The European export machinery is losing power. This is one of the concerns of the European Central Bank. At a conference in Cunef, the ECB's economic director, Spaniard Oscar Arce, said that despite moderation in the euro zone, energy prices were much higher than those supported by the Americans. They were like that before the energy crisis. And it's gotten worse. Concerns have therefore been raised about a loss of competitiveness, which has led to a decline in European exports. According to Eurostat, the EU lost 10% of its share of global exports of goods and services between 2021 and 2022. And the data for 2023 is also likely to be bad.
In contrast, almost 10 points were scored between 2013 and 2016. During these years, the South was able to increase its share of the pie by adapting competitiveness and the strength of German industry. However, the disappearance of cheap Russian gas meant a significant loss of competitiveness, especially for German and Italian industries. Germany is heavily dependent on the production of goods that require large amounts of energy to produce.
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While energy costs in the Eurozone tripled at the height of the crisis caused by the Ukraine war, in the US they rose by only 80%. And Americans already had cheaper energy prices before this shock. The price of electricity in European industry is currently three times higher. Although the worst of the crisis has been overcome, the differences are now greater.
“The price increase was greater because there is no gas in Europe and the United States,” says Antonio Merino, Repsol economist. And he adds that carbon rights explained half of the price increase on the European continent at the end of 2023. While the Americans only use the carrot of aid to promote climate change, the Europeans also use penalties for environmentally harmful emissions.
“China has also suffered from energy costs, but to a lesser extent because it is switching to coal, a much more polluting but cheaper source of energy,” said Arce, the Spaniard in charge of the ECB’s economic analysis.
Moves for energy
A report from the European Commission emphasizes that energy costs are a key location factor for industry. And he concludes: “The Inflation Reduction Act was highlighted.” [ley de reducción de la inflación, conocida por las siglas IRA] However, the measures approved by the US and the resulting subsidy race can play a crucial role and are often overlooked.
The impact of prices can be observed in the evolution of industries dependent on energy compared to those that are not. According to the ECB's figures, the behavior of one towards the other was much worse in Europe than in the United States. European companies that need more energy are falling behind.
“There is a reorganization, some companies are moving their production to where energy is cheaper,” said Arce. This is the case of Basf, the largest German chemical company, which has even announced that it will reduce its presence in Europe and increase it in the USA and China. He blamed the rise in energy prices and over-regulation. Although it is still early to have data on relocations, the German chemical industry employers' association warns that a fifth of the industry's investments have flowed to China.
Data centers, which are so necessary in a digitalized economy, are also very energy intensive. And the transition to electric cars is another obstacle on the way: the combustion car required technical effort in which the German industry was unbeatable. But the electric one is much easier to manufacture. This means that German competitiveness has been swept away in one fell swoop and China is taking the lead in this industry: the country has developed from a net importer of vehicles to an exporter. Furthermore, as Merino points out, the Chinese have beaten Germany as the world's leading exporter of chemicals, machine tools, electrical appliances and automobiles.
The economic slowdown in China also means that Germany is exporting less. But that's not all: To compensate for the sudden downturn in the real estate sector, Beijing is heavily promoting loans and subsidies for the industry, which could lead to overcapacity and increase Chinese competition for exports.
Arce pointed out that energy-intensive exports are weighing heavily on overseas sales. “Maybe not so much for Spain, where services are more important, but it is a problem for other euro countries that are heavily dependent on Russian gas,” he said.
Energy has led to a significant deterioration in the trade balance in the most important euro countries. However, the good news is that the EU could have posted a surplus in the second half of last year after seven consecutive quarters of deficit.
Structural delay
Although there has been some easing in recent months, PMI economic surveys show that the German manufacturing sector has been contracting for almost two years. At the end of 2023, the Eurozone manufacturing production index falls by almost 5% compared to December 2021 levels. And in electricity-intensive manufacturing, no Eurozone country has reached 2019 levels. “The poor” “The behavior of the sector seems to have a structural component,” says María Jesús Fernández, an analyst at Funcas.
Isabel Schnabel, a member of the ECB's Executive Board, explained last week that Europe is accumulating a structural lag behind the United States due to poorer productivity performance, lower public and technological investments, poorer training of workers in technology and more companies It is smaller, there are more bureaucracy and obstacles to business growth. Against the backdrop of an aging population and a time when people prefer to work fewer hours, it is important to improve productivity to maintain the welfare state and investment, he warned. However, since the beginning of the century, Europe has lost 20% of productivity compared to the United States. A technological gap is opening up, he emphasized.
All of this is reflected in the investment. Things are depressed in Germany. “It is more attractive to invest in the United States, with cheaper energy costs and intensive public support based on tax deductions that are easy to apply,” says Manuel Balmaseda, director of the Banking and Finance Institute. Washington has launched three huge programs: the IRA, the chip program and the infrastructure program. The Americans have managed to launch more than a hundred projects with investments of more than a billion dollars. It is estimated that the IRA could mean a payout of more than a trillion dollars (more than 900,000 million euros) in ten years in the areas of climate change and energy alone.
On the contrary: In Europe it is difficult to use the next generation funds, which are worth more than 800 billion euros. Implementation is slow. The Commission has distributed only 27% and the countries still have to implement this while respecting state aid limits. Four years after their creation, these funds, stuck in bureaucracy, are not having the expected driving effect. “Investment is exploding in the United States, while in Europe it is not experiencing an upswing,” emphasizes Balmaseda.
Spain remains
However, Spain has so far emerged relatively well from this crisis in the foreign sector and in industry. Despite the decline in goods exports in 2023, it is the only major European country whose trade balance has remained stable thanks to tourism, business services and automobiles. Furthermore, despite the fact that the industry's turnover fell by 1.6% last year, its manufacturing output is defying the continent's collapse. The Spanish and Italian economies have managed to restore their pre-pandemic real export quotas for goods and services. However, compared to 2010, the transalpine foreign sector performed worse than the Spanish one. On the other hand, Germany and France have lost more than 5% of their export quotas compared to the period before the Corona crisis.
Nevertheless, the governor of the Bank of Spain, Pablo Hernández de Cos, issued a warning last week. Although there was salary restraint in the agreements and there were only a small proportion of purchasing power guarantee clauses, salaries have risen significantly above the agreements in view of increasing vacancies. And labor costs per unit produced have increased even more due to contributions and low productivity. This implies that if this trend continues, there is a risk of loss of price competitiveness in the future, Cos warned.
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