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It is decided: the radical German green transition continues without correction

There was almost palpable enthusiasm in Germany and Europe, from energy experts to economic players, that a major turnaround in Germany’s green transition strategy could occur after the collapse of the traffic light coalition and the February elections. That it could be revised, whether it is the question of bringing back nuclear power plants or rethinking the artificially high energy prices. However, the rather unfounded hopes have been dashed with the CDU-SPD-Greens agreement: German climate neutrality by 2045 will be constitutionally enshrined, making the essentially unchanged green transition strategy sacrosanct. And green projects that are unviable on a market basis will receive an additional €100 billion from the €500 billion infrastructure fund that is now being set up, gradually cannibalising it completely. Even if debt-funded orders stimulate the economy, the decline in German competitiveness is likely to continue.

“What more could they want…?” – blasted Friedrich Merz the German Greens during the post-election haggling. The party has asked a very high price in exchange for supporting the coalition of the Christian Democratic Union (CDU) and the Social Democratic Party (SPD) in abolishing the debt brake – which requires a two-thirds majority – and setting up an infrastructure and defence fund of extraordinary size. The end result is essentially that the radical green transition strategy will continue, as if the Greens, who won only 12 per cent in the elections, were part of the governing coalition. Only now with much greater resources financed by debt issuance.

At this point, it is worth reviewing the strategic mistakes that German economic policy has made so far. Merz himself, as the CDU’s candidate for chancellor, criticised them fiercely during the campaign:

  • Germany embarked on the green transition and electrification by shutting down its nuclear power plants, which were the dominant source of electricity generation, and then starting to physically dismantle them. Even the energy crisis following the Russian attack in 2022 and the loss of Russian gas did not prompt the traffic light coalition to change course or even postpone the change; the process was accelerated instead and the decommissioning of reactors was completed in 2024. A similar process was planned for coal-fired power plants, but was stalled by security of supply concerns.
  • Undeterred by the unprecedentedly high energy prices, German economic policy steadily increased the price of energy and industrial production in Germany, and pushed Brussels in the same direction (through the incessant expansion of the carbon certificate system, carbon taxes and a system of fees and requirements that make energy use more expensive in general.)
  • Together, the German government and industry have spent hundreds of billions of euros on building renewable energy capacity, but without addressing the consequences of electricity generation becoming heavily weather-dependent: taxpayer-funded and unstorable overproduction in good weather, and no choice but extremely expensive imports in bad (such as dark and windless) weather.
  • The use of state coercion throughout the economy, from heating buildings to transport to steel production: it is not only the compulsory use of uneconomic technologies that is causing irreparable damage, but also the jungle of green over-regulation and licensing. In the questionnaires, even those German companies for which energy prices are not critical consistently cite the latter as the most serious problem.

The consequences of this ideology-driven green transition strategy are now well known compared to other industrialised countries: uniquely expensive energy both in Europe and globally, and German companies fleeing uncompetitive production conditions and abandoning their home production.

The figure can be referenced here: https://public.flourish.studio/visualisation/23298793/

With these issues – in addition to migration and the geopolitical situation – being high on the agenda during the election debates, the German and European public had every right to expect significant changes with the formation of the new government.

But there is no sign of this; in fact, quite the contrary.

  • Enshrining climate neutrality in the constitution seems like a symbolic step, but it is not. From now on, in all legally contentious situations – what rights does a German government have against economic actors, or what rights does a new government have against the decisions of an old government? – green transition objectives will take priority. But the same applies to the protection of the German economy’s interests. For example, the European Emissions Trading Scheme (ETS II), which will come into force in 2027, will increase road transport costs by 27 per cent and heating costs by 41 per cent by 2029, according to Bloomberg calculations, to force economic players to adopt green technologies. Many European countries are fiercely opposed to the scheme’s entry into force, but Berlin will have no choice as it would become legally actionable. It is also worth noting that Germany wants to achieve climate neutrality five years earlier (2045) than the EU as a whole (2050). In other words, the carbon pricing scheme will lead to an increasing subsidy of fossil production in other member states. Europe as a whole will subsidise fossil-based production in the US and China.
  • This doctrinaire rigidity, irrevocable without a two-thirds majority, is also seriously at odds with Germany’s gas-related ambitions. Due to a series of delays, the construction of 15 to 20 new gas-fired power plants capable of using hydrogen to offset weather-dependent energy until full green power generation is achieved has not even started. The current plan is for the German economy to import LNG to replace Russian gas for good, with an increasing number of long-term (10-15-20 year) contracts with US and other LNG suppliers (Merz himself talked during the campaign about the need to build 50 new German gas plants!). However, it will be a bit of a ‘tight schedule’, as by 2045 all gas-based activities will have to be completely phased out (and a significant part of the gas pipelines will have to be converted into hydrogen pipelines).
    • Equally far-reaching are the consequences of spending €100 billion of the €500 billion infrastructure fund on green transition in exchange for Greens support. In fact, a large part of the infrastructure fund is inevitably being used for this purpose anyway:

    for example, to develop the electricity grid and the hydrogen pipeline system, due to the lack of financial resources in the German budget. To put the figures in perspective, the German Electricity Grid Agency estimates that it will cost a total of €450 billion to build and replace the grid – to cope with the demands of renewable energy. The cost of building the new hydrogen pipelines – not the ones to be converted from gas pipelines – will be at least €19 billion (by comparison, €18 billion could be spent to restart six decommissioned nuclear power plants, and seven brand new high-power nuclear power plants could be built from €100 billion). How much money is left for what was originally announced: building bridges, clinics and improving the railways? Obviously there will soon be a need to increase the size of the funds. Until now, industry players had assumed that the timetable would be softened as it went along – but this has taken the decision out of the hands of the economic decision-makers.

  • It is particularly telling that, while the need to regain competitiveness is stated, no concrete agreement on this was reached during the coalition negotiations. There is no mention of the extraction of German gas reserves or even the industrial application of carbon capture and storage (CCS). Just as German nuclear power plants were only an important issue in the campaign, but not during the coalition negotiations: there is no political will to reconnect the nuclear power plants that are still intact, nor to build new ones. (The coalition agreement includes support for fusion research, presumably to divert attention from the SPD’s blocking of support for the construction of new generation nuclear power plants.) It is precisely the above that could ensure that the price of German electricity generation fell and that German electrification was competitive in the long term. Instead, the only idea to bring down energy prices is to subsidise electricity prices, i.e. state intervention again: for example, there is a proposal to cut the price of commercial electricity by 5 euro cents per kilowatt hour (which, comically, would be done by cutting the recently introduced taxes, at a cost of €20 billion a year to the taxpayer). This is a very modest step in relation to the depth of the problems, and is moving further and further away from the right solution: to base electrification on abundant and always available energy, low production costs and technological innovation, which is, for example, the strategy of the Chinese green transition.

The figure can be referenced here: https://public.flourish.studio/visualisation/23298961/

And speaking of China’s green transition, Beijing now dominates green technology and the production of green instruments to such an extent that Berlin will soon be forced to make the critical choice whether to use Chinese instruments or keep them out to reach its fast-approaching 2045 target. While the coalition agreement mentions “technological openness”, there are no specifics. For example: what about the ban on conventional car sales by 2035? Will Berlin support the implementation of European tariffs against China, which will almost immediately lead to a surge in the cost of the European green transition? Without tariffs, a significant part of German green transition spending will end up as the profit of Chinese suppliers. At the same time, however, if the decision is taken not to realise the European green transition with the Chinese industry’s products, the German resources now dedicated will be far from sufficient:

The figure can be referenced here: https://public.flourish.studio/visualisation/23299111/

In the light of all this, it is not surprising that the capital markets now value, for example, the car manufacturer Volkswagen Group at a lower market value (€55 billion) than the military equipment manufacturer Rheinmetall (€61 billion). This is an unprecedented turnaround in German economic history and does not bode well for the future competitiveness of German exports. The motto favoured by European and German greens that if we fail to save the climate, “we don’t have a planet ‘B'”, can also be reversed: there is no German economy ‘B’ if the first one is priced out of the the global markets.

Vezető elemző |  Published writings

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