The conflict between Russia and Ukraine hits the heart of the European economy: the German industrial giant is teetering

For the past two years, the German industrial sector has been struggling to extricate itself from the pandemic and unprecedented supply chain challenges, but now the "dawn at the end of the tunnel" has not yet appeared. the sudden conflict between Russia and Ukraine could be an even more deadly blow: the crisis is rapidly threatening Germany's once proud car, chemical and precision machinery manufacturers. As a result, the "locomotive" of the European economy is likely to face the risk of derailment.

Dozens of German industrial giants, including BMW (BMW AG), BASF (BASF SE) and ThyssenKrupp (ThyssenKrupp AG), have warned of a decline in their performance as a result of the geopolitical conflict that has pushed energy costs to record highs and triggered a new wave of high inflation, while others have even refused to make forecasts. Many economists have slashed their growth forecasts for Germany.

"if this war continues, it will seriously threaten the world order that has brought freedom and prosperity to many parts of the world over the past few decades, in which case Europe will suffer the greatest loss," Herbert Diess, chief executive of Volkswagen (Volkswagen AG), said at the company's annual results news conference this month.

In Berlin, the German government has acknowledged the seriousness of the possible economic difficulties. Its economic and political choices are limited by decades of energy policies that make Germany one of the countries in Europe that are most dependent on Russian gas and oil.

To make matters worse, Germany faced a major shift in its energy-intensive industrial base before the geo-storm, with plans to withdraw from nuclear and coal and the highest electricity costs in Europe.

German economy Minister Harbeck has set up a task force to collect industry data on the use and price of natural gas and electricity, production plans, supply bottlenecks and dependence on Russian energy.

Mr Habek, who has been trying to lock in other energy sources, said on Friday that Germany hoped to import gas largely independent of Russia by mid-2024. Last week, Hubbeck led a team of executives from BASF, Deutsche Bank, Commerzbank and RWE to Qatar and the United Arab Emirates to ensure imports of liquefied natural gas.

"We are reducing our dependence on Russian energy every day in order to give ourselves a little more room for manoeuvre," Harbeck said in an interview with local media on Saturday. "

But these measures clearly fail to provide the immediate aid that German companies desperately need, and there are growing signs that it could cause lasting economic pain for German export-driven manufacturers. These manufacturers, who have made great strides in China's strong demand and efficient supply chains for years, are now likely to face an unprecedented crisis.

Christian Lindner (Christian Lindner), Germany's finance minister, warned that Germany faces the danger of stagflation-persistent high inflation while the economy slows.

The German industrial giant is teetering.

In a country that relies on manufacturing to sustain economic growth, a range of economic indicators are likely to be overshadowed. Manufacturing accounts for about 22% of the German economy, compared with 11% in neighboring France.

The Kiel Institute (Kiel Institute) has cut Germany's economic growth forecast for 2022 by nearly half to 2.1 per cent, as the shock waves of the Russian-Ukrainian crisis offset the recovery in demand after the epidemic, while inflation will accelerate to 5.8 per cent, the highest level since the reunification of East and West Germany in 1990.

In March, a German manufacturing index fell further, while a key survey of the business environment hit a new low. But even so, many German companies are still actively or forced to implement sanctions against Russia.

The German government reached an agreement on a second bailout plan last Thursday to reduce the burden on energy costs, bringing the total cost of the bailout to about 30 billion euros ($33 billion). But an official, who spoke on condition of anonymity, said there was still no unified plan to stop the crisis, which would affect many aspects of the economy.

"in the face of soaring energy and commodity prices, our main task now is to survive and maintain jobs, rather than making a profit," said Ralf Stoffels, head of BIW Isolierstoffe GmbH, a German organosilicon producer based in North Rhine-Westphalia, Germany's former industrial hub.

Stoffels is clearly not alone. According to a survey of 3700 companies by the (DIHK), a business lobby group, 78 per cent said their businesses had been hurt by the conflict between Russia and Ukraine, with more than half complaining about rising prices or supply chain disruptions.

"what hurts us most is the electricity price," said Simon Eickholt, managing director of Kern Microtechnik GmbH, a maker of precision milling machines with annual sales of about 40 million euros.

The company's energy costs have roughly doubled, and supply chain disruptions and raw material costs have also weighed on it, he said. Eickholt points out that its mechanical engineering business receives several notices a week for extended delivery times and 15 per cent price increases.

Steffen Auer, managing director of steel trader Schwarzwald Eisenhandel GmbH & Co KG, said prices were "completely crazy" and that the price of a tonne of sheet metal had almost doubled by 2200 euros in a week, forcing the company to raise prices almost every day. "some of our customers can't afford to pay that price," Auer said.

Russia supplies about 2/3 of Germany's natural gas, half of its coal and about 1/3 of its oil. At present, German companies are most worried about a complete shutdown of Russian energy supplies-a decision eventually made by both Russia and the European Union.

Hubbeck also highlighted Germany's plight in his speech on Friday. "even if we reduce our dependence on Russian imports, it is too early to impose an energy embargo," Habek said. The economic and social consequences will remain very serious. "

So far, the EU has not cut off Russia's gas and oil supplies because it recognises that the move will cause shockwaves on the continent. And if the EU does, BIW Isolierstoffe GmbH's Ralf Stoffels predicts that his company will have to shut down and spread to manufacturers that rely on its silicon materials, such as carmakers.

"the danger we face is that we don't have enough energy to sustain our production, even though we produce what all industries need," Stoffels said.