Anti-nuclear movement, helping the German economy go wrong

This week we have witnessed the incredible announcement by German Chancellor Angela Merkel saying Germany will abandon nuclear power totally by 2022, when it will shut down the last 3 remaining nuclear plants that will be in service on that date. Germany has a total of 9 nuclear plants providing energy to the grid as of now, accounting for 23% of the energy mix. Merkel's bet is to replace nuclear power with renewable energies, a move that is expected to harm the German industry greatly by increasing its energy bill. In fact this will be the second most important factor to hit Germany's industrial competitiveness in a row, the first one being the actual exchange rate of the euro against its clients' currencies. 

Neckarwestheim nuclear plant

Even though Germany is the world's 4th biggest economy and Europe's number one, it is not bullet-proof. The last thing the German industrial sector needs is its energy bill rising non-stop or being unpredictable. Because let's face it, whether you are pro-nuclear or anti-nuclear you know shifting from nuclear power to any other source of energy is an expensive move. 

In the case of Germany, the shift will be made towards renewable energies, which are expected to add up to 35% of the total energy mix in 2022 (up from 13% today). In a country where the industrial sector takes more than 50% of the total energy used, the main problem with renewable energies will not be their price, but its unpredictability causing blackouts. The sun not shining, the wind not blowing or simply a specially cold winter day could cause a blackout on peak-hours. When renewable energies are used to cover domestic demand, this unpredictable behavior can be covered with some natural gas power plants, which are fast enough to be plugged into the grid when needed and disconnected shortly afterwards. But industrial demand is far bigger and more important, so that could mean said natural gas plants have to be on most of the day to avoid power disruptions, which would probably kill Merkel's objective of slashing carbon emissions by 40% in 2022, meaning she would have hurt German industry for nothing.

So what are the reasons for such a sudden rush in leaving nuclear energy behind?

Recommended reading: The tragedy of the euro

Even though it is almost a year old, just yesterday I came across a book called "The tragedy of the euro" by professor Philipp Bagus from Universidad Rey Juan Carlos in Madrid. I have not had enough time to read it thoroughly, but what I saw in that short time span is more than enough for me to recommend it to everyone interested in knowing about the future (if any) of the European currency. You can find the full book here (PDF) thanks to the Mises Institute.

It is a story of good and noble ideas being badly applied or intentionally misunderstood. It is a story of how the fathers of what today is called the European Union tried to establish economic liberalism all across Europe, thinking of the possibilities, progress and growth an European-wide open marketplace could bring. But sadly, it is also a story of how some countries, specially France, managed to convert this great idea into a fully-fledged European super-state. A super-state with limiting regulations, the typical bureaucratic slowness and stiffness and inefficiency in general.

The book explains, with piercing clarity, the different motivations behind European countries to adopt a unified currency. Periferic countries like Greece, Ireland, Portugal, Spain and also France saw in the euro a great way to keep printing money and issuing debt (a necessary by-product of their deficit-prone economies). With an unified currency they would be able to hide the inflation caused by this objectionable tactics, as there would no longer be a Deutsche Mark to be compared against.

How did they convince Germany to be part of such an awful plan?

Germany's biggest enemy: a strong euro.

Neither the (now certified) fall of Portugal nor increased debt pressures on other european peripheric countries have been enough to tumble down the never-ending rise of the euro exchange rate against other significant currencies. This should be very worrying for the heart and engine of the eurozone, Germany. I am sure Germany is already worried about that, what I mean is they should be worried enough to do something about it. 

A net exporter like Germany should not allow its currency to be its Achilles heel. Ok, the currency is not really German, but they are its founding fathers and the main reason why it exists... With this in mind, it becomes very difficult to understand why they allow 'their idea' to make their international trades more expensive and complicated. In the actual economic situation, competitiveness and efficiency are key to keep selling and Germany can lose their edge because of this. It is survival of the fittest.
The competitiveness indicators based on consumer prices published by the ECB show this trend clearly, see charts below (where 100% equals the index value in 1999 ) with an obviously sharp decline coincidental with the rise of the euro.

Harmonised competitiveness indicator for Germany. Credit: Deutsche Bundesbank

A strong euro is obviously good for debt issuing, for general borrowing and for imports but it can really hurt the muscle of Europe. Maybe you could think of it as eating everyday at McDonalds (no bashing here, just an example): it is cheap, it is easy and convenient as you can find one almost everywhere and it gets you through the day. But in the long-term fats are bad for your figure and, more importantly, bad for your most important muscle, the heart. The European Central Bank (ECB) is damaging the heart of Europe.

Tuning down inflation

Falling into deflation or stagflation has always been one of the greatest fear for politicians, economists and enterprises. A negative inflation rate theoretically means less money is available, in turn that means less credit and everybody knows what that means in a debt-dependent world like ours. Also deflation is correlated with lower prices, which people tend to associate with depressed economic growth. Whether one agrees with this affirmation or not, during last year's credit crunch it made some sense to be fearing deflation and its consequences,  thus no one worried about currency devaluation and general credit easiness to avoid it all costs.

Now, after the crunch is mostly forgotten and credit channels work again as normal, it begins to look like a flagrant excuse to keep interest rates at all-time lows and to support the worrying commodities rally. 

Strangely, some economists are still asking for a moderately higher inflation as a way to increase competitivity and as a way to cut salaries inadvertently (you cannot lower them without complaints, but you can make them effectively lower by increasing inflation) to boost employment. Everybody knows how to raise inflation, what is difficult is controlling its raise. Raising inflation when official levels are well under 4% would no be a problem by itself, the issue here is that official inflation levels are all wrong.