Germany is confronted with the economic consequences of the Ukraine war. The cost of alternative energy (necessary after the sanctions against Russia) has caused serious problems for the government. She doesn’t want to be the next victim of Spring Day in Europe. Governments in Europe are collapsing like a house of cards. Bulgaria came first, followed by Italy. And now a real domino effect begins.
Habeck turns on the light
German Economics Minister Robert Habeck warned in March that the Russia-Ukraine conflict would make the country “poorer” as skyrocketing energy costs would drive record inflation and plunge Europe’s largest economy into recession. He had said: “It is not possible for this to end without costs for German society, that is unthinkable.”
German inflation rose to a 40-year high of 8.8 percent. In August alone, German energy prices rose by 35.6 percent and food prices by 16.6 percent. Europe’s largest economy, Germany, is on the brink of a slump that could last well into next year, the Bundesbank, the country’s central bank, said in a monthly report. “The signs of a recession for the German economy are increasing,” says the report. As a result of Russia’s closure of the Nord Stream gas pipeline in early September, the central bank cited “unfavorable developments in the gas market”.
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Germany tries to import less energy from Russia. Before the invasion of Ukraine, 55% of Germany’s gas supply came from Russia. Although that number is falling, German industry has warned that shortages could lead to production problems. According to the Bundesbank, even if rationing could be avoided, companies would still be forced to reduce or stop production.
Russia ‘a better energy partner’
Habeck recently said that the spending capacity of German business and industry is a bit of a concern given high energy prices. According to Habeck, who also noted that replacing Russian energy imports will cost Europe’s largest economy €60 billion this year and €100 billion next year. These are just the direct effects of importing alternative energy. The cost of advertising citizens’ energy use and receiving subsidies are other major costs Germans face.
The implication of the statement is clear. Germany’s economy minister admits that importing energy from Russia is far more beneficial than from other countries. The cost of alternative energy is huge for the country and Germany expects a course correction.
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Germany has relied on US LNG exports after Russia cut supplies. According to that Energy Information Management (EIA), the United States overtook other LNG exporters in the first half of 2022 as the country ramped up shipments to Europe amid the Ukraine conflict. About 71% of US LNG exports went to the European Union and the UK in the first five months of this year. That’s how dependent large European countries have become on the United States. The whole motive of not being dependent on any particular country is in hot water as European nations, including Germany, now rely heavily on the US.
All in all, it was the US that convinced Germany to shut down Nord Stream 2. The US benefited from the move and sold its LNG to Europe at spot prices. Now Germany recognizes the dangers of being dependent on the US for LNG. That is why Chancellor Olaf Scholz will sign contracts for the procurement of liquefied natural gas (LNG) during his weekend visit to the United Arab Emirates. Through the recent statement mentioned above, it is also sending the signal to the US to lower energy prices, otherwise it has options in hand. Also, there is a possibility that Germany could open Nord Stream 2 at any time as it is fed up with being subject to the US.
