The German Disease: Coming Soon to a Country Near You?

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The cover of this week’s edition of The Economist, nearby, combines a lot into a little. Above all, it has a Monty Python reference. You can never go wrong with a Monty Python reference.

Overseas the macro news is bad. Germany’s sluggish economy may take the rest of the Eurozone down with it. Japan, which has been unsuccessfully fighting deflation for two decades now, has just issued bonds with negative interest for the first time. And low oil prices are likely to tip Venezuela into default and probably put its socialist government on the course of ultimate extinction. (I didn’t say the news was all bad.  But a Venezuelan collapse could roil the economic picture quite a bit in the short run.)

The United States looks comparatively robust compared with other regions and nations. But not so fast. Back to Germany for a moment. If you think we can’t still throttle the American economy with still more stupidity out of Washington, consider the New York Times article on Friday on why German chemical giant BASF is expanding in the United States rather than Germany: lower energy prices.

Lately, though, BASF has been investing more of its money and management energy outside Germany, especially in the United States. And the company’s reasons for doing that help illustrate why the German industrial economy has been losing momentum — and why Germany risks tipping back into recession.

BASF executives say that German and European Union policies toward industry, particularly when it comes to energy, are forcing big companies to look elsewhere as they seek to expand.

Energy is perhaps BASF’s biggest cost. Tremendous amounts of electricity are required to produce chemical raw materials like ethylene, propylene and butadiene for a range of products like plastics, pharmaceuticals and rubber. And oil or natural gas are the basic feedstocks from which these chemicals are produced.

Especially in Germany, energy prices have jumped as a result of the government’s big push for renewable energy sources — a policy that the government of Chancellor Angela Merkel has labeled the Energiewende, or energy transition.

At the same time, surging production of natural gas from shale rock in the United States is creating cheap and ever more abundant energy, giving American chemical plants and manufacturing sites a new competitive edge over facilities in Europe. (Emphasis added.)

Energy costs in the U.S. are currently favorable—thank you fracking—but will they remain so for long? Just why wouldn’t we expect that the Obama Administration’s long-term EPA scheme to restructure our energy sector to have the same results as Germany in the fullness of time? Someone ought to be asking these questions on the campaign trail in Colorado, Louisiana, Kentucky, etc.

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