Economic

The Rhine is shrinking, endangering Europe’s top economy

By Michelle Toh and Benjamin Brown, CNN Business

Germany’s Rhine river is getting too dry, snarling supply chains and creating more problems for its struggling economy.

Water in the river has dropped to “exceptionally low” levels in some areas, disrupting shipping on the country’s most important inland waterway, German officials told CNN on Friday.

A lack of rainfall in recent months means that cargo ships are now carrying lighter loads, transport costs are soaring, and economic and power supply risks are worsening.

Last month, Germany’s Federal Institute of Hydrology warned that water flows at the Kaub gauge, located to the west of Frankfurt, were already at just 45% of average levels for this time of year. The agency said that had created “frequent obstructions” for ships.

Now, water levels are expected to fall even further before rising “very slightly” in the coming weeks, the Rhine Waterways and Shipping Authority said Friday.

The situation is reminiscent of 2018, when similar problems with the river led to a “standstill of freight shipping” and reduced German economic growth by an estimated 0.2%, according to Deutsche Bank economists.

Higher costs

Although water levels this year haven’t fallen to the same extent yet, “cargo ships already have to reduce the loading quantity,” they wrote in a report last week. “Therefore, transport becomes more expensive.”

For instance, in the Kaub gauge, water levels below 75 centimeters (29.5 inches) usually mean that a large container ship “has to reduce its upload to about 30%,” the economists said.

“There is also an increased levy in Germany to pay for cargo when water levels drop below a certain level,” UBS insurance analysts warned.

The drought could exacerbate an even bigger crisis for Europe’s biggest economy, which is already facing the risk of a recession because of an energy crisis, high inflation and supply chain bottlenecks.

Recently, Germany has resorted to firing up its coal power plants to ensure that the country retains access to electricity as Russia restricts gas supplies.

But “much of the needed hard-coal is transported from the Dutch ports of Amsterdam, Rotterdam and Antwerp by barges” along the Rhine river, adding pressure to capacity there, Deutsche Bank economists noted.

According to Henri Patricot, an oil analyst at UBS, the river’s falling water levels “is challenging shipments of energy products, which is aggravating the commodity supply situation in Europe.” The Rhine is also crucial for transporting chemicals and grain.

In a report Wednesday, Capital Economics said that while the Rhine’s troubles were “a small problem for German industry compared to the gas crisis,” it could become a bigger headache later this year.

If the drop in water levels “persists until December, it could subtract 0.2% from GDP” in the second half of the year, “and add a touch to inflation,” wrote chief Europe economist Andrew Kenningham.

Germany’s hugely important manufacturing sector could take a bigger hit. Researchers at the Kiel Institute for the World Economy have previously found that in a month of low water, the country’s industrial output can fall by about 1%.

Currently, the German shipping authority is not imposing restrictions on Rhine traffic due to low water levels.

But a spokesperson for the waterways agency said that in some instances, commercial shipping may not be viable if freight had to be reduced too significantly.

Large parts of Europe have been suffering extreme heat waves and drought. The source of London’s iconic Thames River has dried up and moved roughly five miles downstream.

High river water temperatures in France have impeded the operation of some nuclear power plants. And in northern Italy, farmers are muddling through the worst drought in 70 years, affecting the production of crops from soya to parmesan.

— Julia Horowitz contributed to this report.

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