1
00:00:00,320 --> 00:00:03,480
Industrial production has been 
falling in most European 

2
00:00:03,480 --> 00:00:07,280
countries, driven by sluggish 
internal demand, high energy 

3
00:00:07,280 --> 00:00:10,680
costs and competition from the 
United States and China. 

4
00:00:11,080 --> 00:00:14,400
The Wall Street Journal wrote in
January that Europe's growth 

5
00:00:14,400 --> 00:00:18,280
engine is broken. 
Eurostat data released last 

6
00:00:18,280 --> 00:00:22,760
month shows that industrial 
production fell by 2.2% in the 

7
00:00:22,760 --> 00:00:27,560
eurozone and 1.7% in the 
European Union over the prior 

8
00:00:27,560 --> 00:00:30,360
year. 
Germany, France, Italy and 

9
00:00:30,360 --> 00:00:34,840
Spain, Europe's four largest 
economies, all recorded a year 

10
00:00:34,840 --> 00:00:38,560
on year drop in the production 
of capital goods and consumer 

11
00:00:38,560 --> 00:00:41,000
durables. 
It's not all bad though. 

12
00:00:41,120 --> 00:00:45,080
Some of the smaller economies 
like Denmark, Greece and Finland

13
00:00:45,240 --> 00:00:48,920
saw significant growth. 
Denmark had the fastest 

14
00:00:48,920 --> 00:00:53,480
industrial growth in Europe, up 
almost 20% over the 12 month 

15
00:00:53,480 --> 00:00:57,520
period, driven by its booming 
Pharmaceutical industry which 

16
00:00:57,520 --> 00:01:01,920
has produced popular weight loss
drugs and an mpox vaccine. 

17
00:01:02,280 --> 00:01:06,960
The former president of the ECB,
Mario Draghi, wrote in a report 

18
00:01:06,960 --> 00:01:11,000
last month that the European 
Union today faces an ecstasy 

19
00:01:11,160 --> 00:01:14,520
substantial challenge, and if it
doesn't change, it will be 

20
00:01:14,520 --> 00:01:18,600
condemned to a slow agony. 
He wrote that real disposable 

21
00:01:18,600 --> 00:01:22,120
income per capita has grown 
almost twice as much in the 

22
00:01:22,120 --> 00:01:25,320
United States as in Europe since
2000. 

23
00:01:25,560 --> 00:01:29,400
And as things stand, there's no 
reason for this downward slide 

24
00:01:29,400 --> 00:01:32,320
to stop. 
Germany, which has been a 

25
00:01:32,320 --> 00:01:36,320
powerhouse of manufacturing in 
Europe for decades, has seen its

26
00:01:36,320 --> 00:01:39,480
output trend downward since 
2017. 

27
00:01:39,720 --> 00:01:43,720
And Bloomberg writes that it's 
days as an industrial superpower

28
00:01:43,720 --> 00:01:47,400
might be coming to an end. 
Since its peak, German 

29
00:01:47,400 --> 00:01:52,080
industrial production has 
contracted by 14%, and it's now 

30
00:01:52,080 --> 00:01:57,000
back to a level last seen in 
2006, if we exclude the sharp 

31
00:01:57,000 --> 00:01:59,680
decline seen globally during the
pandemic. 

32
00:02:00,080 --> 00:02:03,720
This manufacturing downshift can
be seen when factories are 

33
00:02:03,720 --> 00:02:07,480
shattered or firms reduce 
headcount, but it also shows up 

34
00:02:07,480 --> 00:02:11,080
more subtly when firms scale 
back their expansion and 

35
00:02:11,160 --> 00:02:14,960
investment plans or decide to 
grow their operation in other 

36
00:02:14,960 --> 00:02:18,440
parts of the world. 
Last week, Volkswagen, which is 

37
00:02:18,440 --> 00:02:22,200
Germany's biggest employer, 
announced plans to close at 

38
00:02:22,200 --> 00:02:26,360
least three factories, eliminate
thousands of jobs and slash 

39
00:02:26,360 --> 00:02:29,840
wages for 10s of thousands of 
German workers. 

40
00:02:30,080 --> 00:02:33,240
This would be the first time in 
the company's history that 

41
00:02:33,240 --> 00:02:36,400
they've closed a factory in 
their home country and the 

42
00:02:36,400 --> 00:02:40,680
planned salary cuts could affect
as many as 140,000 German 

43
00:02:40,680 --> 00:02:43,040
workers. 
It could be argued that 

44
00:02:43,040 --> 00:02:47,000
Volkswagen can be seen as a 
symbol of Europe's battle for 

45
00:02:47,000 --> 00:02:50,360
industrial relevance as it 
struggles to compete with 

46
00:02:50,360 --> 00:02:54,400
foreign rivals, balance the 
demands of shareholders, unions 

47
00:02:54,400 --> 00:02:58,400
and government, deals with high 
energy costs and grapples with 

48
00:02:58,400 --> 00:03:02,520
an expensive transition to 
greener technology that it's end

49
00:03:02,520 --> 00:03:05,400
customers are not necessarily 
demanding. 

50
00:03:05,840 --> 00:03:10,200
From the launch of the euro in 
1999 through to the start of the

51
00:03:10,200 --> 00:03:15,080
pandemic, euro area exporters 
and German firms in particular 

52
00:03:15,240 --> 00:03:19,400
benefited from strong growth in 
China, which fueled demand for 

53
00:03:19,400 --> 00:03:23,120
European capital goods. 
Over the same period, Europe 

54
00:03:23,120 --> 00:03:25,680
switched from being 
self-sufficient in energy 

55
00:03:25,680 --> 00:03:29,720
production to becoming the 
largest importer of natural gas 

56
00:03:29,720 --> 00:03:32,800
in the world. 
Russia was the cheapest supplier

57
00:03:32,920 --> 00:03:38,760
and the EU relied on it for 41% 
of its natural gas needs, the 

58
00:03:38,760 --> 00:03:42,000
Economist wrote when discussing 
Germanys problems. 

59
00:03:42,280 --> 00:03:46,640
A national business model built 
in part on cheap energy from 1 

60
00:03:46,640 --> 00:03:51,520
autocracy and abundant demand 
from another autocracy faces a 

61
00:03:51,520 --> 00:03:55,040
severe test. 
Since the credit crunch, U.S. 

62
00:03:55,040 --> 00:03:58,120
stock prices have hugely 
outperformed British and 

63
00:03:58,120 --> 00:04:00,800
European stocks. 
And some of this is because 

64
00:04:00,800 --> 00:04:04,080
European stocks are a lot 
cheaper on a price to earnings 

65
00:04:04,080 --> 00:04:07,680
ratio basis. 
But that's no excuse. 

66
00:04:08,080 --> 00:04:12,720
U.S. companies have seen 
earnings per share grow 290% 

67
00:04:12,720 --> 00:04:17,600
since 2010, when European 
earnings only grew 60% over the 

68
00:04:17,600 --> 00:04:21,240
same period. 
So is industry destined to die 

69
00:04:21,240 --> 00:04:23,680
in Europe? 
And should Europe just pivot to 

70
00:04:23,680 --> 00:04:27,400
tourism and settle on becoming 
the world's museum as some have 

71
00:04:27,400 --> 00:04:30,920
suggested? 
According to Mario Draghi's 

72
00:04:30,920 --> 00:04:34,240
report, which is one of the best
pieces I could find on the 

73
00:04:34,240 --> 00:04:38,040
problems facing Europe, high 
energy prices are a real 

74
00:04:38,040 --> 00:04:40,320
headwind for European 
manufacturing. 

75
00:04:40,600 --> 00:04:44,360
Natural gas prices are three to 
five times higher in Europe than

76
00:04:44,360 --> 00:04:47,640
they are in the United States, 
and electricity prices, 

77
00:04:47,640 --> 00:04:50,520
specifically those for 
industrial sectors, are 

78
00:04:50,520 --> 00:04:53,480
currently two to three times 
those in the United United 

79
00:04:53,480 --> 00:04:57,320
States and China. 
Now, European energy prices have

80
00:04:57,320 --> 00:05:01,280
always been higher, but this 
issue has worsened over time. 

81
00:05:01,520 --> 00:05:05,680
In 2020, renewables overtook 
fossil fuels to become the 

82
00:05:05,680 --> 00:05:08,920
leading source of power in 
Europe for the first time ever. 

83
00:05:09,160 --> 00:05:12,960
But wind and solar power are 
incapable of generating enough 

84
00:05:12,960 --> 00:05:17,840
power to account for 100% of 
demand year round, even in the 

85
00:05:17,840 --> 00:05:21,520
most favourable climate 
conditions, according to Draghi.

86
00:05:21,960 --> 00:05:25,400
The phase out of nuclear power 
in countries like Spain and 

87
00:05:25,400 --> 00:05:29,200
Germany, who have set national 
targets for winding down their 

88
00:05:29,200 --> 00:05:32,960
existing nuclear fleets, 
increases the gap between 

89
00:05:32,960 --> 00:05:36,520
consumer demand and the 
electricity supply that can be 

90
00:05:36,520 --> 00:05:41,200
generated by renewable sources. 
The way power is priced in 

91
00:05:41,200 --> 00:05:44,880
Europe is complex. 
They use a marginal model, which

92
00:05:44,880 --> 00:05:49,360
means that if a mix of sources 
are used, the price paid is set 

93
00:05:49,360 --> 00:05:52,840
at the price of the most 
expensive fuel required to meet 

94
00:05:52,840 --> 00:05:56,880
projected demand. 
So even if solar power is cheap,

95
00:05:57,080 --> 00:06:01,080
but some of the energy needed is
natural gas, which is expensive 

96
00:06:01,080 --> 00:06:04,680
in Europe, all suppliers end up 
getting paid the price of 

97
00:06:04,680 --> 00:06:07,600
natural gas. 
The model is set up this way, 

98
00:06:07,600 --> 00:06:12,120
they say, to allow utilities to 
recover investments they made by

99
00:06:12,120 --> 00:06:15,120
installing new sources of energy
on the grid. 

100
00:06:15,520 --> 00:06:19,280
In situations where all of the 
demand can be met with wind, 

101
00:06:19,280 --> 00:06:23,760
solar and nuclear, which have 
low generation costs, the price 

102
00:06:23,760 --> 00:06:28,240
of power can be very low or even
negative, as happened in spring 

103
00:06:28,240 --> 00:06:32,680
2020, when electricity demand 
was low and renewable energy 

104
00:06:32,680 --> 00:06:35,760
production was high. 
Countries like Spain, who 

105
00:06:35,760 --> 00:06:39,240
generate most of their power 
from renewables, have complained

106
00:06:39,240 --> 00:06:42,040
about the way this pricing 
system works to the European 

107
00:06:42,040 --> 00:06:45,280
Commission. 
They might be getting 95% of 

108
00:06:45,280 --> 00:06:49,480
their power from solar, but if 
the remaining 5% was natural 

109
00:06:49,480 --> 00:06:53,600
gas, they have to pay up as if 
the entire fuel supply had been 

110
00:06:53,600 --> 00:06:56,320
natural gas. 
The European Commission have 

111
00:06:56,320 --> 00:07:00,720
rejected their appeal, saying 
that other systems like a pay as

112
00:07:00,720 --> 00:07:04,520
bid approach have been analyzed 
and actually lead to higher 

113
00:07:04,520 --> 00:07:07,840
energy prices in places where 
they've been implemented. 

114
00:07:08,160 --> 00:07:11,840
Now, I haven't seen any analysis
of this, but it does seem quite 

115
00:07:11,840 --> 00:07:15,040
surprising. 
One issue mentioned in Mario 

116
00:07:15,040 --> 00:07:19,560
Draghi's report is that marginal
price setters are often fossil 

117
00:07:19,560 --> 00:07:24,040
fuel sources who are charged a 
carbon tax which is embedded in 

118
00:07:24,040 --> 00:07:27,880
the price that they charge. 
This higher price then boosts 

119
00:07:27,880 --> 00:07:31,480
what's paid to the renewable 
energy producers in the mix. 

120
00:07:31,760 --> 00:07:36,480
According to the report, carbon 
costs accounted for around 10% 

121
00:07:36,640 --> 00:07:41,480
of the EU industrial retail 
electricity price in 2023. 

122
00:07:42,200 --> 00:07:46,360
An economist piece on renewables
and the European energy market 

123
00:07:46,560 --> 00:07:51,120
makes the point that at times 
European energy is very cheap. 

124
00:07:51,400 --> 00:07:55,160
They argued that firms and 
regulators are simply not making

125
00:07:55,160 --> 00:07:58,960
the most of this and that there 
are three ways a more efficient 

126
00:07:58,960 --> 00:08:03,280
market could be established. 
One, sending energy to areas 

127
00:08:03,280 --> 00:08:07,360
where there's no surplus. 2, 
shifting demand to hours when 

128
00:08:07,360 --> 00:08:11,280
energy is plentiful. 
And three, storing energy as 

129
00:08:11,280 --> 00:08:15,600
electricity, fuel, or heat. 
The problem with those solutions

130
00:08:15,760 --> 00:08:18,760
is that sending electricity to 
places where it's needed 

131
00:08:18,960 --> 00:08:21,240
involves expensive grid 
upgrades. 

132
00:08:21,440 --> 00:08:25,320
Storage involves expensive 
battery packs or building out 

133
00:08:25,320 --> 00:08:29,560
hydrogen storage systems, or 
systems where excess solar 

134
00:08:29,560 --> 00:08:33,640
energy is used to pump water up 
a hill, and that water can be 

135
00:08:33,640 --> 00:08:37,640
used later for hydropower when 
there's not enough solar energy.

136
00:08:37,919 --> 00:08:41,280
But once again, all of this is 
expensive and all of these 

137
00:08:41,280 --> 00:08:44,159
solutions can be held up for 
years in planning. 

138
00:08:44,520 --> 00:08:48,800
It's slightly disingenuous, I 
feel, to claim that renewables 

139
00:08:48,800 --> 00:08:52,840
are cheap if they only provide 
reliable power after a bunch of 

140
00:08:52,840 --> 00:08:55,080
really expensive upgrades are 
made. 

141
00:08:55,360 --> 00:08:59,080
I by no means claim to be an 
expert on this topic, but I do 

142
00:08:59,080 --> 00:09:02,280
find it really interesting and 
I've read up quite a bit on it. 

143
00:09:02,520 --> 00:09:05,760
I can find lots of articles 
telling me how cheap renewable 

144
00:09:05,760 --> 00:09:08,680
energy is. 
But despite all of this cheap 

145
00:09:08,680 --> 00:09:12,800
energy, power is so expensive in
Europe that factories are 

146
00:09:12,800 --> 00:09:15,960
shutting down. 
I don't really see an Enron type

147
00:09:15,960 --> 00:09:19,800
middleman getting rich in Europe
either by ripping everyone off. 

148
00:09:20,120 --> 00:09:22,200
But the money must be going 
somewhere. 

149
00:09:22,400 --> 00:09:26,080
And it mostly appears that a lot
of new sources have been tacked 

150
00:09:26,080 --> 00:09:29,680
on to the existing electrical 
grid and they don't really work 

151
00:09:29,680 --> 00:09:33,480
that well together yet. 
And the solutions that will get 

152
00:09:33,480 --> 00:09:37,200
everything working will be both 
expensive and take time to 

153
00:09:37,200 --> 00:09:40,600
implement. 
I do aim to learn more about 

154
00:09:40,600 --> 00:09:43,560
this, as it seems to me that 
energy is a big problem that 

155
00:09:43,560 --> 00:09:45,960
will need to be solved in the 
coming years. 

156
00:09:46,520 --> 00:09:50,400
The Economist's other solution 
of shifting demand to hours when

157
00:09:50,400 --> 00:09:54,400
energy is plentiful and cheap 
using things like smart meters, 

158
00:09:54,600 --> 00:09:57,040
may work for certain types of 
user. 

159
00:09:57,240 --> 00:10:00,720
Your electric car, for example, 
could be set up to charge itself

160
00:10:00,720 --> 00:10:03,840
in the middle of the day while 
solar energy is cheap and you're

161
00:10:03,840 --> 00:10:06,440
at work. 
But that still doesn't work for 

162
00:10:06,440 --> 00:10:09,640
a factory that needs to be 
running 24 hours a day. 

163
00:10:10,400 --> 00:10:13,880
Energy is obviously a very 
complex problem, more 

164
00:10:13,880 --> 00:10:17,960
complicated than Will Smith's 
marriage, but finding a solution

165
00:10:17,960 --> 00:10:20,520
does need to be prioritized. 
In Europe. 

166
00:10:20,840 --> 00:10:24,120
The chief economist at 
Berenberg, a private bank, told 

167
00:10:24,120 --> 00:10:27,800
The Economist last year that 
with energy prices likely to 

168
00:10:27,800 --> 00:10:32,360
stay high for a while, 2 to 3% 
of Germany's industrial 

169
00:10:32,360 --> 00:10:36,720
companies that use energy 
intensive processes will likely 

170
00:10:36,720 --> 00:10:40,720
relocate abroad. 
I made a video about a year ago 

171
00:10:40,920 --> 00:10:45,120
on how China overtook Japan to 
become the largest car exporter 

172
00:10:45,120 --> 00:10:47,640
in the world. 
China's exports have been 

173
00:10:47,640 --> 00:10:52,360
stepping up as its economy has 
slowed as its leader solution to

174
00:10:52,400 --> 00:10:55,960
a drop in domestic demand has 
been to manufacture the same 

175
00:10:55,960 --> 00:10:59,880
amount of goods as when the 
economy was booming and export 

176
00:10:59,880 --> 00:11:02,560
the surplus. 
As a result, the European 

177
00:11:02,560 --> 00:11:07,800
Commission imposed new tariffs 
of up to 35% on Chinese EVs on 

178
00:11:07,800 --> 00:11:13,320
top of the existing 10% duty. 
The automotive sector employs 13

179
00:11:13,320 --> 00:11:17,720
million people in Europe and 
makes up 7% of total employment 

180
00:11:17,720 --> 00:11:21,320
in the region, so it's no 
surprise to see the EU pushing 

181
00:11:21,320 --> 00:11:24,480
back against massive subsidized 
imports. 

182
00:11:25,200 --> 00:11:29,120
The export driven growth model 
is an economic strategy 

183
00:11:29,120 --> 00:11:33,280
pioneered by Germany and Japan 
in the post war period that aim 

184
00:11:33,280 --> 00:11:37,600
to grow productive capacity by 
focusing on foreign rather than 

185
00:11:37,600 --> 00:11:40,680
domestic markets. 
It rose to prominence in the 

186
00:11:40,680 --> 00:11:45,960
late 1970s, largely driven by 
its success in Japan, and became

187
00:11:45,960 --> 00:11:50,520
part of the new consensus among 
economists about the benefits of

188
00:11:50,520 --> 00:11:54,360
economic openness. 
One of the problems today is 

189
00:11:54,360 --> 00:11:57,840
that every economy around the 
world seems to plan on growth 

190
00:11:57,840 --> 00:12:01,360
through exports, with no one 
planning on running a trade 

191
00:12:01,360 --> 00:12:04,200
deficit. 
And that simply can't work. 

192
00:12:04,320 --> 00:12:07,560
If everyone's exporting, someone
has to be importing. 

193
00:12:07,840 --> 00:12:11,840
The economist Thomas Parley 
argues that there are reasons to

194
00:12:11,840 --> 00:12:15,480
believe that the export LED 
growth model stopped working 

195
00:12:15,480 --> 00:12:20,400
after the 2008 financial crisis 
because of changed conditions in

196
00:12:20,400 --> 00:12:22,920
both developing and developed 
economies. 

197
00:12:23,240 --> 00:12:27,480
High debt in the United States, 
fiscal austerity in Europe and 

198
00:12:27,480 --> 00:12:32,120
supply side stimulus in emerging
markets led to a global demand 

199
00:12:32,120 --> 00:12:35,040
shortage. 
He argues that going forward 

200
00:12:35,040 --> 00:12:39,120
there needs to be a shift in 
most economies towards domestic 

201
00:12:39,120 --> 00:12:43,480
demand LED growth while only 
aiming to export enough to pay 

202
00:12:43,480 --> 00:12:46,720
for imported goods that are not 
produced domestically. 

203
00:12:46,920 --> 00:12:50,040
Essentially a move towards more 
balanced trade. 

204
00:12:50,520 --> 00:12:54,880
No matter who wins in the 
upcoming US election, trade can 

205
00:12:54,880 --> 00:12:58,280
be expected to be a huge 
political issue going forward in

206
00:12:58,280 --> 00:13:00,960
the United States. 
And while the Democrats and 

207
00:13:00,960 --> 00:13:04,440
Republicans may offer slightly 
different solutions, 

208
00:13:04,760 --> 00:13:08,440
protectionism, tariffs and 
subsidies do appear to be on the

209
00:13:08,440 --> 00:13:11,560
cards. 
While American productivity 

210
00:13:11,720 --> 00:13:15,680
appears to have grown during the
pandemic, the same thing did not

211
00:13:15,680 --> 00:13:18,920
happen in Europe, the FT 
reported this week. 

212
00:13:18,920 --> 00:13:23,000
The German business executives 
are now warning that high levels

213
00:13:23,000 --> 00:13:27,080
of sick leave are damaging their
competitiveness and compounding 

214
00:13:27,080 --> 00:13:31,280
the country's economic woes. 
A study found that were it not 

215
00:13:31,280 --> 00:13:35,000
for the country's above average 
number of sick days, the German 

216
00:13:35,000 --> 00:13:38,480
economy would have grown by half
of a percent last year, rather 

217
00:13:38,480 --> 00:13:44,040
than shrinking 0 .3%. 
Lower European productivity is, 

218
00:13:44,040 --> 00:13:47,640
however, not just explained by 
extra sick days. 

219
00:13:47,840 --> 00:13:51,920
According to Mario Draghi, the 
productivity gap between the EU 

220
00:13:51,920 --> 00:13:55,800
and the United States over the 
last 25 years is largely 

221
00:13:55,800 --> 00:14:00,120
explained by the tech sector. 
Europe mostly missed out on the 

222
00:14:00,120 --> 00:14:03,400
digital revolution and the 
productivity gains that it 

223
00:14:03,400 --> 00:14:06,280
brought. 
He says that the problem is not 

224
00:14:06,280 --> 00:14:10,200
that Europe lacks ideas or 
ambition, but innovation is 

225
00:14:10,200 --> 00:14:13,760
blocked at the next stage, it's 
not translated into 

226
00:14:13,760 --> 00:14:17,040
commercialization, and 
innovative firms that want to 

227
00:14:17,040 --> 00:14:20,520
scale up are hindered by 
inconsistent and restrictive 

228
00:14:20,520 --> 00:14:23,720
regulations. 
Many European entrepreneurs, he 

229
00:14:23,720 --> 00:14:27,360
says, prefer to seek financing 
from American venture 

230
00:14:27,360 --> 00:14:31,000
capitalists and scale up in the 
American market. 

231
00:14:31,320 --> 00:14:35,160
There are large sections in his 
report on computing and AI and 

232
00:14:35,160 --> 00:14:38,880
semiconductors, but 
unfortunately these topics all 

233
00:14:38,880 --> 00:14:42,280
circle back to the the high 
European energy costs which 

234
00:14:42,280 --> 00:14:46,120
represent a disadvantage for EU 
based providers. 

235
00:14:46,640 --> 00:14:50,640
According to Mario Draghi, the 
European economy has fallen 

236
00:14:50,640 --> 00:14:54,600
behind the United States and 
China is rapidly catching up. 

237
00:14:55,000 --> 00:14:58,920
Real disposable income per 
capita has grown almost twice as

238
00:14:58,920 --> 00:15:03,000
much in the United States as in 
Europe since 2000, and he says 

239
00:15:03,200 --> 00:15:06,360
that as things stand, there's no
reason for this downward slide 

240
00:15:06,360 --> 00:15:09,640
to stop. 
He says that due to the ageing 

241
00:15:09,800 --> 00:15:14,640
European workforce, by 2040 the 
population will start to lose 2 

242
00:15:14,640 --> 00:15:18,720
million working people per year,
which will mask the effects of 

243
00:15:18,720 --> 00:15:21,760
lower growth. 
But without growth, Europe will 

244
00:15:21,760 --> 00:15:25,360
not be able to finance its 
social model and will have to 

245
00:15:25,360 --> 00:15:28,480
scale back some, if not all, of 
its ambitions. 

246
00:15:29,200 --> 00:15:33,240
An IMF blog post from earlier 
this year asked if Germany, the 

247
00:15:33,240 --> 00:15:37,080
manufacturing centre of Europe, 
was irreparably broken. 

248
00:15:37,360 --> 00:15:40,640
They highlight that critics say 
that the strong growth in 

249
00:15:40,640 --> 00:15:44,360
previous decades was based on 
importing cheap Russian gas, 

250
00:15:44,480 --> 00:15:47,280
which powered Germany's export 
industries. 

251
00:15:47,520 --> 00:15:50,880
With this cheap gas no longer 
available, the German 

252
00:15:50,880 --> 00:15:53,400
manufacturing model stopped 
working. 

253
00:15:53,960 --> 00:15:58,720
They point out that after a big 
spike in 2022, wholesale gas 

254
00:15:58,720 --> 00:16:03,680
prices fell back to 2018 levels.
They say that it was not the 

255
00:16:03,680 --> 00:16:08,160
loss of Russian gas, but that 
the post pandemic rebalancing of

256
00:16:08,160 --> 00:16:12,600
global demand from manufactured 
goods, which Germany specializes

257
00:16:12,600 --> 00:16:16,680
in, towards services was 
unfavorable for Germany's 

258
00:16:16,720 --> 00:16:19,760
economy. 
They argue that concerns for the

259
00:16:19,760 --> 00:16:23,480
longer term future of German 
industry are exaggerated. 

260
00:16:23,760 --> 00:16:26,480
While energy intensive 
industries like chemicals, 

261
00:16:26,480 --> 00:16:30,920
metals and paper manufacturing 
have contracted, they only make 

262
00:16:30,920 --> 00:16:35,560
up 4% of the German economy. 
Automobile production on the 

263
00:16:35,560 --> 00:16:39,640
other hand, rose 11% last year. 
They highlight that 

264
00:16:39,640 --> 00:16:43,880
manufacturing value added 
remained steady even as 

265
00:16:43,880 --> 00:16:48,120
industrial production fell 
because manufacturers adapt to 

266
00:16:48,120 --> 00:16:52,280
the energy crisis and supply 
chain disruptions by shifting 

267
00:16:52,280 --> 00:16:56,640
into higher value added products
that use fewer intermediate 

268
00:16:56,640 --> 00:16:59,160
inputs. 
They say that the biggest 

269
00:16:59,160 --> 00:17:03,320
problems for Germany are a 
projected decline in Germany's 

270
00:17:03,320 --> 00:17:08,040
working age population, which 
this chart shows is much worse 

271
00:17:08,040 --> 00:17:12,640
than is expected in Japan, the 
rest of the EU and the UK. 

272
00:17:13,000 --> 00:17:16,280
They argue that German 
productivity has been dragged 

273
00:17:16,280 --> 00:17:19,920
down by inadequate investment in
public infrastructure. 

274
00:17:20,079 --> 00:17:23,960
Where Germany is near the bottom
of advanced economies in terms 

275
00:17:23,960 --> 00:17:27,880
of public investment, this is 
mostly driven by the German 

276
00:17:28,000 --> 00:17:31,280
aversion to debt. 
While borrowing for the sake of 

277
00:17:31,280 --> 00:17:34,920
borrowing makes no sense, 
borrowing to pay for necessary 

278
00:17:34,920 --> 00:17:38,640
infrastructure that will boost 
the nation's productivity does 

279
00:17:38,640 --> 00:17:41,960
make sense. 
Productivity could also be 

280
00:17:41,960 --> 00:17:44,520
enhanced by cutting red tape, 
they say. 

281
00:17:44,760 --> 00:17:48,240
Apparently, the German economy 
is bogged down with excess 

282
00:17:48,240 --> 00:17:51,000
regulation. 
They give the example that it 

283
00:17:51,000 --> 00:17:55,320
takes 120 days to obtain a 
business license in Germany, 

284
00:17:55,440 --> 00:17:58,480
which is more than double the 
OECD average. 

285
00:17:59,040 --> 00:18:02,320
While news of Volkswagen's 
factory closures led to 

286
00:18:02,320 --> 00:18:06,240
headlines of European industrial
decline, the problems at 

287
00:18:06,240 --> 00:18:10,000
Volkswagen can be explained as 
much by its own corporate 

288
00:18:10,000 --> 00:18:14,280
governance issues and a botched 
transition to EV manufacturing 

289
00:18:14,480 --> 00:18:17,200
than the fact that it's a 
European firm. 

290
00:18:17,600 --> 00:18:22,320
Volkswagen's emissions cheating 
scandal in 2015 tarnished its 

291
00:18:22,320 --> 00:18:26,080
reputation with customers, 
regulators and investors. 

292
00:18:26,360 --> 00:18:30,880
It's focus on manufacturing 
expensive SUV's and exporting to

293
00:18:30,880 --> 00:18:35,560
China has not worked out. 
I would argue that almost every 

294
00:18:35,560 --> 00:18:39,480
problem with Volkswagen is 
summed up with its new electric 

295
00:18:39,480 --> 00:18:42,600
bus. 
Now look, I'm no Chip Foose and 

296
00:18:42,600 --> 00:18:45,280
I'm really no graphic designer 
either. 

297
00:18:45,280 --> 00:18:49,600
I don't think many graphic 
designers use PowerPoint, but I 

298
00:18:49,600 --> 00:18:53,560
think I could fix a few of the 
problems with the Volkswagen ID 

299
00:18:53,560 --> 00:18:56,360
bus. 
Firstly, they got the front 

300
00:18:56,360 --> 00:18:57,760
wrong. 
It needs to look like the 

301
00:18:57,760 --> 00:19:00,880
original one. 
We need a bigger logo next. 

302
00:19:01,160 --> 00:19:04,440
Then they got the top all wrong.
We need all of those windows 

303
00:19:04,440 --> 00:19:06,920
back. 
We need to get the wheels right.

304
00:19:06,920 --> 00:19:10,880
Next, and this doesn't make a 
ton of sense if you're taking 

305
00:19:10,880 --> 00:19:13,800
family trips, it should probably
be a hybrid. 

306
00:19:14,080 --> 00:19:18,360
And of course, this is the worst
part, $70,000. 

307
00:19:18,600 --> 00:19:20,880
It's a minibus, It's not an S 
class. 

308
00:19:21,320 --> 00:19:24,840
If anyone at Volkswagen is 
watching, I'm happy to help out.

309
00:19:24,840 --> 00:19:28,600
This is turning into a bit of a 
budget version of Mighty Car 

310
00:19:28,600 --> 00:19:31,200
Mods. 
And please don't criticize the 

311
00:19:31,200 --> 00:19:33,920
panel gaps either. 
I did this in PowerPoint, like I

312
00:19:33,920 --> 00:19:37,160
said, and there are people out 
there buying cyber trucks, so 

313
00:19:37,160 --> 00:19:40,320
this looks just fine. 
And we can put an iPad on the 

314
00:19:40,320 --> 00:19:43,080
dashboard because people seem to
love that sort of thing. 

315
00:19:43,640 --> 00:19:46,480
Anyhow, this isn't a car design 
channel. 

316
00:19:46,480 --> 00:19:48,640
I'm just trying to help out a 
little bit. 

317
00:19:49,320 --> 00:19:53,280
Nicole Pelesh at Oxford 
Economics argues that the 

318
00:19:53,280 --> 00:19:57,440
decline in European industrial 
output in recent years is more 

319
00:19:57,440 --> 00:20:01,120
of an industrial recession than 
deindustrialization. 

320
00:20:01,360 --> 00:20:05,080
He says that Europe shrinking 
share of global industrial 

321
00:20:05,080 --> 00:20:09,640
output is more driven by 
increased output from Asia than 

322
00:20:09,640 --> 00:20:12,320
by decreased competitiveness in 
Europe. 

323
00:20:12,720 --> 00:20:16,880
He points out that the 
industrial share of GDP only 

324
00:20:16,880 --> 00:20:22,080
declined slightly in 2022. 
And 2023, indicating that the 

325
00:20:22,080 --> 00:20:25,240
current industrial troubles 
should be seen within the 

326
00:20:25,240 --> 00:20:27,880
context of a broadly weak 
economy. 

327
00:20:28,120 --> 00:20:30,600
And this is not the 
industrialization. 

328
00:20:30,840 --> 00:20:35,080
He says that some industries can
be expected to decline, but this

329
00:20:35,080 --> 00:20:38,760
decline will be offset by the 
rise of other industries. 

330
00:20:39,360 --> 00:20:43,280
He points out that Europe's 
strengths lie in highly complex,

331
00:20:43,280 --> 00:20:46,880
specialized areas of 
manufacturing, and these areas 

332
00:20:46,880 --> 00:20:50,920
require a highly educated 
workforce, which Europe has. 

333
00:20:51,200 --> 00:20:54,800
They benefit from network 
effects, institutional knowledge

334
00:20:54,960 --> 00:20:58,520
and the cumulative impact of 
decades of investment in 

335
00:20:58,520 --> 00:21:02,400
intellectual property, patents 
and physical capital. 

336
00:21:02,680 --> 00:21:06,000
There are further barriers to 
entry too in the form of 

337
00:21:06,000 --> 00:21:09,440
research costs and building 
trust amongst potential our 

338
00:21:09,440 --> 00:21:12,520
customers. 
Mechanical engineering, 

339
00:21:12,520 --> 00:21:16,840
electronics and pharmaceuticals 
are examples of such sectors 

340
00:21:17,000 --> 00:21:21,560
where Europe competes strongly. 
Companies like ASML, who make 

341
00:21:21,560 --> 00:21:25,760
the machines needed to produce 
semiconductors, Novo Nordisk, 

342
00:21:25,760 --> 00:21:29,000
who makes the blockbuster drug 
Ozempic that we mentioned 

343
00:21:29,000 --> 00:21:33,160
earlier, and Airbus, the 
airplane manufacturer, are the 

344
00:21:33,160 --> 00:21:36,960
types of high scale, high 
specialization businesses that 

345
00:21:36,960 --> 00:21:40,440
are thriving in Europe. 
These sectors are still growing 

346
00:21:40,440 --> 00:21:44,360
as a share of total industry and
economic activity. 

347
00:21:44,840 --> 00:21:48,920
Europe's ageing workforce, 
according to Payless, puts in 

348
00:21:48,920 --> 00:21:53,080
place an incentive for greater 
factory automation, which he 

349
00:21:53,080 --> 00:21:56,720
points out. 
Germany is a leader in certain 

350
00:21:56,720 --> 00:22:00,760
industries he says are at risk, 
like textiles and clothing, 

351
00:22:01,080 --> 00:22:05,400
paper manufacturing, refining, 
plastics, metals and chemicals. 

352
00:22:05,920 --> 00:22:09,280
The green push in Europe, 
combined with high energy 

353
00:22:09,280 --> 00:22:12,920
prices, means that energy 
intensive industries like 

354
00:22:12,920 --> 00:22:16,800
reducing iron ore to make steel,
heating limestone to produce 

355
00:22:16,800 --> 00:22:20,680
cement, and using steam to crack
hydrocarbons into their 

356
00:22:20,680 --> 00:22:23,560
component molecules will be a 
struggle. 

357
00:22:23,840 --> 00:22:28,000
On top of that, the chemical 
processes themselves give off 

358
00:22:28,000 --> 00:22:32,000
lots of additional CO2. 
Cutting all of those emissions 

359
00:22:32,000 --> 00:22:35,240
appears to be prohibitively 
expensive given today's 

360
00:22:35,240 --> 00:22:38,360
technology. 
The problem is that shutting 

361
00:22:38,360 --> 00:22:42,280
down these industries in Europe 
and importing steel, cement and 

362
00:22:42,280 --> 00:22:46,520
Petro chemicals just means that 
the pollution occurs in other 

363
00:22:46,520 --> 00:22:50,160
parts of the world, where these 
processes are often done in a 

364
00:22:50,160 --> 00:22:52,720
dirtier manner than they're done
in Europe. 

365
00:22:52,920 --> 00:22:56,480
It makes neither environmental 
nor economic sense. 

366
00:22:57,000 --> 00:23:00,960
The chemicals industry faces the
biggest challenge as it's 

367
00:23:00,960 --> 00:23:04,800
extremely reliant on 
hydrocarbons, both for energy 

368
00:23:04,800 --> 00:23:08,680
and because thousands of 
necessary products are derived 

369
00:23:08,680 --> 00:23:14,280
from crude oil. 142 gallon 
barrel of crude oil creates just

370
00:23:14,280 --> 00:23:18,880
under 20 gallons of gasoline and
the rest, more than half, is 

371
00:23:18,880 --> 00:23:22,920
used to make everything from ink
to antihistamines to fabrics, 

372
00:23:22,920 --> 00:23:25,840
detergents, paints, the list 
goes on. 

373
00:23:26,600 --> 00:23:30,080
Part of the case made to 
European voters who were 

374
00:23:30,080 --> 00:23:34,000
skeptical of the need for a 
green transition was that going 

375
00:23:34,000 --> 00:23:37,360
green would do more than just 
fend off climate change. 

376
00:23:37,560 --> 00:23:40,800
It would make Europe less 
dependent on Russian gas and 

377
00:23:40,800 --> 00:23:43,800
create lots of new green tech 
jobs. 

378
00:23:44,080 --> 00:23:48,280
Critics today argue that meeting
the new environmental targets 

379
00:23:48,440 --> 00:23:52,440
which shiploads of Chinese solar
panels, which were produced 

380
00:23:52,440 --> 00:23:56,520
using cheap Chinese coal, has 
only served to move pollution to

381
00:23:56,600 --> 00:24:00,480
to the other side of the world 
and change the autocratic regime

382
00:24:00,480 --> 00:24:04,200
Europeans have to depend on 
while crushing employment. 

383
00:24:04,720 --> 00:24:09,280
Labour unions in the UK are 
arguing that green policies are 

384
00:24:09,280 --> 00:24:12,240
hollowing out working class 
communities and that the 

385
00:24:12,240 --> 00:24:15,560
government needs to stop 
decarbonization through 

386
00:24:15,560 --> 00:24:19,880
deindustrialization. 
Going back to Mario Draghi's 

387
00:24:19,880 --> 00:24:23,680
report, which I've linked to in 
the video description, he 

388
00:24:23,680 --> 00:24:26,880
highlights that European 
companies face electricity 

389
00:24:26,880 --> 00:24:29,760
prices that are two to three 
times higher than those in 

390
00:24:29,760 --> 00:24:33,680
America, and natural gas prices 
that are four to five times 

391
00:24:33,680 --> 00:24:36,200
higher. 
He says that Europe's energy 

392
00:24:36,200 --> 00:24:40,320
market has to be quickly 
reformed so that end users can 

393
00:24:40,320 --> 00:24:43,520
see the benefits of clean energy
in their bills. 

394
00:24:43,880 --> 00:24:48,400
Industrial energy prices in the 
EU are impacted by tax, taxes, 

395
00:24:48,400 --> 00:24:52,840
levies, carbon fees and other 
charges which when combined, 

396
00:24:52,840 --> 00:24:56,600
account for a substantial 
portion of the final energy cost

397
00:24:56,800 --> 00:25:00,680
which is substantially higher 
than in other global regions. 

398
00:25:01,280 --> 00:25:05,280
I mostly agree with Oxford 
Economics that Europe is not 

399
00:25:05,280 --> 00:25:08,640
deindustrializing. 
Some industries are suffering, 

400
00:25:08,640 --> 00:25:12,520
in particular the most energy 
intensive ones, but others are 

401
00:25:12,520 --> 00:25:15,200
growing. 
For all of the talk of German 

402
00:25:15,200 --> 00:25:19,000
deindustrialization, 
manufacturing there still makes 

403
00:25:19,040 --> 00:25:23,400
U almost 20% of the economy, 
which is about twice the level 

404
00:25:23,400 --> 00:25:27,040
in the United States. 
With China stimulating its 

405
00:25:27,040 --> 00:25:31,040
economy and pumping out more 
exports than ever before while 

406
00:25:31,040 --> 00:25:34,320
importing next to nothing, and 
with the US moving in a 

407
00:25:34,320 --> 00:25:38,200
protectionist direction, the 
export driven growth model may 

408
00:25:38,200 --> 00:25:41,880
have reached the end of the road
and economies may need to 

409
00:25:41,880 --> 00:25:45,960
restructure towards domestic 
demand LED growth, aiming to 

410
00:25:45,960 --> 00:25:50,480
balance imports and exports such
that enough is exported to pay 

411
00:25:50,480 --> 00:25:53,040
for goods that are not produced 
domestically. 

412
00:25:53,280 --> 00:25:56,640
This change might impact 
emerging markets much more than 

413
00:25:56,640 --> 00:26:00,240
it impacts Europe, as they may 
not be able to rely on the 

414
00:26:00,240 --> 00:26:03,960
United States to absorb their 
excess production in the way 

415
00:26:03,960 --> 00:26:07,240
that they could in the past. 
There are lots of challenges 

416
00:26:07,240 --> 00:26:11,040
ahead for Europe, as there are 
for the rest of the world too, 

417
00:26:11,280 --> 00:26:15,840
but Europe has a highly educated
workforce capable of high tech 

418
00:26:15,840 --> 00:26:19,720
production and innovation. 
Unlike some of the critics, I 

419
00:26:19,720 --> 00:26:23,440
don't expect the continent to 
turn into the world's museum or 

420
00:26:23,440 --> 00:26:27,600
become some sort of green energy
version of Easter Island where 

421
00:26:27,600 --> 00:26:30,760
they keep buying solar panels 
from China until the whole 

422
00:26:30,760 --> 00:26:34,720
economy grinds to a halt. 
If you disagree, do let me know 

423
00:26:34,720 --> 00:26:37,840
in the comments section. 
Thanks for tuning into this 

424
00:26:37,840 --> 00:26:40,040
week's podcast. 
I'd love it if you could tell 

425
00:26:40,040 --> 00:26:43,440
your friends about it to help 
the podcast grow as unlike 

426
00:26:43,440 --> 00:26:46,120
YouTube, there is no podcast 
algorithm. 

427
00:26:46,320 --> 00:26:48,880
Have a great day and talk to you
again soon. 

428
00:26:49,080 --> 00:26:49,400
Bye.