There’s something ironic about an “inflation-busting” plan that involves billions in government expenditures.
But, when the chips are down and the stakes are high, you do what you have to, and in Germany’s case that means throwing another €65 billion at a spiraling energy crisis which threatens to plunge the world’s fourth-largest economy into a deep recession.
The package of measures, unveiled in Berlin on Sunday by Olaf Scholz, Saskia Esken, Omid Nouripour and Finance Minister Christian Lindner following 22 hours of inter-party negotiations, is the third since Scholz became Chancellor. Together, the relief plans sum to almost €100 billion.
Germany is desperate to forestall a nightmare scenario wherein households and businesses are compelled to shoulder the crushing burden of the crisis, which Scholz on Sunday called “Putin’s responsibility.”
As regular readers will readily attest, I’m avowedly biased against Putin’s Russia. Not Russia. And certainly not Russians. But Putin’s Russia, the oligarchic kleptocracy — the protection racket that funnels the nation’s wealth directly into the pockets of a (literal) handful of people obliged to flatter a KGB agent who, in old age, has given himself over to what The New Yorker in 2014 described as “a vision of a Eurasian Russian imperium, fending off Western decay.”
That said, Germany’s crisis isn’t all “Putin’s responsibility,” as Scholz suggested. It takes two parties to complete a natural gas transaction: A seller (in this case Russia) and a buyer (in this case Germany). Although Putin hasn’t always been the cartoonish antagonist we know him as today, he’s never been the sort of person you’d want to entrust with your country’s energy security. And Germany did just that (familiar figure below).
When you give an autocrat leverage, he’ll take it. Especially when he’s trained as an intelligence operative.
Following the onset of Putin’s “special military operation” in Ukraine, Russia gradually throttled Germany by curbing gas flows in steps. Meanwhile, the Scholz government attempted to balance the country’s energy security against the necessity of showing leadership in Europe’s efforts to cripple the Russian economy and bolster Ukraine’s defense capabilities. It was an impossible juggling act.
In June, economy Minister Robert Habeck described a Lehman-style domino effect, as bailout discussions for energy giant Uniper picked up in earnest. In July, the company received a rescue package worth €9 billion. Last week, the utility requested another €4 billion after its liquidity position worsened in the face of a parabolic surge in gas and power prices.
Germany did succeed in filling storage ahead of schedule (to 85% as of Saturday), but Gazprom’s announcement that the Nord Stream won’t reopen following maintenance suggested the charade is over. The decoupling is complete. The German economy will sink or it’ll swim. Germans will freeze or they won’t. The country’s industrial complex will survive or it’ll fail. Whatever happens, Russia won’t be subsidizing the situation anymore.
Energy inflation in Germany is running near 36%. Household energy costs, which include electricity, gas and other fuels, rose more than 43% from the same period in 2021 over the summer (figure below). Preliminary figures for August showed overall inflation rose 7.9% YoY last month.
European leaders are set to meet this week to work towards a bloc-wide pact to lessen the strain from surging energy costs, which helped drive inflation to record highs. Gas and power prices retreated on news that Brussels is poised to intervene, but Gazprom’s late Friday announcement risked upending things anew.
Germany said Sunday that the federal government’s share of the new package will likely come to €40 billion. The government described “limited financial wiggle room” within budget restrictions. The plan includes all manner of handouts. I generally abhor the term “handout,” but I’m not sure what else to call one-off lump sum payments (€300 to pensioners and €200 to university students), rent subsidies, higher welfare and child benefit payments, grid subsidies, a shield against exorbitant costs for “basic consumption” electricity and an extension of a (popular) discounted rail ticket.
Germany will also look to cap energy company profits and may redistribute them. Lindner said the cost of the plan could rise if power prices keep going up. The windfall tax on electricity firms was rebranded as a “coincidence tax.” Apparently, FDP thought alternatives carried a negative connotation. Berlin will also pull forward the implementation of the planned global minimum corporate tax.
Some companies, Scholz explained, are “using the fact that the high price of gas determines the price of electricity [to] make a lot of money.” That’s suboptimal from a societal perspective, so the government “resolved to change the market organization in such a way that these random profits no longer occur or that they are skimmed off.”
Russia, Scholz went on to say, “is no longer a reliable energy partner.”
22 years ago, while speaking through an interpreter to the BBC in Moscow, Putin called Russia “part of the European culture.” “I cannot imagine my own country in isolation from Europe and what we often call the civilized world,” he said. “So it is hard for me to visualize NATO as an enemy.”
So trying to sanction Russia to oblivion was to the delight to the same people who now think it is unfair to use Energy as a weapon . Two sides to every conflict it seems. This will be resolved because even the most stubborn individuals (both sides ) can comprehend the word Existential (I hope )..
To be clear, though: Putin needs to be sanctioned to oblivion. I try my best to tell “both sides of the story,” so to speak, but there aren’t “good people on both sides” in this equation. This is an unmitigated disaster for Russia. He’s condemned his country for the remainder of his reign. As long as he’s in power (which is obviously going to be for the rest of his life), there’s no chance of real reconciliation with the West. And contrary to all the propaganda out there (a lot of which, by the way, is penned from the safe confines of Western cities by people hoping to get rich on a counter-narrative bandwagon which was full to capacity a half-dozen years ago), Russia isn’t going to prosper as a Chinese vassal state. For example, this idea Moscow has about spending tens of billions on yuan assets is a bad one. Those won’t be liquid. You could argue they’ll be infinitely more liquid than Russia’s hard currency claims given that those were frozen, but Elvira Nabiullina has surely warned the Kremlin that no matter what assurances Putin might get from Xi, Beijing isn’t going to just let Russia sell a giant pile of CNY assets all at once at some point down the road. Whoever succeeds Putin will need to clean up this mess and it’s not going to be easy. Especially not if the Party (the CCP) ends up with too much leverage. The China-Russia “strategic partnership” isn’t a “partnership.” It’s opportunism on Xi’s part.
I’ve always maintained Russia should be suspicious of China’s motivations.
The real problem is that NATO has been equally deceptive. That dual scenario created a position for Russia that puts them between ” A Rock and a Hard Place. ” This is one of those issues that can be articulated from both sides and there is more than enough History to justify different positions . Where are the ” Wise Men ” (or Women) when you need the most .. Really discouraging as this was planned by both sides and predictable ..
After Germany shivers through this winter and maybe the next, and emerges with a Russia-free energy structure (ME gas, US LNG, nuclear, renewable, coal, etc), it’ll be interesting to see “at what cost”. If German energy costs 2X and 3X in 2024 versus 2021, will that hollow out industry – or will they adapt?
In the meantime, Germany (and UK/Europe generally) should ready Covid-style relief for companies shutting down and workers laid off. This time, due to energy costs rather than a virus.
I agree with the sentiment in the article. Germany made their mistake by trusting Putin. I am a 100% supporter of green energy, but I’m not naïve you have to add to nuclear energy to the mix in order to make the transition. I also know that nuclear plants take along time to build. This is the only way for Germany can solve it’s energy problem in the long term.
It’s common for a later government to deal with a previous administration’s mistakes: Obama after Bush Jr.
They had a clear warning in 2014 but it didn’t change their behavior/investments, like Nordstream2.
The question here is how much do the European leaders understand that Putin will not stop with Ukraine? (Also Marine Le Pen is financed by russian petro dollars)
Ideally they capitalize on the obvious horrors in Ukraine to get their people to support the immediate economic pain rather than sticking their heads in the sand (again) and prolonging the existential risk to every free person in the region.
Don’t be naive when Trump says Putin is a great guy…