Introduction
Europe’s industrial base – especially Germany’s – faces unprecedented challenges over the next two decades under a worst-case scenario of energy shocks and deindustrialization. The 2022 rupture of Russian gas supplies triggered an acute energy crisis that exposed structural vulnerabilities in Europe’s economy desapublications.un.org. In this scenario, high energy costs and supply disruptions become a persistent drag on heavy industries like chemicals, automotive, and metals. Manufacturing firms either relocate to lower-cost countries or shut down, eroding Europe’s position as a manufacturing powerhouse desapublications.un.orgcepa.org. The socioeconomic fallout could be severe: rising unemployment, widening regional inequalities, and social unrest as communities grapple with the loss of industries. This report examines the key factors behind this potential decline – from Russia’s pivot away from Europe to Europe’s own policy responses – and outlines policy actions to avert the worst outcomes.
Russian Energy Pivot to Asia: Implications for Europe
Illustration: A model of a natural gas pipeline with Gazprom’s logo. Russia’s reorientation to Asian markets, including new pipelines to China, signals a long-term redirection of energy flows away from Europe.
A fundamental shift in global energy trade underpins Europe’s worst-case scenario. In the wake of the Ukraine war and Western sanctions, Russia has aggressively reoriented its oil and gas exports toward Asia, reducing its reliance on European markets reuters.comnature.com. Major infrastructure projects, such as the proposed Power of Siberia 2 pipeline from Siberia to China (with a capacity of up to 50 billion cubic meters per year), exemplify this pivot reuters.comreuters.com. By 2030, Russia aims to supply China with volumes approaching what it once sent to Europe, cementing Asia as its primary customer reuters.comreuters.com.
For Europe, the long-term implications are stark. The loss of cheap Russian pipeline gas – which once met 40% of EU gas demand – appears permanent nature.comhir.harvard.edu. European countries have vowed not to return to pre-war dependency on Russian energy, accelerating plans to eliminate Russian fossil fuels entirely by 2027 (the EU’s REPowerEU strategy) nature.com. In a worst-case context, Russia’s energy pivot means Europe must compete on the volatile global LNG market for the foreseeable future, with little prospect of restoring former supply arrangements. Europe managed to avoid immediate gas shortages in 2022–23 by swiftly buying LNG from other suppliers and curbing demand desapublications.un.orgdesapublications.un.org. However, the geopolitics of energy have fundamentally changed: Russia’s new partnership with China signals that Moscow no longer regards Europe as its main market or a priority in energy trade reuters.com. This diminishes Europe’s leverage and could leave Europe more exposed to price spikes. Analysts note that even with new pipelines to Asia, Russia will struggle to fully replace its lost European market – its gas exports in 2040 are projected to remain 13–38% below pre-crisis levels nature.com. Yet Europe, in turn, faces a future without its historically dominant energy supplier. In sum, Russia’s eastward turn locks Europe into a higher-cost, less secure energy paradigm, a critical backdrop for industrial decline.
Europe’s Post-2022 Energy Policy Shifts and Competitiveness
To respond to the energy crisis, Europe undertook sweeping policy shifts after 2022. The EU’s REPowerEU plan and related measures sought to bolster energy security by diversifying supply (e.g. importing LNG from the U.S. and Qatar), accelerating renewable energy deployment, and reducing gas demand nature.comnature.com. These emergency actions succeeded in averting an immediate catastrophe – gas storage was filled, consumption dropped ~20%, and a mild winter helped dodge outright shortages desapublications.un.orgdesapublications.un.org. By early 2023, natural gas prices retreated from their peak, alleviating the worst short-term fears of factory shut-offs desapublications.un.orgdesapublications.un.org.
However, the long-term competitiveness of European industry has been undermined. Energy prices remain significantly higher in Europe than in other industrial regions, a gap that may persist. Even as prices eased from the 2022 spike, EU governments spent over €540 billion shielding consumers and businesses – a costly intervention that underscores how uncompetitive European energy pricing had become nature.com. The structural disadvantage is clear: by mid-decade, German industrial firms were paying three times more for energy than U.S. competitors, and about twice as much as French firms (which benefit from nuclear power) fastbull.comfastbull.com. These cost differentials, if sustained, spell trouble for energy-intensive manufacturing. Sectors such as steel, chemicals, cement, and paper – which rely on affordable power and gas – find it hard to survive in Europe’s high-price environment. A United Nations analysis warned in late 2022 that persistently high gas and electricity prices could inflict lasting damage, eroding Europe’s competitiveness in heavy industry and prompting companies to relocate to regions with cheaper energy desapublications.un.org. Indeed, by 2025 European policymakers openly acknowledged the risk of “deindustrialization” as a result of the energy-price handicap desapublications.un.org.
Europe has tried to adjust its policies to balance climate goals with industrial survival. In early 2025, the EU unveiled a “Clean Industrial Deal” to streamline permits for renewables and subsidize clean-tech manufacturing cepa.org. The plan recognized existential threats to European industry – high energy prices, tougher U.S. and Chinese competition, and fragmented EU industrial policies – but critics argue it offered only incremental fixes cepa.org. For example, the EU is introducing a Carbon Border Adjustment Mechanism (CBAM) to shield domestic steel and cement from carbon-intensive imports, and encouraging long-term power contracts to stabilize electricity costs cepa.orgcepa.org. Yet these measures may not suffice if the underlying energy-cost gap remains large. Think-tank analysts warn that Europe’s responses so far “stop short of meaningful action” – without deeper integration of energy markets and bolder industrial policy, Europe could become a “museum of climate virtue…empty of factories” in this worst-case trajectory cepa.org. In other words, despite laudable green goals, Europe’s post-2022 policies might inadvertently accelerate industrial decline by failing to restore cost competitiveness.
Structural Deindustrialization in Germany: Key Sectors at Risk
A BASF chemical complex in Germany. The chemical industry, Germany’s third-largest sector, has been hit hard by surging natural gas prices and is scaling back operations cepa.org.
Germany, the industrial heart of Europe, is acutely vulnerable to these energy and cost pressures. Industry accounts for about 21% of Germany’s GDP – nearly double the industrial share of France – and includes globally competitive sectors like automobiles, chemicals, machinery, and metals iris-france.org. This industrial engine was historically fueled by secure supplies of cheap Russian energy and a globalization model of importing low-cost inputs while exporting high-value productsiris-france.orghir.harvard.edu. The abrupt loss of Russian gas and the spike in energy costs have shaken the foundations of that model. By 2024, German industry was grappling with an “explosion in energy costs” that dramatically raised production costs iris-france.org. Energy-intensive companies in Germany were producing nearly 20% less output than before 2022, as many factories curtailed operations due to high power and gas prices edwardconard.comedwardconard.com.
Các chemical sector exemplifies this stress. Chemical producers rely on natural gas both as fuel and feedstock (for processes like ammonia, fertilizers, plastics). When gas prices hit record highs, German chemical output plummeted – major firms announced restructuring to survive. BASF, Germany’s largest chemical company, launched a “massive” cost-cutting program targeting over €2 billion in annual savings in Europe, citing a deteriorating outlook for German industry reuters.com. In 2023 BASF permanently shut some energy-intensive production lines and shifted new investment abroad. By early 2025, BASF even explored listing a major division on the U.S. stock market – a signal that it sees more growth and investor appetite outside Europe cepa.org. The steel industry is similarly strained: steelmakers like ArcelorMittal have delayed or scaled back investments in Europe, pointing to uncertain regulatory and cost conditions cepa.org. In a worst-case scenario, Germany’s venerable chemical and steel complexes could downsize drastically, hollowing out supply chains centered around the Rhine-Ruhr industrial belt.
Các automotive sector, Germany’s economic flagship (nearly 5% of GDP and 16% of exports iris-france.org), faces a twofold challenge. First, high energy and commodity costs raise the expense of manufacturing cars and components in Germany. Second, a disruptive shift to electric vehicles (EVs) and fierce global competition (from U.S. EV makers and China’s auto industry) threaten Germany’s traditional automakers. Already by 2024, Volkswagen – the nation’s largest automaker – warned of potential plant closures in Germany, an almost unthinkable scenario a few years prior iris-france.orgiris-france.org. While VW has not confirmed closures, the mere fact it’s under discussion underscores the pressures on German auto firms to cut costs and consolidate production. German brands also rely heavily on China’s market (VW earns ~37% of its sales in China iris-france.org), making them vulnerable to China’s economic shifts and to Chinese EV competition both at home and abroad. In this worst case, if Germany’s car industry fails to innovate rapidly or if trade barriers rise, assembly lines in high-cost German plants could go quiet, with production shifting to cheaper locations.
Across sectors, the trend is evident: a structural deindustrialization is underway. Germany has already lost about 250,000 manufacturing jobs since 2020, and the decline could accelerate edwardconard.comedwardconard.com. Small and medium-sized manufacturers (the famed “Mittelstand”) are particularly at risk – many lack the capital to relocate or the margins to absorb soaring input costs fastbull.com. Survey data in 2025 showed one in three German industrial firms expecting fewer orders and very few planning new investments, reflecting deep pessimism fastbull.comfastbull.com. Economists note that what began as an energy shock now threatens to become an irreversible erosion of industrial capacity, unless competitiveness is restored fastbull.comfastbull.com. Germany is now openly questioning its post-Cold War economic model, which for decades was built on “importing cheap raw materials (especially Russian gas) and exporting high value-added goods” iris-france.org. In the worst-case trajectory, without affordable energy and bold adaptation, that model collapses – leaving Germany’s mighty industrial base a shadow of its former self by 2045.
Energy Supply Risks, High Costs, and the Erosion of the Manufacturing Base
Even without new geopolitical shocks, Europe could face periodic energy shortages or persistently tight supplies in the coming decades. A combination of factors drives this risk. First, Europe’s pivot away from Russian pipeline gas means heavier reliance on the global LNG market, which is prone to price volatility and supply crunches during cold winters or surges in Asian demand nature.com. Until large new LNG projects come online around 2026–2030, global gas spare capacity is limited, so a harsh winter or delays in LNG infrastructure could force tough choices. In a severe scenario, Europe might again flirt with gas rationing for industry – the very nightmare barely avoided in 2022 desapublications.un.orgdesapublications.un.org. Secondly, Europe’s energy transition, while crucial for long-term sustainability, introduces short-term reliability challenges. Germany’s phase-out of nuclear power (completed in 2023) and planned coal retirements remove stable baseload sources hir.harvard.eduhir.harvard.edu. If renewable expansion or grid upgrades lag behind, the power system could struggle during “dunkelflaute” periods (dark, windless days). A prolonged renewable shortfall or unexpected outage might necessitate emergency measures and could send electricity prices spiking, hitting industries hard.
Các high-cost energy environment is assumed to persist in this worst case. European natural gas and electricity prices may remain well above pre-2022 levels on average – perhaps 30–50% higher than in the 2010s – due to pricier imports and carbon costs hir.harvard.eduhir.harvard.edu. Indeed, even after the immediate crisis, German energy prices in 2024 were ~35% higher than before the war hir.harvard.eduhir.harvard.edu. Such elevated costs act like a continuous tax on manufacturing. Energy-intensive industries that cannot pass on costs (due to global competition) have essentially three choices: invest in efficiency or cleaner energy to cut usage, relocate production to a lower-cost country, or shut down. In the worst-case scenario, many choose the latter two options. Europe could see a wave of industrial capacity leaving its shores. For example, ammonia and fertilizer plants might move operations to regions with cheap gas (Middle East, North America) rather than continue in Europe. Aluminum smelters and zinc refineries, already hit hard in 2022, might close permanently – as several did when power costs made operations unviable reuters.comspglobal.com. By 2045, Europe’s primary metals sector could be a fraction of its current size, making the continent dependent on imported metals even for basic industries.
Collectively, these trends portend a substantial loss of Europe’s manufacturing base. Companies large and small are re-evaluating the benefits of producing in Europe’s high-cost environment. As one analysis noted, “industries with high energy demand could see disruptions…persistently high prices could cause losses in market share and prompt relocation to countries with lower energy costs” desapublications.un.org. Indeed, global firms have been prioritizing expansion in places like the United States, where shale gas ensures far cheaper energy cepa.org. European industrial stalwarts from ArcelorMittal (steel) to BASF (chemicals) have either cut European investment or shifted new projects abroad in recent years cepa.org. A Forbes analysis went so far as to label Europe’s trend as “economic suicide” if energy and regulatory burdens continue to drive deindustrialization. By 2045 in this worst case, Europe’s share of global manufacturing output could shrink significantly, ceding ground to Asia and North America. Entire value chains might disappear locally – for instance, if the European chemical industry contracts, downstream plastics and pharma supply chains will import more inputs from foreign plants. The economic ramifications would extend beyond lost GDP: Europe would lose strategic autonomy in key materials and technologies, and its trade balance could worsen as it imports more industrial products.
Socioeconomic Consequences: Inequality, Unemployment, and Unrest
The fallout from a deep industrial decline would extend into Europe’s social fabric. Manufacturing has long been a source of well-paying, middle-class jobs, especially for workers without advanced degrees. As factories close or relocate, hundreds of thousands of workers could be displaced. Unemployment would likely rise in industrial regions, and many laid-off workers might struggle to find equivalent new jobs in service sectors. This scenario risks creating pockets of high joblessness and despair, particularly in areas heavily dependent on one or two major employers (e.g. a steel mill or auto plant town). Even those who keep their jobs may face stagnating wages if industries are under pressure. The result is widening inequality – between those who can thrive in the new high-tech or service economy and those left behind in rusting industrial towns. Regionally, the divide may sharpen. Europe could see an amplifying “north-south” or “east-west” split internally: for example, parts of Eastern Germany, northern England, or Italy’s industrial north-east might experience sharper decline, while capital cities or tech-centric hubs still prosper. The rural-urban divide could also grow, as many industrial facilities are outside the big metropolitan centers.
Such economic grievances provide fertile ground for political extremism and unrest. We are already seeing early signs: in Germany, frustration over economic stagnation and loss of status has coincided with a surge in support for the far-right Alternative für Deutschland (AfD) party, especially in harder-hit eastern regions iris-france.orgiris-france.org. In a worst-case deindustrialization, disenchantment with mainstream politics could intensify. Historically, mass layoffs and regional decline have led to protests and radicalization – from the “gilets jaunes” fuel-tax protests in France to anger at EU austerity in Southern Europe eurofound.europa.eueurofound.europa.eu. As one European agency report noted, “discontent can give rise to civil unrest, as exhibited by the gilets jaunes”, and can strengthen anti-establishment parties eurofound.europa.eu. In this scenario, widespread factory closures or energy-driven hardships could spark strikes, demonstrations, or even riots. Governments might face backlash for failing to protect jobs or for pursuing climate policies seen as causing the decline.
Social cohesion would be under strain. A “shrinking industrial base undermines tax revenues while expanding social welfare needs”, warns one analysis – a recipe for fiscal stress and political volatility fastbull.comfastbull.com. Indeed, as more workers draw unemployment or need retraining support, government budgets would feel the pinch, possibly forcing tough trade-offs in welfare programs. Perceptions of injustice may grow – for instance, a narrative that “elites pushed green policies that cost us our jobs” could take hold among affected groups. If nothing is done, civil unrest could become a recurring feature by the 2030s: unrest indices for Europe might rise to levels higher than any other region, as the International Labour Organization warned even back in the 2010s when inequality last spiked reuters.comreuters.com. In extreme cases, chronic unrest and polarization could threaten democratic stability in some countries. The European project itself might be tested if economic divergences widen between member states or if populist forces gain power on promises to restore jobs at the expense of EU unity. This worst-case social picture is not a certainty – but it underlines the urgent need for policies that manage the industrial transition fairly and prevent large groups and regions from being left behind.
Conclusions and Policy Recommendations
While the scenario described is bleak, proactive policies now can help Europe avoid or mitigate this industrial decline. To reverse course or cushion the impact, European governments and the EU should consider a mix of energy, industrial, and social policies aimed at restoring competitiveness and promoting a just transition:
- Secure Affordable Energy Supplies: Pursue an energy strategy that lowers costs for industry. This includes massive investment in domestic clean energy (wind, solar, geothermal) to reduce reliance on volatile imports, while also negotiating stable long-term contracts for natural gas (e.g. with reliable partners like Norway, U.S., Qatar) to prevent shortages. Reassessing the balance of the energy mix may be necessary – for instance, some experts urge revisiting nuclear power or developing next-generation modular reactors to provide baseload electricity at stable prices. Building a centralized strategic gas reserve for the EU could buffer future supply shocks cepa.org. Overall, the goal is to move Europe from having the world’s priciest energy to a more moderate-cost regime through diversification and innovation.
- Integrate and Reform Energy Markets: Break down internal barriers to create a truly unified European energy market. A fully integrated electricity grid and gas network would allow power and gas to flow where needed, smoothing out local price spikes cepa.org. The EU should accelerate grid interconnections (e.g. between France and Spain, or across Eastern Europe) that have lagged due to national resistance cepa.org. Energy taxation also needs harmonization – today, countries have very different tax and surcharge regimes on energy (Germany’s industry pays heavy levies while others subsidize costs) cepa.org. The EU could set guidelines to reduce these disparities cepa.org. Crucially, electricity market reform is needed so that gas prices no longer set the marginal power price in all hours cepa.org. Decoupling renewables from gas in pricing, or introducing capacity mechanisms that reward reliable power generation cepa.org, would help stabilize electricity costs for industrial users. These technical fixes can significantly improve the price environment for manufacturers over time.
- Industrial Policy and Investment Support: Europe must counterbalance the U.S. and China by adopting a bolder industrial policy. This means direct support for critical industries to stay and modernize in Europe. The EU’s new industrial initiatives (such as the Net-Zero Industry Act and clean tech subsidies) should be ramped up with real funding and less bureaucracy cepa.orgcepa.org. Key areas include providing low-cost financing or grants for factories to adopt energy-efficient equipment or switch to cleaner fuels (e.g. hydrogen-ready furnaces for steel). The Draghi competitiveness report estimated on the order of €300+ billion is needed over 15 years to decarbonize Europe’s most carbon-intensive sectors iigcc.org – a level of funding that likely requires EU-wide programs and public-private partnerships. Additionally, export credit guarantees and other tools should be expanded to help European manufacturers compete abroad cepa.org. Rather than leaving firms to face high risks alone, governments can shoulder some risk to encourage domestic investment. The overarching aim is to ensure Europe remains a viable location for advanced manufacturing by subsidizing the transition costs (much as the U.S. is doing with its Inflation Reduction Act).
- Innovation in Energy and Industry: Technological innovation is a longer-term salvation. Europe should double down on R&D for breakthrough energy solutions (like green hydrogen, energy storage, carbon capture) that could give its industry a new competitive edge if mastered early. For example, developing cost-effective green hydrogen at scale would allow refineries, fertilizer plants, and steel mills to replace natural gas, securing energy independence. The EU’s green hydrogen targets (e.g. 10 million tonnes domestically by 2030) must be backed by subsidies and infrastructure so that by the 2030s energy-intensive industries have alternatives to fossil fuels. Similarly, embracing digitalization and advanced manufacturing (Industry 4.0) can raise productivity in European factories, offsetting some cost disadvantages. Governments can incentivize adoption of AI, robotics, and other productivity enhancers among small manufacturers. High productivity and innovation would enable European firms to compete on quality and technology rather than price alone.
- Social and Regional Transition Support: A just transition for workers and regions is essential to prevent unrest. Policymakers should strengthen safety nets and invest in workforce retraining programs for industries in decline. For example, if coal or gas-dependent industries are phased out, workers should have access to retraining in growing fields (renewable energy installation, electric vehicle maintenance, etc.). The EU already deploys funds like the Just Transition Fund for coal regions; similar mechanisms can be expanded for any region hit by deindustrialization. Place-based investments can help diversify economies of one-company towns – e.g. establishing technology parks, incentivizing new industries or service hubs in those areas. Improving infrastructure and connectivity in struggling regions (including rural broadband, transportation links) can attract new businesses eurofound.europa.eueurofound.europa.eu. Europe should also continue policies like the Youth Guarantee to fight unemployment and prevent long-term joblessness, especially in regions where manufacturing jobs vanish eurofound.europa.eu. These measures maintain social cohesion by showing people that they are not being abandoned.
- Political and Fiscal Measures: Finally, maintaining stability may require political measures to address inequality and frustration. Progressive taxation or wealth redistribution could be tools to ensure that the burdens of transition don’t all fall on the working class. At the EU level, flexibility in state aid rules (temporarily) might be warranted so that countries can support key industries through the crisis period. At the same time, the EU must improve communication and inclusive dialogue with citizens about the necessity of the green transition – highlighting not just costs but opportunities, and involving workers in planning for new industries. Proactive outreach can reduce the perception of a distant bureaucracy imposing job-killing rules. If social unrest does spike, governments should be prepared with mediation and response plans to address legitimate grievances (for example, cushioning energy price spikes for low-income households to avoid protests like the gilets jaunes eurofound.europa.eu).
In conclusion, Europe’s industrial future in 2045 need not be bleak. Yes, the continent is navigating a treacherous period of high energy prices and intense global competition. The worst-case trajectory outlined here – of cascading industrial decline and social strife – is a warning of what could happen if Europe fails to adapt. But with strategic foresight, investment, and unity, Europe can transform its industrial base rather than watch it wither. The policy measures recommended – from securing affordable energy to actively supporting industries and workers – are ambitious, but they match the scale of the challenge. Europe’s history shows resilience: after past crises, it has rebounded by confronting problems head-on (as Germany did to shed the “sick man of Europe” label in the 2000s hir.harvard.eduhir.harvard.edu). By doing so again, Europe can ensure that the years to 2045 are a renaissance of sustainable industrial growth, rather than a long descent into economic irrelevance. The time to act is now, before the worst-case scenario becomes reality.
Sources: Official documents, economic forecasts, and expert commentary have informed this analysis, including reports from the UN Department of Economic and Social Affairs, the European Commission, think-tanks (CEPA, IRIS), academic studies (Nature), and news agencies (Reuters, Bloomberg, FT) that provided data on Europe’s energy and industrial outlook desapublications.un.orgcepa.orgiris-france.orgedwardconard.comfastbull.com. These sources underscore both the gravity of Europe’s current trajectory and the potential solutions to change course.
