Deutschland Update #13
This weeks topics: Relief package consensus, the start-up scene has some concerns, and the (recurring) fracking debate.
Hi everyone,
I had the opportunity to be a fly on the wall at the U.S. - German Futures Forum over the last couple of day in Münster, so the newsletter is coming out a bit later in the week than usual.
Happy friday.
Best,
Michael
This week’s topics:
States and Fedederal government agree on reflief package
Start-up concerns
Fracking debate
Consensus reached: details of coming relief package
Many proposals have been made over the last few months regarding the shape and financing of the package of relief measures that are to be implemented in response to the current energy crisis. While the federal government has taken the lead on drafting the proposals, how they would be implemented and (importantly) financed have remained open questions. The proposed policies would require both state and federal financing, meaning that the prime ministers of all 16 German states also have a seat at the negotiating table.
The negotiations have not been easy. A meeting between the heads of the 16 states and federal ministers in early October ended without having produced a consensus. However, in the face of a time crunch precipitated by the coming winter and approach of the new year, a similar meeting this week resulted in an agreement between the federal government and the states on the shape and financing of the relief measures. They include significant interventions in energy markets that should stabilize prices for both consumers and industry, an expansion of housing subsidies for low-income households, support for municipalities to deal with a growing number of refugees, and concrete plans for a national rail ticket.
The details:
- Natural gas price-break: Beginning March 1, 2023 consumers who pay directly for natural gas, or indirectly for “Wärme” (distributed heating systems that run on natural gas) will have 80% of their 2022 usage subsidized. The price will be 12ct per kilowatt hour for gas, and 9.5ct per kilowatt hour for distributed heating. A similar price subsidy will be introduced for large industrial gas customers beginning in January. Industrial consumers will have 70% of their 2021 consumption level subsidized by the state. The total cost: €54 billion.
- Electricity price-break: Beginning in January 2023, electricity customers will have 80% of their 2022 electricity consumption subsidized at a set price of 40ct per kilowatt hour. Industrial customers will have 70% of their 2021 electricity consumption subsidized at a set price of 13ct per kilowatt hour. The total cost of the measure is estimated to be between €50-70 billion.
- €49 “Deutschlandticket”: It has been clear for some time that a replacement of the €9 ticket, which was available for three months this summer to much fanfare, was going to happen. However, the question of how it would be financed remained open, until now. Beginning January 1, 2023, a €49 ticket will be available that is valid on all regional and municipal train systems in Germany. The federal government and the states will each contribute €1.5 billion annually to fund the measure. The federal government will also provide the states with €1 billion annually in order to fund improvements and expansion of regional transportation systems.
- Expansion of housing subsidies: Subsidies that are available for low-income households that aren’t receiving other state financial aid (essentially the population of people who are employed but remain unable to cover the entirety of their housing costs) are to be significantly expanded. Beginning in January 2023, the program will be enlarged to cover 2 million households – an almost 3x increase from the current 640,000 households currently covered by the program. The cost will grow from the current €1.4 billion to €5.1 billion, with the financing being split 50/50 between the states and the federal government.
- €1.5 billion for municipalities to support refugees: An estimated 1 million people have fled to Germany as a result of Russia’s war of aggression in Ukraine, straining the resources of local communities that have worked to provide housing and other resources. The federal government will provide €1.5 billion in extra funding to support those efforts.
The start-up scene has some concerns
A group of some of the most successful players in Germany’s start-up scene published an open letter this week that raised the alarm on what they see as the government’s lack of action on creating the necessary conditions for the continued flourishing of young, innovative companies in Germany. Their public call for specific reforms in the areas of immigration, profit sharing rule, capital investment restrictions and the digitization of the bureaucracy comes on the heels of a report published this week by Berlin-based VC Morphais, that points to both a decline in overall new companies and an increase in new start-ups based on proprietary technological innovations.
In the open letter addressed to Economics Minister Robert Habeck and Finance Minister Christian Lindner, 12 of Germany’s most well-known founders argue that in the context of the various crises the country currently faces, the government is making a critical mistake in focusing its aid efforts primarily on long established industries, to the detriment of its nascent start-ups. The list of signatories includes Hanno Renner of Personio, Flix co-founder Jochen Engert, Julia Bösch of Outfittery, as well as the co-founder of Delivery Hero Niklas Östberg. They argue that the Germany’s start-up ecosystem can only be sustained through consequential “innovation politics” (Innovationspolitik). “Without innovation and growth, we don’t stand a chance,” they write in the letter.
The letter’s signatories are requesting that the federal government implement reforms in four areas:
- Immigration: According to the German Start-up Association (as reported in the Handelsblatt) 50% of start-ups report difficulties in filling open positions. At firms with more than 25 workers, that number goes up to 85%. The letter argues that Germany must simplify its visa process for qualified immigrants by reducing bureaucratic hurdles and streamlining the process for recognizing foreign qualifications.
- Profit sharing rules: the letter argues that Germany’s current rules regulating profit sharing and allocating ownership shares to workers must be reformed. They take particular issue with what is termed “dry-income-taxation”. These are current rules which force equity holders in pre-IPO start-ups to pay taxes on the value of their shares, despite the fact that this value only exists on paper and cannot be made liquid. This is a rule unique to Germany, and they argue that it creates a tax burden that disincentivizes high-risk investment in German companies.
- Pension reform: the letter argues for an expedited implementation of a national pension scheme that is fund invested (Aktienrente). They argue that a portion of that fund should be directed towards “future-oriented, large-volume investments in European technology and high growth companies” in order to enable the effective mobilization of Germany’s already significant capital stock. They argue that this will also make the German stock market a more attractive for IPOs, as opposed to those in the U.S. They point to the example of BioNTtech, the German biopharma company that developed the first mRNA-Covid vaccine, which raised $150 million in its IPO on the NASDAQ exchange in New York in October 2019.
- Digital bureaucracy: “The bureaucracy needs to transform from a break-pad to a driver of innovation.” The letter argues that the government must follow through on the plan to develop a unified, digital portal for all bureaucratic processes by 2025, and that particular attention should paid to streamlining the process of founding companies.
The letter comes on the heels of a study released last week by Morphais, which shows 30% year-on-year decline in the number of new start-ups founded in Q3 2022. This downward overall trend has continued since the boom year of 2021. However, this overall decline is not evenly spread among different sectors. The report points to a steady rise in the number of companies that have been founded on what is termed “deep tech” – these are new companies that have formed around proprietary technology that is solution-oriented and based on novel research. According to the report, 10% of the new companies founded in Germany this year are based on deep tech, up from 6% in 2021.
Given the current global economic context, this year-on-year decline in overall new start-ups is not surprising. The precipitous decline in stock market values over the last six months means there is simply less capital to be invested. Companies that are based on proprietary, novel technology would also presumably become more attractive in this context. When times are tough, quality becomes more important than quantity.
Context:
It is not entirely fair to say that the federal government has lost sight of the value that the start-up ecosystem provides to the German economy. In July this year the Ministry of Economics and Climate Action published “The Start-up Strategy of the Federal Government” in which it lays out a list of legislative initiatives that it hopes to enact into law in the current legislative period.
The full report is available here (in German), and includes all of the reforms identified in the open letter. The two sides of this argument do not disagree on what should be reformed, but rather on how far those reforms should go.
Fracking debate is back (again)
As an acute energy crisis has taken hold in Germany and the rest of Europe as a result of Russia’s war of aggression in Ukraine, a debate around the use of fracking in order to tap potential domestic natural gas reserves has resurfaced at a quite regular cadence. This week Finance Minister Christian Lindner rekindled the debate: in an interview with the Funke Media Group, he argued that Germany should lift a ban on the controversial drilling technique.
There are indeed potential gas fields located in Germany: 1.3 million cubic meters of it according to the Bundesanstalt für Geowissenschaften und Rohstoffe. That is enough to satisfy the country’s demand for at least a decade.
“We must quickly begin with extraction. I am confident that within a few years we will be able to cover a relatively large portion of demand through domestic gas resources. Doing so is expedient if we look at the developments globally,” Lindner said in the interview.
The reaction to the Lindner’s comments were swift and fell along predictable political lines. “Those calling for fracking domestically, are calling for expensive malinvestment and grave utilization competition,” Nina Scheer, energy expert for the SPD told the Handelsblatt. “The land and available financial resources are needed for renewable energy, storage capacity, and network infrastructure, not for backward-looking investments in fossil fuels.”
Context:
The debate around fracking in Germany has become a regular fixture of political debate in the last six months as the energy crisis has taken hold, and it is bound to continue resurfacing in the coming months and years. Therefore, I thought it would be useful to take a sober look at the history and arguments for and against.
Germany is now importing natural gas from around the world at an unprecedented scale, and at a price point that is significantly higher than what was the standard when the majority of the country’s natural gas resources came from Russia via pipeline. The liquified natural gas that is being imported must also be transported; this involves the extremely energy intensive process of liquifying, transporting, and re-gasifying. In the face of this dramatic reorganization of the energy market, the idea of tapping Germany’s domestic reserves via fracking begins, if one takes a purely economic perspective, to make a lot more sense than it did a year ago.
However, while the price point may now favor proponents of domestic fracking, the environmental impacts and domestic political realities continue to provide strong arguments against it.
Fracking as a process has been utilized around the world for decades, enabling some countries, like the U.S., to vastly expand their fossil fuel extraction capacity over a relatively short period of time. However, it cannot be implemented without significant environmental risks, and is in and of itself extremely resource intensive.
Germany banned the practice in 2016, with the primary justification for the ban being the risk that it poses to groundwater resources. German authorities feared that the enormous amounts of chemically treated water pumped into the ground in order to create cracks in deep geological formations would pose a contamination risk in the highly populated areas under which the potential natural gas deposits are located.
The politics of the matter, especially at the local level, complicate the issue as well. “Former administrations considered these processes. The resistance locally was so great, that they never became a reality,” Chancellor Olaf Scholz told the Welt am Sonntag newspaper last week, referring to the possibility of allowing fracking in Germany.
The largest potential reserves in Germany are located in the state of Lower Saxony. Lower Saxony is not Texas: regions in the U.S. where fracking has been widely utilized tend to be geographies that have a low overall population density. There are very few such areas in densely populated Germany. In the run-up the ban implemented in 2016, more than 100 towns and municipalities in Lower Saxony passed resolutions codifying their opposition to local fracking. Any attempt to implement the process at scale in the region would inevitably be met with a flurry of legal challenges.
The cost of building out the infrastructure is another factor that potential producers would have to take into consideration. If Germany were to allow fracking, and if the inevitable legal challenges those plans would face were overcome in favor of producers, then building the necessary infrastructure at scale would be another challenge to overcome. It would also be expensive. Part of the reason that the debate around domestic fracking only resurfaced after the onset of the current energy crisis, is because making the necessary investments only makes sense at today’s much higher price levels. It is extremely unlikely that we will end up in a near-term future when natural gas prices return to pre-crisi levels. However it is also possible that the current price levels, which would justify the necessary capital investments if they persist, will reamin in the long term in the context of a transition away from fossil fuels.
Given these conditions at the outset, it is unlikely that we will see fracking allowed again in Germany. However, it is very likely that we will continue to debate it. Germany is often better at deliberating than doing.