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The powerhouse of the euro zone is slowing, because its engine is decelerating.

Germany's industrial output fell for the second month running. The decline is raising doubts about whether German manufacturers can sustain their export drive in the face of weak demand from their core euro zone markets, and rising competitive pressures – notably, the cost of energy.

The industrial manufacturers that are viewed as Germany's national champions produced 1.2 per cent less in October, an unexpected decline when economists were predicting a recovery after a 0.7 per cent dip in September. Trade statistics also showed a shifting balance with only a marginal rise in exports while imports surged by almost 3 per cent. Politicians who have berated Germany for its aggressive pursuit of export growth, which they claim creates unsustainable imbalances within the euro zone, will welcome signs of a shrinking trade surplus. However, others might wonder what is weighing down the German juggernaut. Part of the answer could be the cost of power and natural gas, the feedstock of the German chemical industry.

German manufacturers are in vocal rebellion over energiewende, the country's expensive renewable energy strategy. Up until now, its cost was borne by consumers, but in a vote-grabbing strategy adopted by Angela Merkel, the chancellor, it may soon be dumped in the laps of manufacturers. Kurt Bock, chief executive of BASF, the chemical giant, recently gave warning that energy-intensive companies, such as BASF, might transfer production abroad, if faced with additional costs. The chemicals chief was pointing clearly at the United States, where shale gas has given the U.S. chemical industry an unprecedented boost and competitive advantage, one that has cast a huge shadow over European rivals. The price of gas imported into Europe from Russia is almost triple the cost for American industry.

It's not just a problem for German manufacturers, but the country's entire economy, reckons IHS, the energy consultancy. In a recent report, "The Challenge to Germany's Global Competitiveness in a New Energy World," IHS gives warning of investment leakage as firms flee Germany's high energy costs and shift capital to the lower-cost North American environment. Export-oriented firms account for more than half of the country's GDP and it is telling that the biggest component of the output decline in October was durable goods, which fell by 4.5 per cent.

IHS reckons that the challenge facing Germany with a 10 per cent rise in electricity costs over 12 months, is equivalent to the labour cost dilemma of a decade ago which threatened large swathes of German manufacturing with redundancy. The question is whether Germany has the political ambition to deal with its energy problems, which must be tackled not just at a national and local political level, but also at a European Union level. The EU has adopted green energy targets that the EU's Industry Commissioner, Antonio Tajani, believes will lead to a "massacre" of jobs.

Political reform will not be enough to substantially reduce Europe's energy costs. The continent will increasingly become dependent on Russian, Middle Eastern and African imports. However, no one should discount the ability of German manufacturers to adapt and innovate while under cost pressure. It is these skills that, in the end, may enable German and other European manufacturers to innovate and survive while North American industry wallows in a glut of cheap gas.

Consider the wide gap in energy efficiency between those countries in possession of abundant energy resources, and those that lack them, as shown by the most recent (2011) figures from the U.S. Energy Information Administration. For every dollar of GDP, Germany consumed 4,300 British Thermal Units (BTU), France consumed 4,800 and Britain 3,600 BTU. However, a dollar of U.S. economic output consumed 7,300 BTU while Canada burned the roof off, requiring almost 11,000 BTU to make a buck, a rate even greater than Poland, with its legacy of Soviet coal-fired power plants.

Germany now has little choice but to increase its energy efficiency. The desperate need to get more euros out of every barrel of oil and cubic metre of natural gas will propel its engineers into energy-saving technologies and more efficient manufacturing. The question is whether American manufacturers use their improved margins to invest in better technology, or whether relief over cheap energy encourages firms to burn more fuel as they chase volume and market share. The U.S. probably has another five years of strong shale gas output before the costs of drilling into a depleting resource begin to swell. At that point, the shale revolution will have moved East, transferring the cost advantage once again to China.

Sadly, for energy-rich Canada, the issue remains the same as ever: when dollars can be dug out of the ground, you need a very good idea to persuade people to stop digging ever deeper holes.