Germany goes crazy: how Net Zero is killing Europe’s most efficient industrial machine

Earlier this year, an acquaintance was encouraged to purchase an electric vehicle (EV) as a company vehicle.

He chose a top-of-the-range BMW iX minivan with trim.

Everything was going well until the expensive electric vehicle, fully loaded and carrying his family, came to a screeching halt on a busy suburban street.

Emergency services were called, but no one could convince the vehicle to start. It was eventually towed to the BMW dealership, where it remained for two months while the mechanics and diagnostic team tried with great difficulty to locate and correct the fault.

The engineering crisis at one of Germany’s most admired brands offers a metaphor for the hasty transformation in car manufacturing.

The global shift from the internal combustion engine to electric vehicles, accelerated by climate change targets, is wreaking havoc on car manufacturing across Europe.

In Britain, an industry emerging from the manufacturing destruction of the last century once again faces a fragile future.

After 120 years of manufacturing vehicles in Luton, Vauxhall is closing operations with more than 1,000 jobs at risk because it cannot make the electric vehicle economy work.

This comes on the heels of a similar decision by the American Ford, which will eliminate 800 jobs.

There is now a big risk that Nissan of Japan in Sunderland, which has enthusiastically embraced the electric vehicle revolution, will decide it can no longer meet challenging targets for battery production and the move to electric vehicles.

Germany, as Europe’s key economy, faces the biggest obstacles. Over the past few decades, Britain and much of the rest of the world have accepted the narrative of Germany as the world’s engineering power.

Top mechanical experts and an integrated supply chain at Mittelstand, often family-owned (small and medium-sized manufacturing companies), created an unrivaled reputation for reliability.

Whether it’s cars, appliances, water filters or industrial equipment, we trust German engineering.

A combination of careful fiscal policy, sound currency, manufacturing capacity, and political stability offered an idealized model for Western democracies.

The BMW breakdown, however, is more than just an unfortunate anecdote. It is emblematic of a broken economic model, as described by German writer Wolfgang Munchau in his new book Kaput: The End of the German Miracle.

The country’s Luddite attitude toward new and IT technologies, an obsession with old manufacturing, and a snail’s adjustment to greener energy (it still burns coal) have left Germany in the slow lane.

Even the much-underrated, low-growth economy of the United Kingdom is expanding faster than it was the locomotive of Europe. As if this were not bad enough, the political situation is dire.

While the world’s eyes were on Washington and the outcome of the Nov. 5 U.S. election, the German government, led by weakened Social Democratic Chancellor Olaf Scholz, was collapsing.

The immediate trigger was an investigative dispute over breaches of a debt limit, but tensions run deep. The consequence is months of political and fiscal uncertainty.

A vote of confidence is scheduled for December 16 and a general election is likely to be held on February 16. The right-wing Alternativ für Deutschland (AfD) is among the parties that remain behind the scenes.

Germany’s postwar economic renaissance needs renewal. It is the world’s fourth largest economy and scores highly on global indices of good living standards, healthcare and education.

At a time when other Western nations are drowning in excessive debt, the country’s debt level relative to national output stands at a modest 62.9 percent.

That makes German bonds, the equivalent of British bonds, a gold standard by which other Western bonds are measured.

However, the real economy of production and employment is seriously failing. The country doubled down on manufacturing and auto manufacturing, while much of the rest of the world has focused on the technology, digital and service industries.

About 26 percent of production in Germany is generated by manufacturing things, especially cars.

German vehicle production focused on high-value, beautifully designed, fossil fuel-powered vehicles as global trade advanced. Elon Musk’s Tesla paved the way for the new generation of electronically controlled electric vehicles at premium prices.

China, one of the biggest markets for German cars, got the message and embarked on mass production of electric vehicles at cheaper prices.

This put enormous pressure on the German automobile industry.

Production there peaked at 6 million vehicles in 2012, when the country’s economy showed resilience after the great financial crisis.

Since then, it has been decreasing and production is around 4 million.

Nothing demonstrates the competitive challenge better than Volkswagen, market leader in Europe every year since 2005.

The company has the highest labor costs of any automobile company in the world. He has canceled salary agreements and wants to push for salary cuts. The company says rising factory costs are 25 to 50 percent higher than the competition.

Faced with electric vehicle and pricing challenges, Scholz has erected trade barriers against China, which for decades has been its largest export market.

Unlike other Western economies, Germany avoided much of the asset price bubble of the great financial crisis.

It enjoyed a golden period of expansion until 2018. However, since then, industrial production has stagnated and automobile production has declined. As a result, Germany has underperformed almost all of its European rivals, including Britain.

The International Monetary Fund expects Germany to flirt with recession this year and its output to fall 0.2 percent.

The Fund cut its 2025 prediction from a paltry 1.3 percent to just 0.8 percent. There will be downward pressure on living standards and employment.

Munchau, in his criticism of the German miracle, attributes it to technophobia in a country where 80 percent of companies still communicate by fax.

The country’s great technology hope, fintech group Wirecard, ended in disaster when it fell into bankruptcy in 2020 after the discovery of massive fraud.

The war in Ukraine dealt a devastating blow to the country’s energy security.

Former Chancellor Angela Merkel ordered the closure of all nuclear plants following the Fukushima nuclear disaster in Japan in 2011.

This made the country increasingly dependent on Russian gas, now embargoed. It still relies heavily on fossil fuels, with 30 percent of production coming from burning coal.

Britain’s last coal station closed in September this year.

The pandemic, Russia’s war against Ukraine and the green revolution in the automotive sector have devastated Germany’s economic model.

The country has been plagued by dependence on an aging banking system, distrust of technology, lagging creative industries, energy dependence on Russia and deep trade relations with China.

Furthermore, it is tormented by economic orthodoxies rooted in historical fears of a repeat of the horrendous inflation of the Weimar Republic.

All this has given political hope to veteran opposition leader Friedrich Merz, 69, of the Christian Democratic Union (CDU).

He has spent much of the last decade burnishing his new economic credentials as chairman of the supervisory board of the world’s leading asset manager BlackRock.

Its stated goal is to deploy its free-market skills to make the German economy competitive again. It is a formidable challenge.

• Kaput: The End of the German Miracle by Wolfgang Munchau (Swift £20, p. 256).