Germany hopes to surpass a Russian gas cut and a bone-cold winter

Russian natural gas has fired the furnaces that create molten stainless steel at Clemens Schmees’ family foundry since 1961, when his father set up shop in a garage in western Germany.

It never occurred to Clemens that this energy flow could one day become unaffordable or completely cease. Now, Mr Schmees, like thousands of other chiefs of companies across Germany, is preparing for the possibility that his operations may face severe rationing this winter if Russia shuts off the gas.

“We’ve had a lot of crises,” he said as he sat in the company’s branch office in the eastern town of Pirna overlooking the Elbe Valley. “But we have never before had such instability and uncertainty at once.”

Such sentiments resonate this week in executive suites, at kitchen tables and in government offices as Nord Stream 1, the direct gas pipeline between Russia and Europe, was shut down for 10 days of scheduled maintenance.

Germany, the pipeline terminus and a gas transit hub for the rest of Europe, is the largest and most important economy on the continent. And the fear that President Vladimir V. Putin may not turn on the gas again – as an expression of being close to countries opposed to Russia’s invasion of Ukraine – is particularly sharp.

In Berlin, officials have declared a “gas crisis” and triggered an emergency energy plan. Landlords, schools and municipalities have already started lowering thermostats, rationing hot water, closing swimming pools, turning off air conditioning, dimming street lighting and exhorting the benefits of cold showers. Analysts predict that a recession in Germany is “imminent”. Government officials are rushing to rescue the largest importer of Russian gas, a company called Uniper. And political leaders warn that Germany’s “social peace” could erode.

The crisis has not only set in motion a hectic climb to cope with a potentially painful crisis this winter. It has also prompted a reassessment of the economic model that made Germany a global powerhouse and produced enormous wealth for decades.

Yet “Germany is worse off than the eurozone as a whole,” said Jacob Kirkegaard, a senior fellow at the German Marshall Fund in Brussels.

More than any other economy in the region, Germany is built on industrial giants – powerful chemical, automotive, glass and steel producers – that consume huge amounts of fuel, two-thirds of what is imported. The chemical and pharmaceutical industry alone uses 27 percent of the country’s gas supply.

Most came from Russia. Before Mr Putin invaded Ukraine five months ago and launched retaliatory sanctions from Europe, the United States and their allies, Russia supplied 40 percent of Germany’s imported oil and more than 55 percent of its imported gas.

Gazprom, Russia’s gas monopoly, reduced supplies in June, and if they are further reduced, German industries could soon face fuel shortages, which will force them to downsize production, Kirkegaard said. “I do not think there are that many other European countries that need to do that,” he said.

Over the next five to eight years, until more of an ongoing transition to renewable energy is completed, the country will be “under acute pressure,” he added. “This is the period when Germany’s economy will still be fundamentally fueled by fossil fuels.”

High oil and gas prices and a difficult energy transition are not the only challenges.

A large part of Germany’s wealth comes from the export of processed goods. But even before the war, production and exports had slowed down. And now China, Germany’s largest trading partner, is expected to see significantly slower growth than in the previous decade, reporting on Friday that the economy grew by only 0.4 percent in the second quarter. This slowdown is likely to wave through other emerging countries in Asia, which is also dragging down their growth.

At the same time, Beijing has developed its own industrial manufacturers that have turned former consumers and business partners from German companies into potential competitors.

The changing landscape raises sharp questions: Is an economy built on energy-hungry industries sustainable when fuel is very expensive? Can an export-driven strategy succeed when major trading partners are vulnerable to sanctions and when countries are more prepared for the security risks of globalized trade?

Some economists have argued that the German business models were partly based on an erroneous assumption and that cheap Russian gas was not as cheap as it looked.

Economist Joseph Stiglitz, a Nobel laureate, said the market did not precisely price the risk – however unlikely it might have seemed at the time – that Russia might decide to reduce or withhold gas in order to exert political pressure.

It would be like calculating the cost of building a ship without including the cost of lifeboats.

“They did not take into account what could happen,” Mr Stiglitz said.

In any case, the recent series of disturbances has created political problems for Chancellor Olaf Scholz’s coalition government. Energy prices are expected to rise further. Inflation last month was 7.6 percent. Investor confidence in Germany has fallen to its lowest point in a decade.

Scholz gathered the leaders of large German companies in Berlin this week to discuss how the Ukraine war and economic sanctions against Russia are affecting their companies.

The industry has long had a major voice in Germany’s political decision – making and enjoys a relationship that has been criticized by some.

“It is this lobby that is brutal and keeps trying to set the course,” said Norbert Röttgen, a Conservative lawmaker, former environment minister and an opponent of the decision to build another Nord Stream pipeline to Germany. (The opening of the $ 11 billion pipeline was suspended in February.)

Households, hospitals and essential services will be considered priorities if gas rationing becomes inevitable, but industry representatives have put forward their cases in Berlin.

“Industry will largely play a major role in dictating how things go and what measures will be taken and which will not,” said Matthias Breuer, an associate professor at Columbia University’s Graduate School of Business. Influential business and political figures will argue that it will be more important to “keep people in work than to keep them warm.”

Regardless of the political choices, he added, “everyone understands that this war really means a great loss of wealth for everyone in the West as well as in Russia.”

Much of the economic debate in Germany now revolves around how large these losses can be, especially if the energy supply from Russia is suddenly stopped. The conclusions have ranged from mild to catastrophic.

Tom Krebs, an economist at the University of Mannheim and adviser to the Treasury, estimated in May that Germany’s national output could fall as much as 12 percent once ripple effects on industries other than energy and consumers were taken into account.

Looking forward to winter, Mr Krebs said that much depended on temperature and Russian gas supply levels.

“The best case scenario is stagnation with high inflation,” he said. But in the long run, he argued, Germany could become more competitive if it manages energy conversion well and provides rapid and significant public investment to create the necessary infrastructure.

Marcel Fratzscher, chairman of the German Institute for Economic Research, agreed. Germany’s industrial success is based on added value more than cheap energy, he said. Most German exports, he said, are “highly specialized products – it gives them an advantage and makes them competitive.”

Labor policy will also have an impact.

Wage negotiations for the industrial sector are scheduled to begin in September. The powerful union IG Metall will seek a wage increase of 8 percent for its 3.9 million members. And from 1 October, a new minimum wage law will for the first time establish a common national rate – 12 euros per hour.

So far, supply chain breakdowns are still causing headaches, and companies that had only just begun to recover from the Covid-19 pandemic are busy devising contingency plans for gas shortages.

Beiersdorf, a manufacturer of skin care products, including Nivea, has had an emergency team in place since May to draw up backup plans – including the preparation of diesel generators – to ensure production continues to run.

At Schmees, high costs have already forced an oven to shut down, cutting back on the foundry’s ability to meet deadlines. Customers awaiting deliveries of stainless steel include companies operating massive turbines used in icebreaker ships and artists using it in their sculptures.

Schmees, an energetic man who is proud to have nurtured a strong corporate culture, plans to ask his employees to work a six-day week until the end of the year to ensure he can complete all of the company’s orders per year. December. As long as he bets that Germany’s natural gas supply will last if Russia cuts off power completely.

“The tragedy,” said Mr. Schmees, “is that we have only now realized what we have played away with this cheap gas from Russia.”

Katrin Bennhold contributed reporting from Berlin.

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