It never occurred to Clemens that this flow of energy might one day become inaccessible or stop altogether. Now Mr. Schmees, like thousands of other company chiefs across Germany, is trying to prepare for the possibility that his business could face severe rationing this winter if Russia shuts off natural gas. “We had a lot of crises,” he said, sitting in the company’s branch office in the eastern town of Pirna, overlooking the Elbe River valley. “But never before have we had such volatility and uncertainty at the same time.” Such sentiments are echoing this week in executive suites, kitchen tables and government offices as Nord Stream 1, the direct gas pipeline between Russia and Europe, shut down for 10 days of scheduled maintenance. Germany, the terminus of the pipeline and gas transit hub for the rest of Europe, is the largest and most important economy on the continent. And anxiety that President Vladimir V. Putin might not turn the natural gas back on — in a show of inconsistency with countries opposed to Russia’s invasion of Ukraine — is especially acute. In Berlin, officials declared a “gas crisis” and activated an energy emergency plan. Already landlords, schools and municipalities are turning down thermostats, rationing hot water, closing swimming pools, turning off air conditioners, dimming street lights and extolling the benefits of cold showers. Analysts predict a recession in Germany is “imminent”. Government officials are scrambling to rescue the largest importer of Russian natural gas, a company called Uniper. And political leaders are warning that Germany’s “social peace” could unravel. The crisis has not only sparked a frantic scramble to manage a potentially painful crisis this winter. It also prompted a reassessment of the economic model that turned Germany into a world power and generated enormous wealth for decades. However, “Germany is worse off than the eurozone as a whole,” said Jacob Kirkegaard, senior fellow at the German Marshall Fund in Brussels.
The Russia-Ukraine War and the Global Economy
Card 1 of 7 An extended conflict. Russia’s invasion of Ukraine has had ripple effects around the world, compounding stock market woes. The conflict has caused skyrocketing gas prices and product shortages, and has prompted Europe to reassess its reliance on Russian energy sources. Russia’s economy is facing a slowdown. Although pro-Ukrainian countries continue to impose sanctions against the Kremlin in response to its aggression, the Russian economy has avoided a crippling collapse for now thanks to capital controls and interest rate hikes. But the head of Russia’s central bank warned that the country is likely to face a sharp economic downturn as its stockpile of imported goods and spare parts is low. Trade barriers are rising. The invasion of Ukraine has also unleashed a wave of protectionism as governments, desperate to secure goods for their citizens amid shortages and rising prices, erect new barriers to stop exports. But the restrictions make the products more expensive and even harder to find. Base metal prices are soaring. The price of palladium, used in car exhaust systems and mobile phones, has soared amid fears that Russia, the world’s biggest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also risen. More than any other economy in the region, Germany’s economy relies on industrial giants – powerful producers of chemicals, cars, glass and steel – that consume huge amounts of fuel, two-thirds of which is imported. The chemical and pharmaceutical industries alone use 27 percent of the country’s natural gas supply. Most of it came from Russia. Before Mr Putin invaded Ukraine five months ago and drew retaliation from Europe, the United States and its allies, Russia supplied 40% of Germany’s imported oil and more than 55% of its imported gas. Gazprom, Russia’s natural gas monopoly, cut supplies in June and if they cut further, German industries could soon face fuel shortages that would force them to cut output, Mr. Kirkegaard said. “I don’t think there are that many other European countries that have to do that,” he said. Over the next five to eight years, until the ongoing transition to renewables is complete, the country will be “under acute pressure,” he added. “This is the period of time that Germany’s economy will continue to be powered primarily by fossil fuels.” High oil and natural gas prices and the difficult energy transition are not the only challenges. Much of Germany’s wealth comes from the export of manufactured goods. However, even before the war, its production and exports had slowed. And now China, Germany’s biggest trading partner, is expected to see significantly slower growth than in the previous decade, reporting on Friday that the economy grew just 0.4 percent in the second quarter. This slowdown is likely to ripple through other emerging nations in Asia, slowing their growth as well. At the same time, Beijing is developing its own industrial producers, turning one-time consumers and business partners of German companies into potential competitors. The changing landscape raises sharp questions: Is an economy based on energy-hungry industries sustainable when fuel is too expensive? Can an export-led strategy succeed when major trading partners are vulnerable to sanctions and when countries are more acutely attuned to the security risks of globalized trade? Some economists argued that German business models were partly based on a faulty assumption and that cheap Russian gas was not as cheap as it seemed. Nobel laureate economist Joseph Stiglitz said the market had failed to accurately assess the risk – however unlikely it seemed at the time – that Russia could decide to cut or stop natural 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 consider what could happen,” Mr. Stiglitz said. In any case, the latest series of unrest has created political problems for Chancellor Olaf Solz’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 gathered 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. Industry has long had an outsized voice in Germany’s policymaking, enjoying a relationship that has been criticized in some quarters. “This lobby is brutal and keeps trying to set the course,” said Norbert Röttgen, a conservative lawmaker, former environment minister and opponent of the decision to build a second Nord Stream pipeline to Germany. (The opening of the $11 billion pipeline was suspended in February.) Households, hospitals and essential services will be seen as priorities if the distribution of natural gas becomes unavoidable, but industry representatives have pleaded their cases in Berlin. “Industry is going to have a pretty big role in dictating how things go and what measures will and will not be taken,” said Matthias Breuer, an associate professor at Columbia University’s Graduate School of Business. Influencers and influential political figures will argue that it will be more important to “keep people busy 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 how big those losses could be, particularly if Russian energy supplies were suddenly cut off. The conclusions range from mild to catastrophic. Tom Krebs, an economist at the University of Mannheim and an adviser to the finance ministry, estimated in May that Germany’s national output could fall by as much as 12 percent once the ripple effects on industries beyond energy and consumers are taken into account. . Ahead of winter, Mr Krebs said much depended on the temperature and Russian gas supply levels. “The best case scenario is stagnation with high inflation,” he said. But in the long run, he argued, Germany could emerge more competitive if it manages the energy transition well and provides rapid and substantial public investment to build the required infrastructure. Marcel Fratzscher, president of the German Institute for Economic Research, agreed. Germany’s industrial success is based more on added value than cheap energy, he said. Most German exports, he said, are “highly specialized products – that gives them an edge and makes them competitive.” Labor policy will also have an impact. Wage negotiations for the industrial sector are scheduled to begin in September. The powerful IG Metall union will seek an 8% pay rise for its 3.9 million members. And from October 1, a new minimum wage law will introduce a single national rate for the first time — €12 an hour. For now, supply chain disruptions continue to cause headaches, and businesses just beginning to recover from the Covid-19 pandemic are busy drawing up contingency plans for gas shortages. Beiersdorf, maker of skin care products including Nivea, has set up a crisis team since May to draw up back-up plans — including preparing diesel generators — to ensure production continues to run. At Schmees, high costs have already forced the closure of one furnace, cutting the foundry…
