Europe faces an industrial crisis as energy prices soar

Two centuries ago Europe, including England, was ready to lead the way in the industrial revolution, starting an unprecedented period of innovation and production that generated enormous wealth and profoundly changed the quality of life on the continent.

The United States, rich in natural resources and a population of eager immigrants, would one day surpass Europe in industrial production, but the Old World remained a crucial industrial centre making the finest products carrying legendary names.

But today Europe is continuing along the path of what economists call de-industrialization, a process that began with the rise of manufacturing in the US and continued with massive production in Asia. The challenge to European industry was further exacerbated by the continent’s maturing societies, heavy regulation, entitlements to workers, relative lack of natural resources, economic crises and high levels of debt.

Now added to all that is the soaring cost of energy. Unless Europe can innovate quickly, the structural problem of high energy costs could be the final blow to its industries.

Among those recently hit are Netherlands-based companies Aldel, an aluminum maker that has halted production because of surging electricity prices, and Yara Sluiskil, which has shut its fertilizer plant for the same reason.

Nicolas de Warren, president of Uniden industrial federation in France, said that energy-intensive companies in France are not capable of producing at competitive prices. The non-ferrous metals association Eurometaux said 50 per cent of EU aluminum and zinc capacity has already been forced offline due to the power crisis.

And while gas prices eased last week, the energy crisis is a long-term problem that could erode Europe's industrial might for good. A potential exodus of European operations has sparked a deeper concern over the risk of final de-industrialisation on the continent.

A red flag signalling that trend is investment outflows from Europe to the United States that are rising due to high energy prices. German media report that airline Lufthansa, multinational conglomerate Siemens, supermarket brand Aldi and healthcare company Fresenius have jointly added $300 million in investment in the US. In June Volkswagen laid the foundation for a new battery laboratory in Tennessee and has committed $7.1 billion in supplier partnerships in North America through 2027. Mercedes-Benz and BMW have made similar investments.

Long the leader of the Western civilization, can Europe now show the way in adapting to a post-industrial world? While possible, such a tectonic shift would bring a range of profoundly disruptive results. The surging costs of energy pose severe challenges to businesses, but the most dire consequence could be social unrest.

Belgium’s Prime Minister Alexander De Croo Alexander told the press last week that Europe could face an enormous reduction in industrial activity and heightened social unrest if it does not act quickly to bring down energy prices as winter approaches.

“We are risking massive de-industrialisation of the European continent and the long-term consequences of that might actually be very deep,” he said.

According to risk analytics firm Verisk Maplecroft some of the wealthiest nations in the world could see their way of life disrupted by not only energy shortages but also unrest and protests.

Verisk’s latest civil unrest index found more than 50 percent of the nearly 200 countries covered had an increase in the risk of mass mobilizations in the second and the third quarter of 2022, the largest number of nations since the firm first released the index in 2016. Countries with the biggest risk include Switzerland and the Netherlands.

“Over the winter, it wouldn’t come as a surprise if some of the developed nations in Europe start to see more serious forms of civil unrest,” said the firm’s lead analyst Torbjorn Soltvedt.

And as if on cue, tens of thousands marched in Paris last weekend to protest the rising cost of living amid an increasingly tense political atmosphere marked by strikes at oil refineries and nuclear plants that threaten to spread further.

The march had been planned long before, but organizers are using the energy crisis to build social unrest and increase pressure on the government.