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Germany is preparing for a rough winter of sky-high energy costs

A MARTINEZ, HOST:

The German government is setting aside 5% of its annual GDP to help the country get through what promises to be a tough winter, as energy prices are expected to climb to unprecedented levels. Particularly vulnerable is German industry, the backbone of the country's economy. NPR's Rob Schmitz reports from the factory floor.

ROB SCHMITZ, BYLINE: It's metal as far as the eye can see at the Thoma Metal refinery in rural Bavaria. In one corner, there's a box full of nuts and bolts the size of baseball bats ready to be shipped to Dubai to build a skyscraper, and in another, polished stainless-steel tubes that'll be used inside a commercial jet. Andrea Thoma-Bock oversees all of this.

ANDREA THOMA-BOCK: (Through interpreter) We finish every type of metal. When you turn the taps in the bathroom in the morning, you're touching our work. When you get in your car, when you board a plane - people don't know us, but they use our products on a daily basis.

SCHMITZ: The same could be said for the thousands of Germany's so-called Mittelstand companies, small- to medium-sized privately owned family firms that make up the backbone of Europe's largest economy. And Thoma-Bock says they're in real danger.

THOMA-BOCK: (Through interpreter) We're an energy-intensive business. But with the war in Ukraine, things have reached another dimension. Our electricity prices have gone up by a factor of more than 10. We used to pay 4 cents a kilowatt hour. Now we're paying 57 cents.

SCHMITZ: Thoma-Bock's company, which has been in her family for nearly a century, is spending $3 million more on energy this year than it did last year. And this, she fears, is just the beginning.

THOMA-BOCK: (Through interpreter) Everyone is dreading the last day of this year, when a lot of energy contracts for businesses will run out. There are businesses who have contracts for next year. But for the rest of us, the prices are going to be astronomical. This is how businesses shut down.

SCHMITZ: Disruptions in the flow of natural gas from Russia, now made permanent by explosions that ripped apart two pipelines that connect Germany to Russia, have pushed up prices to record levels. Inflation in the country hit a 70-year high of nearly 11% in September.

MARCEL FRATZSCHER: In many ways, it's a problem because companies don't know whether they can actually pass on higher costs to consumers and other companies that demand their products.

SCHMITZ: Marcel Fratzscher, president of the German Institute for Economic Research, says Germany's Mittelstand companies, whose quality have assured them a competitive position on the global market, will soon be undercut on price.

FRATZSCHER: Energy prices, gas prices have increased for European and for German companies a lot more than for American or Chinese or Korean or Japanese companies. And that is a big challenge particular for such an open economy as Germany, which relies a lot on trade and competition in global markets.

SCHMITZ: But according to a business survey conducted by economist Andreas Peichl, more than half of German Mittelstand companies should be able to pass on higher costs to their customers simply because they produce specialized products that few other global companies produce, essentially cornering the market for these goods.

ANDREAS PEICHL: And of course, if they have market power, then maybe this is easier to do so. And so there will be some firms who won't survive this. But then, maybe that's part of the market economy.

SCHMITZ: Back on the factory floor, Andrea Thoma-Bock isn't so confident.

THOMA-BOCK: (Through interpreter) At some point, nobody is going to be interested in the products we export because they'll be too expensive. Politicians have had a year to watch this, yet they seem blind to this.

SCHMITZ: Last week, Germany's government announced it'll set aside at least 200 billion, 5% of its GDP, to help limit rising energy prices. But they haven't yet worked out how they'll do that.

Rob Schmitz, NPR News, Bavaria.

(SOUNDBITE OF CAVES OF STEEL'S "TRANSVERSE") Transcript provided by NPR, Copyright NPR.

Rob Schmitz is NPR's international correspondent based in Berlin, where he covers the human stories of a vast region reckoning with its past while it tries to guide the world toward a brighter future. From his base in the heart of Europe, Schmitz has covered Germany's levelheaded management of the COVID-19 pandemic, the rise of right-wing nationalist politics in Poland and creeping Chinese government influence inside the Czech Republic.