Germany hopes to weather Russian gas cut and freezing winter

Russian natural gas has powered the furnaces that create molten stainless steel at Clemens Schmees’ family foundry since 1961, when his father moved to a garage in western Germany.

It never crossed Clemens’ mind that this flow of energy might ever become unaffordable or cease altogether. Now Mr Schmees, like thousands of other business leaders across Germany, is scrambling to prepare for the possibility that his operations will face strict rationing this winter if Russia cuts gas.

“We had many crises,” he said, sitting in the company’s branch in the eastern town of Pirna, overlooking the Elbe Valley. “But we have never experienced such instability and such uncertainty, all at once.”

Such sentiments reverberate this week in executive suites, at kitchen tables and in government offices as Nord Stream 1, the direct gas pipeline between Russia and Europe, was shut down for 10 days of scheduled maintenance.

Germany, the pipeline terminus and gas transit hub for the rest of Europe, is the continent’s largest and most important economy. And concern that President Vladimir V. Putin will not turn on the gas — as a demonstration of a tightrope policy with countries that oppose Russia’s invasion of Ukraine — is particularly live.

In Berlin, the authorities have declared a “gas crisis” and launched an emergency energy plan. Already, homeowners, schools and municipalities have begun to lower thermostats, ration hot water, shut down swimming pools, turn off air conditioners, dim streetlights and encourage the benefits of cold showers. Analysts predict that a recession in Germany is “imminent”. Government officials are rushing to bail out Russia’s biggest gas importer, a company called Uniper. And political leaders warn that German “social peace” could collapse.

The crisis has not only triggered a frantic escalation to manage a potentially painful crisis this winter. It has also prompted a reassessment of the economic model that made Germany a world power and produced enormous wealth for decades.

Still, “Germany is worse off than the eurozone as a whole,” said Jacob Kirkegaard, senior fellow at the German Marshall Fund in Brussels.

More than any other economy in the region, Germany relies on industrial giants – powerful producers of chemicals, automobiles, glass and steel – which consume huge amounts of fuel, two-thirds of which are imported. The chemical and pharmaceutical industries alone use 27% of the country’s gas supply.

Most were from Russia. Before Mr Putin invaded Ukraine five months ago and triggered retaliatory sanctions from Europe, the United States and their allies, Russia delivered 40% of Germany’s imported oil and more 55% of its imported gas.

Gazprom, the Russian gas monopoly, cut deliveries in June, and if they are further reduced, German industries could soon face fuel shortages that will force them to cut production, Kirkegaard said. “I don’t think there are many other European countries that need to do this,” he said.

Over the next five to eight years, until a more ongoing transition to renewable energy is completed, the country will be “under acute pressure”, he added. “This is the period during which the German economy will still be mainly powered by fossil fuels.”

High oil and gas prices and a difficult energy transition are not the only challenges.

Much of Germany’s wealth comes from exports of manufactured goods. Yet even before the war, its production and exports had slowed. And now China, Germany’s biggest trading partner, is expected to grow significantly slower than in the previous decade, reporting on Friday that the economy grew just 0.4% in the second trimester. This slowdown should have repercussions on other emerging Asian countries, also slowing down their growth.

At the same time, Beijing has developed its own industrial producers, turning former consumers and business partners of German companies into potential competitors.

The changing landscape raises pointed questions: is an economy based on energy-intensive industries sustainable when fuel is very expensive? Can an export-oriented strategy succeed when major trading partners are vulnerable to sanctions and when countries are more sensitive to the security risks of global trade?

Some economists have argued that German economic models were partly based on a faulty assumption and that cheap Russian gas was not as cheap as it looked.

Nobel Prize-winning economist Joseph Stiglitz said the market had failed to accurately price the risk – however unlikely it might seem at the time – that Russia might decide to cut or hold back. gas to exert political pressure.

It would be like calculating the cost of building a ship without including the cost of lifeboats.

“They didn’t take into account what could happen,” Mr. Stiglitz said.

Either way, the latest round of disruption has created political problems for Chancellor Olaf Scholz’s coalition government. Energy prices are expected to rise further. Inflation last month was 7.6%. Investor confidence in Germany has fallen to its lowest point in a decade.

Mr. Scholz brought together the leaders of major German companies in Berlin this week to discuss how the war in Ukraine and economic sanctions against Russia are affecting their businesses.

The industry has long had an outsized voice in German policy-making, enjoying a relationship that has come under criticism from some.

“It is this lobby that is brutal and continues to try to set the course,” said Norbert Röttgen, a conservative lawmaker, former environment minister and opponent of the decision to build a second Nord Stream gas pipeline to Europe. Germany. (The opening of the $11 billion pipeline was suspended in February.)

Households, hospitals and essential services will be given priority if gas rationing becomes unavoidable, but industry representatives have made their case in Berlin.

“Industry will have an important role to play in dictating how things go and what actions will be taken and what will not,” said Matthias Breuer, associate professor at Columbia University’s Graduate School of Business. Influential businessmen and politicians will argue that it will be more important to “keep people employed than to keep them warm”.

Whatever the political choices, he added, “everyone understands that this war really means a great loss of wealth for everyone in the West as well as in Russia.”

Much of the economic debate in Germany now revolves around the magnitude of these losses, particularly if Russia’s energy supply is suddenly interrupted. The findings range from mild to disastrous.

Tom Krebs, an economist at the University of Mannheim and an adviser to the Ministry of Finance, estimated in May that German domestic output could fall by up to 12% once the ripple effects on industries beyond are taken into account. energy and consumers.

As for winter, Krebs said a lot depends on the weather and levels of Russian gas delivery.

“The best case scenario is stagnation with high inflation,” he said. But in the longer term, he argued, Germany could become more competitive if it manages the energy transition well and provides rapid and significant public investment to create the required infrastructure.

Marcel Fratzscher, president of the German Institute for Economic Research, agrees. Germany’s industrial success is based more on adding value than cheap energy, he said. Most German exports, he said, are “highly specialized products – which gives them an edge and makes them competitive”.

Labor policy will also have an impact.

Wage negotiations for the industrial sector are due to begin in September. Powerful IG Metall union will demand an 8% pay rise for its 3.9 million members. And from October 1, a new minimum wage law will establish a single national rate for the first time – 12 euros per hour.

For now, supply chain outages are still causing headaches, and companies that were just beginning to recover from the Covid-19 pandemic are busy making contingency plans in the event of supply shortages. gas.

Beiersdorf, maker of skincare products including Nivea, has had a crisis team in place since May to draw up backup plans – including the preparation of diesel generators – to ensure production continues.

At Schmees, high costs have already forced the shutdown of a furnace, reducing the foundry’s ability to meet deadlines. Customers expecting stainless steel deliveries include companies that operate massive turbines used in icebreaker ships and artists who use it in their sculptures.

Mr. Schmees, an energetic man who prides himself on nurturing a strong company culture, plans to ask his employees to work a six-day week until the end of the year, to ensure that ‘he can fulfill all the company’s orders in December. This is how long it bets Germany’s natural gas supplies will hold if Russia completely cuts off the flow.

“The tragedy,” Mr. Schmees said, “is that we’ve only just realized what we’ve bet on with this cheap gas from Russia.”

Katrin Bennhold contributed reporting from Berlin.

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