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Is Europe deindustrialising?

Apr 05,2023 - Last updated at Apr 05,2023

ATHENS — European industry is reeling under the twin threat of high energy prices and President Joe Biden’s Inflation Reduction Act (IRA) which, in essence, bribes Europe’s green industries to migrate to the United States. Are Europe’s industrial heartlands about to become rustbelts? Will Germany experience the trauma that Britain suffered as its factories closed, compelling its high-skilled manufacturing-based labor force to accept low-skill, low-productivity, low-wage jobs?

The threat is reverberating in Europe’s corridors of power. German Chancellor Olaf Scholz moved quickly to propose a new European Union fund that will offer state aid for EU companies tempted by the US subsidies to emigrate. But in view of how slowly Europe moves, especially when common debt needs to be issued to finance anything, it is questionable whether the EU subsidies will counter the US subsidies in a timely and proportionate manner.

Germany’s car industry is a good example of what is at stake. Carmakers were dealt a double blow by the return of inflation: rising fuel prices deterred customers and increased production costs. Given the substantial portion of German industry that relies on car manufacturing, commentators have begun to agonise over the country’s deindustrialisation. Their angst is justified, but their analysis misses the crucial point.

By switching rapidly to producing electric vehicles with increasing amounts of renewable energy, German carmakers have already demonstrated a capacity to rise to the challenge of the green transition and rising fossil-fuel costs. If they also receive some state aid, either from the German government or the EU, they will probably continue to produce in Germany as many cars in the future as they did in the past.

But if fear of deindustrialisation is overblown, there is nonetheless a point to German, and, by extension, European, anxiety that the whole continent is about to lose ground to the US and China. The shift to electric cars, which energy price inflation has accelerated, is shrinking the power and depth of European capital. In particular, compared to their American and Chinese counterparts, European capitalists have fallen far behind in the race to accumulate, and benefit from, what I call cloud capital.

Consider the kernel of German capital’s power: precision mechanical and electrical engineering. German carmakers, in particular, got rich on the back of profits from building high-quality internal combustion engines and all the parts (gearboxes, axles, differentials, etc.) that are necessary to convey power from such engines to a car’s wheels. But electric vehicles are mechanically much simpler to engineer. Most of their added value comes from artificial intelligence and smart software connecting the car to the cloud, the very cloud that German capitalists failed to invest in over the past decades.

So, even if EU state aid succeeds in persuading Volkswagen, Mercedes-Benz, and BMW to produce their electric cars in Europe, rather than migrate to America to benefit from IRA subsidies, car manufacturing will never be as profitable in Germany and Europe as it once was. More and more of the profits to be made from electric cars will come not from selling the actual hardware but from applications sold to their owners (current and future) — exactly the way Apple makes a mint from “third party developers” that produce apps for iPhones sold via the Apple Store. When one adds to this the value of the data generated by the car’s movements and uploaded to the cloud, it is not hard to see why cloud capital is already overshadowing the terrestrial capital that Europe is rich in.

A similar story can be told regarding the energy sector. Once the pandemic receded and energy prices surged, Big Oil and Gas made a fortune. The fossil-fuel industry thus gained a second wind, much like how the rise of corn prices in Britain during the Napoleonic wars, owing to the disruption of corn imports, gave British feudalists a second wind. But second winds do not last long. In the 1820s, capitalist profit overcame the short-term revival of feudalist ground-rent; today, the post-pandemic surge in inflation is already expanding cloud capital’s reach into the energy sector.

Fossil fuels are the domain of an unholy alliance of feudal-era contracts and terrestrial capital: The industry relies on licenses to drill on particular patches of land or ocean bed, for which governments and private landlords receive old-fashioned ground-rent. The industry also relies on old-fashioned capital goods, including oil rigs, tankers, pipelines and floating regasification plants, to feed fossil fuels into large, highly concentrated, vertically integrated (or top-down) power stations which, both aesthetically and economically, recall nineteenth-century factories — William Blake’s “dark Satanic Mills”.

Renewables, in contrast, are best deployed in a decentralised fashion, with solar panels, wind turbines, heat pumps, geothermal units, wave-powered devices, and so forth all horizontally integrated as part of a neural-like network comprising cloud capital. With little need for licenses that incur ground-rent, their productivity depends on smart networks that rely on sophisticated software and artificial intelligence.

In short, green energy is cloud-capital intensive, much like the electric car industry. Again, even if the EU subsidies ensure that Europe’s industry mass produces solar panels, wind turbines and other green equipment, Europe will lack access to the value chain’s most lucrative part: the cloud-based capital on which green-energy grids run.

Even if the return of inflation fails to deindustrialise Europe, it will force Europe’s manufacturing industry to adopt production methods that rely a lot more on the cloud capital that Europe lacks. In practical terms, unable to collect sufficient returns to cloud capital, or cloud-rents, Germany’s surpluses will suffer and so will a European economy reliant on them.


Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 Party and professor of Economics at the University of Athens. Copyright: Project Syndicate, 2023.

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