European industry is reeling under the twin threat of high energy prices and US President Joe Biden’s Inflation Reduction Act (IRA), which essentially bribes Europe’s green industries to migrate to the US.
Are Europe’s industrial heartlands about to become rust belts? Will Germany experience the trauma that the UK 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 EU fund that would offer state aid for EU companies tempted by the US subsidies to emigrate.
Illustration: Mountain People
However, 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 can counter the US subsidies in a timely and proportionate manner.
Germany’s auto industry is a good example of what is at stake. Automakers 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 agonize over the country’s deindustrialization. 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 automakers 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 would probably continue to produce as many vehicles in Germany as they did in the past.
However, if fear of deindustrialization is overblown, there is 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 with their US 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 automakers, in particular, got rich on the back of profits from building high-quality internal combustion engines and all the parts — gearboxes, axles and differentials — that are necessary to convey power from such engines to a vehicle’s wheels.
However, 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.
Even if EU state aid succeeds in persuading Volkswagen, Mercedes-Benz and BMW to produce their electric cars in Europe, rather than migrate to the US to benefit from IRA subsidies, auto manufacturing would never be as profitable in Germany and Europe as it once was.
More of the profits to be made from electric cars would come not from selling the actual hardware, but from applications sold to their owners — 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 vehicle’s movements and it is 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 COVID-19 pandemic receded and energy prices surged, big oil and gas made a fortune. The fossil fuel industry gained a second wind, much like how the rise of corn prices in the UK during the Napoleonic wars, owing to the disruption of corn imports, gave British feudalists a second wind.
However, 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 power stations that recall 19th century factories — William Blake’s “dark Satanic Mills.”
In contrast, renewables are best deployed in a decentralized fashion, with solar panels, wind turbines, heat pumps, geothermal units and wave-powered devices 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.
Green energy is cloud-capital intensive, much like the electric car industry. Even if the EU subsidies ensure that Europe’s industry mass produces solar panels, wind turbines and other green equipment, Europe would still 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 deindustrialize Europe, it could 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 would suffer — and so would a European economy reliant on them.
Yanis Varoufakis, a former Greek minister of finance, is leader of the MeRA25 party and professor of economics at the University of Athens.
Copyright: Project Syndicate
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