Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Car Makers Are Moving Production to the US
Transcript
- Lucas: If walking through the economy with us has made something click — maybe today's number or a past episode — stick around for a quick note on that at the midpoint. But first, let me lay out a shift that's quietly reshaping the European industrial landscape. Lucas: European carmakers are moving production to the United States. Not just assembly, but entire supply chains — battery plants, motor lines, final assembly. And this is happening at a pace that surprised even the most bearish European industrial analysts. Luna: We've talked about European industry losing competitiveness before, but this feels different. Car manufacturing is the backbone of German economic power. If that moves, what's left? Lucas: Exactly. Let's anchor on one concrete case: Volkswagen. In March this year, the company broke ground on a massive battery cell plant in South Carolina — its first outside Europe. The plant is slated to produce enough cells for 500,000 EVs annually by 2028. Luna: And that's not just a battery plant — it's pulling in suppliers. I read that several German auto parts firms are setting up shop nearby. Lucas: Right. Brose, Schaeffler, ZF Friedrichshafen — all have announced US expansions tied to the VW plant. This isn't just a single factory move. It's a cluster forming. And the drivers are structural, not cyclical. Lucas: First, the Inflation Reduction Act. The US offers a $7,500 consumer tax credit for EVs assembled in North America, plus up to $45 per kilowatt-hour of battery cell production. For a 60-kilowatt-hour pack, that's around $2,700 dollars per vehicle in subsidy. Luna: Europe has nothing comparable. The EU's response — the Net-Zero Industry Act — offers less than half the direct subsidy per unit, and it's not even fully rolled out yet. Lucas: And the gap is widening. Second factor: energy costs. Industrial electricity prices in Germany are roughly three times what they are in the US, even after German government subsidies to offset carbon pricing. For energy-intensive battery production, that's existential. Luna: Then there's the dollar. The trade-weighted dollar is at 120.7 — near historic highs. A strong dollar means a US factory's output is cheaper when sold in Europe, because the dollar buys more euros. That flips the traditional logic of building where you sell. Lucas: Exactly. You used to build cars in Europe to sell in Europe, because shipping was expensive and you wanted to hedge currency risk. Now, you build in the US, ship to Europe, and the currency tailwind covers the logistics cost. Lucas: And that's showing up in trade data. Eurozone exports to the US are still growing, but the composition is shifting. Finished vehicles are being replaced by machinery and intermediate goods — parts that get assembled in the US. Luna: So Europe is exporting the value-add upstream, not the final product. That means fewer jobs in assembly, less tax revenue, and a weaker domestic supply chain. Lucas: Right. The European automotive sector employs about 14 million people, directly and indirectly. If even 10 percent of production moves offshore over the next decade, that's over a million jobs at risk. And we're seeing early signs already. Lucas: Let me bring in a number from the live data. Eurozone real GDP growth annualized is 2.1 percent — not terrible. But industrial production in Germany, the euro zone's manufacturing heart, has been flat for three quarters. The auto sector is dragging. Luna: And the ECB can't fix this with rate cuts. Lowering interest rates doesn't close the energy cost gap or match IRA subsidies. This is a fiscal and trade policy problem. Lucas: Which brings us to the politics. Christine Lagarde recently left the door open to an early ECB exit — partly due to frustration with French politics and the lack of coordinated fiscal response. But even if she stays, the tools are limited. Luna: The irony is, European carmakers are also selling more EVs in the US. So they're effectively voting with their feet — moving production to the market that's both bigger and more supportive. Lucas: And this isn't just Volkswagen. BMW is expanding its Spartanburg plant in South Carolina. Mercedes has a battery plant in Alabama. Stellantis is building in Indiana. The pattern is consistent. Lucas: Now, there's a counterargument: maybe this is just a temporary arbitrage. Once US interest rates fall and the dollar weakens, the calculus reverses. But that assumes the IRA subsidies sunset, which they don't — they're locked in for a decade. Luna: And even if the dollar weakens, Europe's energy cost disadvantage is structural. Unless Europe gets cheap, abundant energy — which means nuclear or renewables at scale — the gap persists. Lucas: Before we go further — and I realize we're in the middle of a heavy topic — I want to pause for a moment. Because if today's episode was actually useful to you, the way these stay ad-free is listener support. You can head to buy me a coffee dot com slash fexingo to chip in. Luna: Yeah, it's a small gesture that keeps us independent and focused on the numbers that matter, not on sponsor talking points. We really appreciate it. Lucas: Back to the production shift. One thing that might change the trajectory is European retaliation. The EU is considering a carbon border adjustment mechanism that could effectively tax goods produced in countries with weaker climate policies. Luna: But the US isn't exactly a climate laggard. The IRA is the largest climate investment in American history. So the EU can't easily argue that us made cars are dirtier. Lucas: Right. The EU could try to impose local content requirements in its own EV subsidies — but that would risk a trade war with the US at a time when Europe can't afford one. And it would also hurt European carmakers who are already investing in the US. Lucas: There's a deeper question here: is this the start of a transatlantic reindustrialization of the US at Europe's expense? We've seen this movie before — in steel, in semiconductors. Now it's cars. Luna: And if cars go, what's next? European chemicals? Pharmaceuticals? The profit margins in pharma are high, but energy costs still matter for production. Lucas: That's the fear. The European Commission has acknowledged the risk — a recent paper warned of 'deindustrialization' if the investment gap isn't closed. But so far, the policy response has been slow and fragmented. Luna: We'll be watching the German industrial orders data next week. That will tell us if the domestic auto supply chain is already feeling the pinch. Lucas: Exactly. And whether the ECB's next move — another rate cut or a hold — can do anything to stem the tide. My guess is: not much. This is bigger than monetary policy. Luna: So where does that leave European investors? VGK, the broad European ETF, is down 1.6 percent in the last five days. The German ETF EWG is down 2.7 percent. The market is pricing in weakness. Lucas: It is. And until Europe offers a credible, large-scale industrial subsidy program to match the IRA, the production shift will continue. That's not a prediction — it's an arithmetic certainty.