Can Germany do without Russian gas?

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OLAF SCHOOLZ reacted on March 27 with unusually harsh words to a question from Anne Will, a popular Sunday talk show host, about studies by economists that suggest an immediate halt to Russian energy imports would only reduce German economic growth modestly. “Their view is wrong,” Scholz said, adding that it was “irresponsible” to feed numbers into mathematical models to come to that conclusion.

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For several weeks, leading economists debated passionately among themselves and with Mr. Scholz’s ministers the possible consequences of a ban on Russian energy. The government, along with industry lobbies and think tanks close to it or trade unions, say a ban would lead to high unemployment, mass poverty and a recession. But some independent economists, as well as a number of opposition politicians, insist the consequences would be manageable, if substantial.

The debate may yet become moot. On March 30, Robert Habeck, Germany’s economy and climate minister, activated the first stage of an emergency plan to manage the gas supply in case Russia turns off the tap. Russia is threatening to do so because Germany and the rest of the g7 refuse to accept his demand that “unfriendly” countries pay for gas in rubles rather than euros or dollars, which sanctions have made it difficult for Russia to use.

But if the gas keeps flowing, the debate over the morality of buying it will also continue. Germany imported around 1.8 billion euros ($2 billion) worth of Russian gas, oil and coal per month, helping to fund Vladimir Putin’s war in Ukraine. Mr Scholz says stopping it would hurt Germany more than Russia, even though other European governments have called for an embargo. This week the MKI, a think tank close to German trade unions, has published a study that backs up the government’s grim record. He claims that stopping energy imports from Russia would lead to a deep recession, with GDP down more than 6% even though alternative suppliers could represent half of the gas supplied by Russia. These are rough estimates. “It is impossible to seriously model a stoppage of gas imports”, warns Sebastian Dullien of the MKI.

the MKI is in rare agreement with industrial lobbies such as the BDI, the association of German industry. At the beginning of March, Siegfried Russwurm, the BDI‘s boss, warned that talking about a EU the Russian energy embargo is “playing with fire” and would harm the EU more than the aggressor. BASF, a German chemicals giant, said if its gas supply is cut in half, it will have to shut down production at the world’s largest chemical plant in Ludwigshafen, which employs around 40,000 people. Hundreds of thousands of related jobs would be at risk. Martin Brudermüller, the boss of BASFtold investors on March 26: “There is no way to replace Russian gas in the short term.”

These pessimistic assessments are contradicted by the German Institute for Economic Research (DIW); a working paper co-authored by a group of German and international economists and published by I FO, another research team; and ECONtribute, an economics research group involving the universities of Bonn and Cologne. These suggest that German GDP would suffer a drop of up to 3% if Russian energy imports were to cease immediately. This is significantly less than the 4.5% drop in German GDP in 2020, the first year of the covid-19 pandemic, which Germany stoically managed to overcome.

“The big problem is gas,” says Moritz Schularick, one of the authors of the article. The loss of Russian oil and coal could be managed relatively easily, as they can be replaced by imports from other countries. But Germany gets about half of its gas from Russia. An increase in gas imports from other countries, the substitution of coal or nuclear electricity for gas electricity and a regular filling of storage facilities during the summer could only offset 70% of that, he says.

The central question is how German industry would cope. Everyone agrees that finding quick substitutes for gas in industrial processes is a daunting task. Yet Benjamin Moll, one of the paper’s other authors, notes that during World War II the US economy showed an amazing ability to adjust to similar shortages. When in 1940 US President Franklin Roosevelt demanded that American companies produce 50,000 fighter planes a year, economists deemed his demand foolish, since annual production of planes for the military in 1939 was lower. to 3,000. By the end of the war, America was producing 300,000 fighters a year.

In an interview with Welt am Sonntag, a weekly, Wolfgang Schäuble, former Minister of Finance, argues that people sometimes have to make substantial sacrifices for their way of life and their freedoms. Moreover, prolonging the war in Ukraine is also costly for European economies. “There are a lot of hidden costs because of the uncertainty,” says Luis Garicano, a Spanish member of the European Parliament, who supports a EU energy embargo. Mr Garicano fears such an embargo could come after Russia has further escalated its brutal war. “You shouldn’t wait for that,” he said.

This article appeared in the Europe section of the print edition under the headline “Can Germany give up Russian imports?”

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