Article

Europe seeks its green recovery

The wealth gap between countries in the European Union means the cost of the bloc’s rush to a ‘green’ economy may increasingly fall on unimpressed German taxpayers.

| 6 min read

“Next-Generation EU” is the slogan across the website of the European Commission – and on the lips of the major European Union (EU) players. The bloc wants to “make it real”. It also seeks to “make it green.”

The EU is up for a digital transformation too. It is trying to engage with the public, assuring them that they will be an important part of the green journey currently being designed. Some €750bn of new borrowings will add to the funds for the ‘Build Back Better’ green recovery plan.

There is an acknowledgment that the green transition is not good news for everyone. For all the winners making windmills and electric cars there will be losers currently earning a living from oil, gas, conventional heating, internal combustion engine vehicles – and the rest. For every market gardener able to sell more cabbages, there will be a beef or sheep farmer worrying about loss of sales. There is a fund to help with the costs of transition, presumably to train people for different jobs and to pay some compensation for lost activities.

The German economy has been the great success story of the EU economy so far, based on strength in engineering in general – and vehicle production in particular. The German car market, both at home and abroad, has seen vehicle sales tumble. Many attribute this to the pandemic, which closed factories and showrooms last year for a period. However, they also need to ask if the persistence of lower volumes this year also has something to do with the clear messages to people to avoid buying new diesel and petrol cars before they are ready in large numbers to buy ones powered by new battery technology.

Uninspiring bounceback

Of course, the first five months of 2021 saw a good recovery when compared with a weak 2020, but the total number of cars through the factory gates was still below pre-pandemic levels. Diesel cars especially have taken a major structural hit. The UK, Germany’s largest market in the past for cars, has pledged to ban the purchase of new diesel and petrol cars as early as 2030 – which is having an impact on consumer preferences already as vehicles are long-term purchases.

Whilst battery electric vehicles have grown well from a small base, they are still accounted for only 5% of sales – despite the big fall in diesel car purchases to a 28% market share last year. The German car manufacturers association, the VDA, got close to criticising the whole net-zero policy in a recent statement. It said:

“The idea of the EU Commission on reducing the fleet target values (of carbon dioxide) for new vehicles to zero as of 2035 would practically force the European auto industry to market only battery electric vehicles… restricting the technology to a single drivetrain option within such a short period of time is worrying and does not give any consideration whatsoever to the interests of consumers.”

That is tough language given the normal consensual relations between the industry and government on these matters. The VDA has earmarked €150bn of investment to try to reorient the industry away from diesel and petrol cars up to 2025. That is all investment money to try to maintain car-industry volumes, as internal-combustion car sales decline. It is unlikely to produce good profit growth, given the backdrop of writing off the residual investments in diesel and petrol manufacturing facilities.

German taxpayers can see what’s coming

If German output and activity in vehicles remains damaged, Berlin’s worries about the way German taxpayers are being asked to help fund the lower-income deficit countries of the EU may grow. The latest figures for transfers between member states in the euro through the European Central Bank (ECB) showed that Germany deposited its accumulated surplus at a new high of €1,047bn at the ECB compared to deficits and borrowings of Spain at €498bn and Italy at €480bn. Whilst the new German CDU leader, who may take over from Angela Merkel, is arguing for a more centralised Europe. He will want it, in part, to impose spending and borrowing discipline on these countries that could otherwise find ways to raid Germany’s cash – and to get German taxpayers footing more of the bills.

The EU also faces an uphill task in hitting its new – and more exacting – climate change targets. To get to a 55% reduction in CO2 by 2030 it will have to close more coal-powered power stations, switch more homes from gas, persuade more people to buy more electric vehicles and cut meat consumption.

The EU is aware of the problem and is urging “everyone can do their part by taking public transport or biking, be eating more vegetables and less meat, by buying second hand, recycling and reusing”. Germany is less keen to end its mining and burning of coal – and has just completed Nord Stream 2, a gas pipeline that will allow it to import more Russian gas. Poland remains keen on coal, and the EU steel industry has a long way to go become carbon neutral.

The EU will enjoy a decent post-pandemic recovery this summer and autumn. It still has some good brands and some successful global companies. It still lags well behind the US and China in the digital revolution, as it embarks on a very expensive green transition. The debts run up by the southern states are still real debts owed to bondholders including the ECB in ways which are not true of the US, UK and Japan – where a lot of the state debt is now owed to the state itself. These are longer-term concerns which will limit the scope for superior performance in the years ahead, once the recovery catches up with equity valuations and is fully reflected in share prices.

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Europe seeks its green recovery

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