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Germany to grant big industry firms subsidies to clean up their act

Germany on Tuesday launched what it called "an innovative" multi-billion-euro subsidy scheme aimed at turbocharging investments that will make industrial production in Europe's top economy more climate friendly.

Published: 12 March 2024 14:58 CET

An employee in protective clothing works in front of a tapped blast furnace at Germany's second-largest steel manufacturer, Salzgitter AG. Photo: picture alliance / Julian Stratenschulte/dpa

Energy Minister Robert Habeck said four billion euros ($4.4 billion) would be up for grabs in the first round of the programme, with companies in energy-intensive sectors like glass, steel and paper-making invited to submit proposals for green technology projects that will slash their emissions.

“We are the first industrial country to introduce this,” Habeck told a press conference, calling the scheme “an innovative, new instrument” that would cut red tape, boost technological innovation and help Germany reach its climate targets.

The “climate protection contracts” will run for 15 years, Habeck said, with the government awarding subsidies to those firms that can decarbonise their production processes at the lowest cost.

The government has set aside a “mid-double-digit” billion euro amount for the programme overall, Habeck said. The next round of bidding will open in the autumn for 19 billion euros in subsidies.

The scheme comes as Germany’s crucial manufacturing industry is suffering through a downturn, battered by inflation, weaker global demand and soaring energy costs after Russia’s war in Ukraine cut off access to cheap gas imports.

“We need this as stimulus for the economy and of course for climate protection,” Habeck said.

The scheme is expected to help reduce carbon emissions from industry by 350 million tonnes by 2045, according to the economy ministry.

Germany aims to be carbon neutral by 2045.

Habeck said the subsidy programme was also “a good answer” to the green incentives offered by the United States’ Inflation Reduction Act, which have already prompted some German firms to mull moving production abroad.

“We need production in Germany, I want energy-intensive industries here and I want that production to be climate neutral,” he said.

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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.