I caught this Twitter thread last week, and wanted to make sure I got a chance to talk about it. It’s by Andrew Hammel, an American living in Germany. The first people to pass it around to are all of your friends who still think Angela Merkel was the real leader of the free world over the last six years.
After that? Pass it on to all of your friends and relatives who think that “Social democracy – Socialism lite – is financially self supporting, and doesn’t depend on literally everything going perfectly.
And while it’s about European macro economics, there is an inevitable Minnesota angle below Mr. Hammel’s piece, which follows. And speaking of Minnesota – whenever “Germany” is mentioned in the piece below, fill in “Minnesota”. It doesn’t all fit, but enough of it does that it’s worth sitting up and taking notice.
I think many Germans don’t realize how the energy crisis directly threatens Germany’s future as a prosperous country. Germany has a huge bureaucracy and social-welfare apparatus, and provides comparatively generous subsidies for the arts.
Universities are free, which means the taxpayer pays for them, and lots of vocational training is also heavily subsidized.
Where does all the money to pay for this come from?
If you ask the typical lefty voter, they have only the vaguest idea: Big companies and the rich people in modernist villas who always turn out to be the real killer on German crime shows.
The German media do a terrible job conveying the basic principles of economics and management to viewers and listeners, so most Germans who aren’t engineers or executives or factory workers or otherwise directly involved in producing goods don’t really understand where Germany’s wealth comes from.
But no, the only reason Germany can afford all these dead-weight investments which don’t yield any returns (or only indirect, generalized, time-delayed returns) is because Germany makes things people want to buy.
That’s what brings the money in. Germany doesn’t have many natural resources (at least, that it is willing to recover), so those don’t bring in the cash. Germany’s exports are the main, nearly the exclusive, source of its wealth.
Germany has much higher manufacturing costs than many other comparable countries, and the only way it can keep competitive is through a well-educated workforce, efficiency, high technology, and high quality.
That’s what generates enough value added to make it worthwhile to produce something in Germany, rather than in Hungary or China or the US or Russia, where all input costs are cheaper.
But the energy crisis has the potential to nearly or completely destroy this competitive advantage.
When energy costs are merely three times what they are in a competitive country such as the USA or Romania or China (depending on the product), German efficiency and technical quality and brand reputation can make up for that.
When energy costs rise to 10 times or even 15 times those of competitive countries, and the markets become convinced this is a lasting situation, Germany becomes unsustainable. It becomes impossible to manufacture high value-added products for a profit within Germany.
They may be designed in Germany, but they won’t be made there. It will just be too expensive, period. There’s no way to make the numbers work.
And this leads to long-term erosion of the tax base.
Gradually the money dries up for things which aren’t vital to the survival of the country. And what are those things vital to the survival of the country? Massive government subsidies to make energy and food affordable to the average person.
This is where much of the budget of many developing countries goes right now: to subsidies on diesel and wheat and rice which enable ordinary people to be able to pay their (artificially reduced) bills.
Half of the time you read about riots in places like Indonesia or Egypt, the cause is the government being forced to reduce subsidies on food and energy, often by a mandate from the IMF.
Once Germany reaches the point where it has to subsidize energy and food to prevent social unrest – something it’s about to start doing right now – then money for non-essential things dries up.
Those things include generous welfare, arts subsidies, free education, generous pensions, etc. There will be even more privatizations, and many arts institutions will simply go bankrupt.
Train travel might become something reserved (even more) for the well-off, since (1) subsidies which keep the Deutsche Bahn (even remotely) affordable will disappear; and (2) the average German consumer will not have enough disposable income to pay for a non-subsidized train ticket. Universities will gradually wither on the vine unless they introduce tuition fees, and even then, they’ll shut down entire degree programs which don’t channel graduates into well-paying jobs.
Goodbye humanities, it was nice knowing you.
Sorry regional symphony orchestra, we can’t afford you anymore. Bye-bye small museum, you’re becoming an Aldi. And sorry 2nd-oldest church in Hepperhausen, there’s no money to maintain you anymore.
We can just barely afford the 1st-oldest church, which we have to keep up because it’s a tourist attraction, and we are desperate for every tourist dollar.
And all those state-funded “streetworkers” and “night buses” providing basic assistance to the growing numbers of homeless? Sorry, you’ll have to find money elsewhere.
And then Germany will find itself in the trap many developing countries find themselves in: It will lack the productive industries needed to support the subsidies which it must continue paying to avoid social chaos.
It will go further and further into the red, and will need help from outside entities. And those entities will point out that the only way out of the red is to cut the broad subsidies for basic survival.
Which Germany won’t be able to do without plunging millions of people into genuine, real, not-enough-food-to-eat poverty.
Germany will survive, of course, but it will keep getting steadily poorer and poorer.
And that is very bad for a country’s psyche, since humans regret what they have lost much more bitterly than they regret losing a chance to get something they’ve never had. Deaths of despair will increase, as they did in Russia in the 1990s.
This is why the energy crisis poses a grave threat to Germany’s future as a prosperous country. There is still a way to avert it, but certainly not with the strategies currently favored by the administration. We’ll see whether the EU can pull a rabbit out of the hat.
I’m not optimistic.
The side angles – about things that Germans do when things break down – are too obvious and awful to think about.
Minnesota, and US, angle: we don’t have the Soviet…er, Russian government shutting off gas and raising energy prices by an order of magnitude.
Or do we? I mean, this winter is going to suuuuuuck, and we’ve got a governor who thinks, like Angela Merkel, that shutting off nuke and coal plants and driving people to solar and wind power makes perfect sense.
Originally in this tweet thread:
