How does the energy crisis affect the European industrial sector?

Since the year the Second World War came to an end, the white-hot furnaces of Duralex have been blazing close to the banks of the River Loire, near Orléans, France.

In contrast, not a single piece of glass is being made this winter along the motionless production lines of the company's glass factory in La Chapelle-Saint-Mesmin.

Due to the prohibitively exorbitant cost of the gas needed to keep the furnace running at full blast, it is currently in "hibernation" mode until April. When operated in such low temperatures , it is unable to produce anything. But if it were completely shut off, the equipment would be destroyed as the molten glass inside would solidify.

In his office next to the factory, José-Luis Llacuna, president of La Maison Française du Verre, the company that owns the Duralex and Pyrex brands, explained that a difficult decision had to be made. "It has technical and human risks, but makes us save energy."

Even if you are unaware of it, you have likely handled a Duralex product, an underappreciated achievement of European manufacturing. Their robust glass tumblers are exported all over the world and may be found in every French school canteen. Both the MoMA in New York and the John Lewis department stores in the UK sell them.

The factory's future in Europe, according to Llacuna, is secure, but its struggle this winter serves as a metaphor for a larger issue impacting Europe's centuries-old manufacturing sector as high energy prices and intense politics clash.

Since Russia's invasion of Ukraine and its cutting off of crucial gas pipelines, energy costs have reached record highs in 2022, making it impossible for many manufacturing companies to remain competitive if they stay in Europe. Meanwhile, a sizable package of American green sector subsidies has astonished and angered EU officials, who see the U.S.—a putative ally—enticing companies to move across the Atlantic.

The glass, chemicals, metals, fertilizer, pulp and paper, ceramics, and cement industries, which require the greatest energy to power their industrial output and collectively employ 8 million people, are particularly affected by the energy crisis. But as the United States becomes more protectionist and China's economic competition grows, European politicians publicly express concern about a "deindustrialization" epidemic that might affect all manufacturing on the continent.

Preventing this terrible conclusion, as well as its social and political repercussions, has risen to the top of the EU's priority for 2023.

European Internal Market Commissioner Thierry Breton identified initiatives to increase Europe's global competitiveness as "a top priority" in a new year's email to staff.

",High energy prices in Europe will continue to affect our fellow citizens, but also entire industrial supply chains and [small and medium-sized businesses]

According to Breton's email, "Europe's security of supply, export capability, and job creation are at risk" without a robust industrial base. At the same time, China, the U.S. and other countries are trying — not without success — to attract our industrial capacities," according to Breton.

As of December, European manufacturing, particularly the industrial powerhouse of the continent, Germany, had survived the worst of the winter energy shortage, reducing their gas usage by about 15% without experiencing a comparable decrease in overall output.

However, many continue to worry that larger companies would simply shift operations outside of Europe while smaller enterprises may completely fold because gas prices are still more than four times higher in Europe than in competitor countries like the U.S., despite recent drops.

The long-cherished idea of Europe serving as the engine for a green industrial revolution has been seriously cast into serious doubt by Joe Biden's $369 billion Inflation Reduction Act, which only serves to heighten the gloom. European authorities worry that the package would entice more of their companies over the Atlantic due to its substantial subsidies for green technologies and "Buy American" clauses.

A senior member of the European Commission stated, "Given the actions of the U.S. and China, we see the real danger of deindustrialization and disinvestment."

According to Luc Triangle, general secretary of the IndustriALL European Trade Union, which represents industrial workers, reducing production capacity results in job losses and has "political consequences."

Triangle stated, "We are not exaggerating when we say that European industry — starting with the energy-intensive industries on the frontline — is facing an existential crisis."  According to IndustriALL, the 8 million employees in the energy-intensive sector face the same "existential" threat.

According to the European Commission's annual labor market study, which was released last month, employment rates in the EU remained high despite the conflict, with the unemployment rate dropping to 6% in July. However, it also stated that continuing to pay high energy prices poses a "major risk" to jobs in the EU, particularly in manufacturing industries that use a lot of energy.

"We don’t see it in the data yet … but it is a concern for the future, maybe as soon as this year," according to the economics minister of an EU country.

Even if it has only had a minor impact thus far, jobs are already affected. The European Foundation for the Improvement of Living and Working Conditions (Eurofound) published a list of job losses in December, including 300 jobs at a plant in Slovakia, 350 jobs at a Polish ceramic tile business and 441 layoffs at a Romanian plant that produces aluminum oxide in Tulcea in June. According to the group, the effects of the energy crisis on employment in the bloc are probably "only just beginning."

Triangle cautioned that accelerated industrial collapse in central and eastern Europe might spark a voter backlash against the EU that could potentially become an enduring legacy of the crisis, similar to the former manufacturing towns of northern England that went on to support Brexit.

Triangle stated, "There are political consequences. Which parties are going to win, thriving on the dissatisfaction and disappointment? The parties that have an anti-European agenda, or an extremist agenda."

According to the minister previously cited, government representatives are already "worried."

Businesses have become more loud in their warnings, and requests for concerted EU-level action to save Europe's manufacturing base have also increased. A complete new "made in Europe" policy for the entire EU is currently demanded by France.

According to Triangle, the German chemical firm BASF's decision to permanently scale back its operations in Europe in October sent shockwaves through the European manufacturing sector. BASF has had its headquarters in Ludwigshafen since the middle of the 19th century.

Volkswagen warned that Europe was no longer "cost-competitive in many areas, in particular when it comes to the costs of electricity and gas" in November, highlighting the wider impact beyond energy-intensive sectors — a warning shot from the 13 million-person automotive industry, which is the crowning achievement of European manufacturing.

EU leaders believed they had heard the call at their final summit of 2022 in December. The outcome of the conference was a directive to the European Commission to formulate suggestions as soon as possible "with a view to mobilizing all relevant national and EU tools" to solve the dual energy and competitiveness challenges that are affecting European industry. The topic is expected to take center stage at the February 9–10 meeting of EU leaders.

But the direction the bloc will go in is still up in the air due to disputes between nations regarding the best course of action.

Officials are primarily focused on loosening the rigorous state aid regulations of the EU, and financial support from the EU for manufacturing sectors is also being considered.

The Next Generation EU COVID recovery package and the RePowerEU fund to wean the Union off Russian fossil fuels are two current programs that may need to be examined by governments in the near future to "cater for the manufacturing investments needed," according to the senior Commission official.

The majority of the biggest replies thus far have been at the national level. Germany, the bloc's largest manufacturing center and economic power, has set aside €200 billion for a support package for individuals, businesses, and homes. Additionally, Germany will cap the price that industrial consumers of gas and electricity must pay. A new bill to encourage the reshoring of green businesses has been announced by France.

German Finance Minister Christian Lindner recently wrote an opinion piece for the Financial Times in which he expressed optimism that "Europe and Germany can weather this crisis without a collapse in industrial production."

Others, though, worry that smaller nations lacking Germany's fiscal might may fall behind without significant EU engagement. The economics minister stated that "principles should be agreed at European level to maintain the level-playing field."

The discussion will probably continue well into the spring.

A new, more economical energy arrangement that will enable the furnace to be fired up once more and glass to be made at Duralex in France will bring some relief in April. Llacuna, the company president, is certain that the business will survive the energy crisis and carry on as usual. According to him, "Made in France" is an "emotional brand" for the company that it would not easily give up.

But for many others across the continent, there is now greater skepticism about the "Made in Europe" label.

One EU diplomat stated that "If the EU doesn’t step up its industrial policy, our industry is bleeding to death."

By fLEXI tEAM