The war in Ukraine was always going to damage Europe economically. However, experiments with Europe’s energy supply, undertaken under the pretext of fighting climate change, have made the continent excessively dependent on Russian energy imports. Already before the war, the energy crisis had started. High debt and unreformed welfare states, all facilitated by a common European currency, made Europe even less prepared, economically, for the fall-out of the war. Even Germany, the powerhouse of the Eurozone, now finds itself in dire straits.
For the first time since 1991, Germany no longer has a trade surplus. Meanwhile, skyrocketing energy prices are causing paralysis in the economic muscle of Europe, whose performance has great influence on all the other European economies.
Having a trade surplus or deficit does not mean much in itself. During some years, countries import more than they export without setting off alarms—when they are able to afford it. The import-export imbalance becomes a problem when it is combined with high debt levels, currently the situation for France, which hasn’t had a trade surplus since 2004.
Many commentators have described Germany’s strength as an exporter as the outcome of some kind of conscious policy ‘strategy,’ but this is not an accurate description. Germany has a strong industrial base, dating back for centuries, that was boosted with market-friendly reforms and a trustworthy currency after World War II. Nevertheless, this claim, that the German government has deliberately manipulated deals to artificially enhance its export sector, is frequently made by outsiders, not only by former U.S. President Trump, but also by French and Italian politicians.
What’s really going on is the result of the EU currency, the euro.
The euro has strangled other EU member states’ economies. France and Italy, for example, are no longer able to devalue their national currencies to artificially inflate politically well-connected exporting businesses. As a result, their exporters have been suffering since the euro was founded, given how the French and Italian governments have not implemented competitiveness reforms, unable to overcome public opposition. For the United States, the euro has meant that an important industrial competitor—Germany—now has a currency that is artificially undervalued, not at the instigation of German politicians, but by Southern European politicians, keen to prevent an artificially strong currency that would make life even harder for their export industries.
Germany’s competitive edge may now be nothing more than fiction. Its economic advantage has faltered over the last fifteen years despite the country’s export success, as there has been gradual wage reflation. The doping provided by an artificially undervalued currency is likely to have been at least a factor enabling politicians to create a federal minimum wage—instead of allowing sectoral agreements to set this—and to avoid the reforms needed to finance Germany’s future pension bill. In recent years, certainly with COVID, budgetary discipline has weakened. In sum, Germany’s economy wasn’t as solid as it appeared; it certainly could not withstand the shocks resulting from the war.
Both the COVID lockdowns, which disturbed supply chains, and Russia’s invasion of Ukraine have now imposed great stress on the energy sector, which has been the victim of large-scale experiments for the last two decades now. Using ‘climate change’ as an excuse, EU and national policy makers have been promoting unreliable energy sources—wind and solar power—while phasing out reliable ones, like nuclear power, domestic gas, and coal. Ignoring these traditional energy sources, to reduce CO2 emissions, without a drastic fall in living standards is unavoidable.
These large-scale European energy experiments have greatly benefited Russia, as a leading exporter of natural gas. In other words, Germany’s excessive energy dependence on Russia is not the outcome of a natural process, but rather the consequence of policies that have been artificially imposed.
With Europe’s skyrocketing energy prices, the euro is now dropping in value accordingly, which is a reflection of the challenges expensive energy brings for the European economy. The high prices of imports, up an annual 30% in May, has now also led to a German trade deficit of $1 billion, offsetting export statistics.
Chancellor Olaf Scholz has warned that Germany faces a “historic challenge,” while Rainer Dulger, head of the Confederation of German Employers’ Associations, stated that the country is facing the “toughest economic and social crisis since reunification” and that “difficult years lie ahead of us.” ING Bank thinks there is a “high probability” that both Germany and the rest of the Eurozone will enter a recession this year. Yasmin Fahimi, the head of the German Federation of Trade Unions (DGB) anticipates industrial devastation for certain sectors: “Because of the gas bottlenecks, entire industries are in danger of permanently collapsing: aluminum, glass, the chemical industry.”
As Germany and the rest of Europe try to fill gas reserves ahead of winter, Russian President Putin has not played along with this political theater, which would allow Europe to ignore him. Over the last month, Russian gas giant Gazprom has been cutting the supply of gas to Germany and the rest of Western Europe, which has lead to speculation of energy rationing and suspension of industrial production. Major cities like Hamburg are preparing for rationing of gas and warm water supply, while Germany’s largest residential landlord, Vonovia, has already decided to reduce heating for tenants in many of its apartments at night.
EU affairs think tank Bruegel estimates that “if Russian supplies get fully cut, the current demand reduction will be insufficient in most EU countries to prevent storages from running dry.” In six out of seven scenarios of Germany’s natural gas supply situation, published by its energy regulator, gas storages run completely or virtually empty this coming winter. In three scenarios, this happens as early as mid February.
Meanwhile, both Germany and Belgium are planning to shut down nuclear plants this year.
As a leading German nuclear energy expert, Björn Peters, puts it: “To stop using nuclear energy in Germany and Belgium in the middle of such an energy crisis can only be described in one word: irresponsible. Who can talk sense into the German and Belgian politicians?”
There is, however, a silver lining to the current economic storm. The EU is rethinking the place of nuclear power, and a whole range of European governments have reversed their opposition to it. At the beginning of July, the European Parliament voted to include both nuclear and gas in its “taxonomy” regulations, which provides energy sources with a label of being environmentally friendly—not that it should be the job of the EU to come up with such a classification system in the first place.
Europe, furthermore, has begun to import fracked American ‘freedom gas’—even more than Russian gas—now, even while fracking is banned within the EU. This is so obviously hypocritical that prominent voices have already expressed their support to reconsider the ban on fracking, like Bavarian PM Soeder.
Changing an energy system cannot be done overnight, so Europeans will now need to pay the price for years of irresponsible policies decided by the likes of Angela Merkel, whose government ordered the shut down of perfectly functional nuclear power plants.
At least the tide seems to be turning, as the first policy reversals can be witnessed.