Europe’s Industrial decline is coming

Industrial production in Europe has been experiencing a notable decline, with key players like Germany, France, Italy, and Spain reporting significant downturns. Eurostat data highlights a 2.2% fall in the eurozone and 1.7% in the EU over the past year. Factors such as sluggish internal demand, high energy costs, and mounting competition from global giants like the U.S. and China are at the core of this industrial recession. But is Europe truly deindustrializing, or is this part of a larger transformation?

Industrial production change in the European Union from July 2022 to July 2024 (compared to the same month of the previous year)

Germany: The Bellwether of European Industry

Germany, long seen as the powerhouse of European manufacturing, has seen its industrial output drop 14% since its 2017 peak, returning to levels last observed in 2006. High energy prices have been a key factor in this decline, exacerbated by the end of cheap Russian gas imports and the challenges of transitioning to renewable energy. Volkswagen, Germany’s largest employer, recently announced plans to shutter factories and cut jobs, signaling larger structural issues within the sector.

Top publicly traded German companies by number of employees

Energy Costs and the Green Transition

Energy costs remain a significant burden on European industries. Natural gas prices in Europe are three to five times higher than in the U.S., and electricity prices for industrial sectors are similarly inflated. The EU’s reliance on renewable energy sources like wind and solar has grown, but gaps in consistent energy supply and the high costs of necessary grid upgrades hinder the full realization of benefits.

European Energy Prices are Uncompetitive

Moreover, the phase-out of nuclear power in countries like Germany has exacerbated the energy gap. While the green transition promises to reduce reliance on foreign energy sources, critics argue that it has inadvertently increased dependence on Chinese solar panels and shifted pollution abroad.

The Decline of Export-Led Growth

Historically, Europe’s economic model relied on export-led growth, particularly in Germany, where cheap energy and robust demand from autocratic regimes like China fueled industrial success. However, global shifts post-2008, including reduced global demand and fiscal austerity, have made this model less viable. Today, the focus is shifting towards domestic demand-led growth to balance trade and sustain economic stability.

A Mixed Industrial Picture

While some sectors, particularly energy-intensive industries like chemicals and metals, face decline, others like pharmaceuticals and high-tech manufacturing are thriving. Denmark, for instance, has seen a 20% growth in industrial output, driven by its booming pharmaceutical sector.

Europe’s strength lies in its high-skill, specialized industries like mechanical engineering, semiconductors, and aerospace. Companies like ASML and Airbus exemplify Europe’s capacity for innovation and global competitiveness.

Challenges and the Path Forward

Europe’s industrial woes are not insurmountable. Addressing high energy costs, improving infrastructure, and fostering innovation are critical to ensuring the continent’s industrial future. Regulatory reform and increased public investment could also bolster productivity.

While the challenges are significant, Europe’s educated workforce and expertise in high-tech production position it to navigate these difficulties. Rather than succumbing to pessimism, Europe can leverage its strengths to adapt and thrive in a changing global economy.