After the news that Europe’s largest car producer VW may close two plants, experts are sounding the alarm that the downsizing of manufacturing isn’t just limited to the car industry. The German Institute for Economic Research (DIW) says companies need to evolve.
As EU car companies struggle with the phasing out of combustion engines and a transition to electric vehicles before 2035, experts are predicting that thousands more jobs may be cut across different sectors over the next couple of years.
DIW President, Marcel Fratzscher, says that the German economy is both export and industry dependent, and in the face of the energy transition, “companies have missed out on the transformation,” and that many, such as VW, have “fallen behind”.
“It’s not just the automotive sector, it’s machinery, it’s the pharmaceutical, the chemical sector, this is quite a problem many have,” he told Euronews.
The largest chemical producer in the world, who has its headquarters in Germany, BASF, is also looking at relocating some of its workforce to Asia and laying off workers in Germany amid exploding energy prices due to the full scale in Ukraine and burdensome bureaucracy in Germany.
Has Germany lost its competitiveness?
Asia is on an economic upwards spiral, which is having a global impact.
“German companies have located already a lot of production to China, to India, elsewhere, and this will continue,” Fratzscher said.
With China starting to reduce competition and subsidising their own companies, it “makes it harder for German companies to compete,” especially with high energy and labour costs in Europe.
So what next for the German economy?
DIW said it sees a “stagnation of the German economy this year, a gradual recovery in the next few years.” The German economy shrunk again in the second quarter of 2024, and is technically in a recession, with industrial production continuing to fall.
The car industry has particularly been affected with low demand for electric vehicles, due to slow investment in infrastructure.
However, Fratzscher said he is an optimist and believes that big German companies “have always been very innovative” after reinventing themselves several times.
“They need to readjust, need to reform. And that’s the case for Volkswagen and many German companies,” he added.
Can the German government help?
Fratzscher said he doesn’t think the government should interfere to retain workers.
“Transformation means change. Change means often consolidation. Companies need to shrink in order to be able to invest and develop new technologies,” he said.
Fratzscher also noted the government trying to keep the old structures in big companies is not just limited to Germany, but also a European phenomenon.
“Often old parts, redundant parts of an economy need to disappear for new parts to be able to happen and to to reappear or to be developed,” he added, suggesting that these crises do not have short-term solutions.
“It will require some resilience and continued investment for the next five years and then hopefully over that period, the German economy will manage the transition.”
With the German economy largely dependent on the car industry, these mass layoffs may lead to an increase in disillusionment amongst the German population and play into the hands of the far right. This could have a major impact on next year’s federal elections.
