, green subsidies offered by the United States have lured away some German firms.

Through its own new subsidy scheme, the coalition government presumably intends to support some of Germany’s critical industries and also to encourage a transition toward an economy that is less dependent on fossil fuel imports.

Many of these industrial decarbonisation projects will also create jobs – construction jobs in the short term as new plants are built, and in some cases likely also new STEM and administrative jobs as new production processes are developed and deployed.

But with project funding to be distributed gradually over the next 15 years, it will likely be a few more years before these economic impacts are felt.

According to a report by Handelsblatt, climate protection agreements are to be financed by the Germany’s Climate and Transformation Fund (KTF), and €660 million have been set aside for this year.

Companies hoping to receive funding will submit project proposals. In the initial round of tenders, expected to open soon, a funding limit of one billion euros is set to encourage small and medium-sized projects to benefit.

Later rounds will likely have higher limits and can be expected to award big industry players that would amount to the largest carbon dioxide reductions.

A statement released by BMWK said, “With the climate protection agreements, companies in Germany can better compensate for and secure the costs of the transformation and switch to a carbon-free economy.”

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Output is expected to expand 0.3 percent this year, the economy ministry said, up from a prediction of 0.2 percent in February.

The slightly rosier picture comes after improvements in key indicators — from factory output to business activity — boosted hopes a recovery may be getting under way.

The German economy shrank slightly last year, hit by soaring inflation, a manufacturing slowdown and weakness in trading partners, and has acted as a major drag on the 20-nation eurozone.

But releasing its latest projections, the economy ministry said in a statement there were growing indications of a “turning point”.

“Signs of an economic upturn have increased significantly, especially in recent weeks,” Economy Minister Robert Habeck said at a press conference.

The ministry also cut its forecast for inflation this year to 2.4 percent, from a previous prediction of 2.8 percent, and sees the figure falling below two percent next year.

“The fall in inflation will lead to consumer demand — people have more money in their wallets again, and will spend this money,” said Habeck.

“So purchasing power is increasing, real wages are rising and this will contribute to a domestic economic recovery.”

Energy prices — which surged after Russia’s 2022 invasion of Ukraine — had also fallen and supply chain woes had eased, he added.

Several months ago there had been expectations of a strong rebound in 2024, with forecasts of growth above one percent, but these were dialled back at the start of the year as the economy continued to languish.

‘Germany has fallen behind’

But improving signs have fuelled hopes the lumbering economy — while not about to break into a sprint — may at least be getting back on its feet.

On Wednesday a closely-watched survey from the Ifo institute showed business sentiment rising for a third consecutive month in April, and more strongly than expected.

A key purchasing managers’ index survey this week showed that business activity in Germany had picked up.

And last week the central bank, the Bundesbank, forecast the economy would expand slightly in the first quarter, dodging a recession, after earlier predicting a contraction.

German Economics Minister Robert Habeck

Economics Minister Robert Habeck (Greens) presents the latest economic forecasts at a press conference in Berlin on Wednesday, April 24th. Photo: picture alliance/dpa | Michael Kappeler

Despite the economy’s improving prospects, growth of 0.3 percent is still slower than other developed economies and below past rates, and officials fret it is unlikely to pick up fast in the years ahead.

Habeck has repeatedly stressed solutions are needed for deep-rooted problems facing Germany, from an ageing population to labour shortages and a transition towards greener industries that is moving too slowly.

“Germany has fallen behind other countries in terms of competitiveness,” he said. “We still have a lot to do — we have to roll up our sleeves.”

Already facing turbulence from pandemic-related supply chain woes, the German economy’s problems deepened dramatically when Russia invaded Ukraine and slashed supplies of gas, hitting the country’s crucial manufacturers hard.

While the energy shock has faded, continued weakness in trading partners such as China, widespread strikes in recent months and higher eurozone interest rates have all prolonged the pain.

The European Central Bank has signalled it could start cutting borrowing costs in June, which would boost the eurozone.

But Habeck stressed that care was still needed as, despite the expectations of imminent easing, “tight monetary policy has not yet been lifted.”

In addition, disagreements in Chancellor Olaf Scholz’s three-party ruling coalition are hindering efforts to reignite growth, critics say.

This week the pro-business FDP party, a coalition partner, faced an angry backlash from Scholz’s SPD when it presented a 12-point plan for an “economic turnaround”, including deep cuts to state benefits.

Christian Lindner, the fiscally hawkish FDP finance minister, welcomed signs of “stabilisation” in the economic forecasts but stressed that projected medium-term growth was “too low to sustainably finance our state”.

“There are no arguments for postponing the economic turnaround,” he added.