The sanctions against Russia for the invasion of Ukraine are taking effect, but they are a boomerang that hits Germany especially hard. The Government has declared alarm 2 of the 3 provided for in the Gas Emergency Plan in view of the serious situation that would be created if, as Economy Minister Robert Habeck suspects, Moscow turns off the tap this summer. If that happens, Germany, dependent on Russian gas and with reserves at half capacity, will enter an abrupt phase of withdrawal. There is already talk of energy rationing, industrial shutdown, insolvencies, energy poverty and recession.
With the energy transition halfway through and the difficulty of finding alternative gas providers free of futures contracts, Habeck would already prepare the population for the economic war that President Vladimir Putin has opened against us. His Ministry has launched a campaign with tips to reduce consumption ranging from shortening the shower time and lowering the heating or air conditioning a couple of degrees, to unplugging all electronic devices at night or not moving the car. Although it is only 90 cents per household if we multiply it by 41 million households in the country, it is many millions a year, explains the minister, from the Greens party. The extension of nuclear power plants has been ruled out for political reasons, although the debate has arisen and with doubts about a massive return to coal to counteract a possible cut in supply, citizens have rushed to fill the shelves. Winter will be hard.
Already in the first package of sanctions against Russia, the Government warned the population that those measures will not come for free. What he did not say is that the timid growth of the economy after the Covid-19 pandemic would slow down, that more breaks would open up to the supply chain, a phase of energy insecurity would enter and inflation would run amok. It was not said that the cost of the sanctions would extend over time, accumulating their effects more and more perceptible to the citizens. Compared to last year, the price of Russian natural gas has risen by 148%, electricity by 90% and fuel by 56%.
Rising energy prices and the threat of gas shortages are causing great concern in the German economy, said Ifo President, Clemens Fuest, who put his finger on the chemical and pharmaceutical industry, for which a mere cut in the gas supply would spell ruin. The gas market situation is threatening, says Jens Sdekum, Government Advisor and professor of international economics at the Heinrich Heine University in Düsseldorf. If there is rationing and production stops, the result could be a severe recession. The same is true of the president of the Confederation of German Industry (BDI), Siegrried Russwurm.
The two alert levels activated so far do not entail state intervention in the market, but if the third is activated, the panorama will change. There will be rationing and electricity companies will be able to pass on higher prices directly to their customers to force savings. The law prioritizes supply to homes and strategic infrastructure in case of shortage, but it would open up a scenario never seen before for companies, especially in the chemical sector, the epicenter of industrial activity.
A stoppage due to lack of gas would be more drastic and harmful than the Corona pandemic, says the economist Thilo Schaefer, of the Institute for German Economics. Companies are already going through a minefield, there are still bottlenecks in the supply chain and production becomes more expensive. So much so that aluminum and ammonia, for example, have ceased to be produced partly because it is not profitable and if the preliminary products are missing there will be a ripple effect throughout the industry. We are talking about a recession, Schaefer warns.
Some analysts believe it is unnecessary to sow panic because in the European Union the principle of solidarity governs and there would be a transfer. Business confidence, however, is cloudy. The Ifo index has fallen 0.7 points to 92.3, according to the latest survey conducted by this economic research institute of some 9,000 managers. Economists forecast a decline to 92.9 points.
Uncertainty in homes and businesses is palpable. Not surprisingly, the Ifo Institute, like many other economic research institutes, has lowered its growth forecast for the German economy for this year from 3.1% to 2.5%. The BDI only forecasts 1.5%. The unions, by contrast and to compensate for the effects of inflation, ask for wage increases of 8%.
In the euphoria of sanctions, Germany has practically said yes to everything, except gas. With a dependency on Russia when the first 55% package arrived, the government tripartite, made up of social democrats, environmentalists and liberals, asked for time to reduce their dependency and Habeck, from the Greens party, went shopping. He openly turned his back on the Russian dictator to travel to the non-democratic Gulf countries in search of new contracts. He searched the United States, knocked on the door of the neighbors to the North, hastily approved the construction of two regasification plants in the North Sea to be able to import liquefied gas (LNG) and promised a new boost to renewables. The energy contracts are for the future, but the message to Russia was unequivocal: Germany will abandon its client portfolio.
Putin took note, but with energy prices skyrocketing, compensating for sanctions losses, he let the Nord Stream 1 gas pipeline flow, connecting Russia and Germany directly across the Baltic Sea. Germany, always denying her contribution to the war machine, has reduced its dependence on Russia to 35% and Habeck wants to lower it to 30% by the end of the year. For the summer of 2024, the federal government considers a further decrease in the quota to 10% of consumption possible.
A few weeks ago, an alleged problem in one of the Nord Stream 1 turbines – impossible to replace due to the sanctions – caused the volume of supply to be reduced by 60%. In the Government and in the industry the alarms went off. The plan to fill the reserves for the winter failed. With a supply of 40% above normal, it is almost impossible to fill the tanks, which are at 58% of its capacity. Next day 11, the Nord Stream 1 will dry for two weeks for maintenance. It’s commonplace, but Habeck fears Putin won’t reopen it. Putin knows how to hit the West and it is clear that the brake on exports through the Nord Stream 1 gas pipeline is part of their power struggle, emphasizes Habeck.
From June to the end of August, the Government has made available to citizens a monthly subscription for any type of public transport, except high-speed trains. I think that instead of three months it will be three years, at least, says the director of the largest energy producer in Germany, RWE, Markus Kreber. That is how long analysts believe high prices will last.
The opposition to the tripartite government, the conservatives of the Christian Democratic Union (CDU) and the Bavarian Christian Social Union (CSU) have called for a general reduction of energy taxes, almost free public transport permanently and an increase in tax relief for workers who need to travel by car. His list of demands amounts to 3,000 million. Habeck would be willing to negotiate it, but his Finance colleague, the liberal Chjristian Lidner, rejects it although in just a few months he has become the king of the debt. From promising its brake for next year, it has gone on to contract a new one worth 138,900 million. It is another mine in the field of a Germany that is discovered to be vulnerable.
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George is Digismak’s reported cum editor with 13 years of experience in Journalism