‘Putin’s Responsibility’: Germany Bails Out Households

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.”