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27 February 2022

Is Germany changing?

Within a single week, the German government announced the end of Nord Stream 2, accepted Russia’s exclusion from the Swift intra-bank communication system, supplied arms to Ukraine, and committed itself to the Nato 2% defence spending target.

These are big shifts. Perhaps even more so is the German public debate's tonal shift. For the first time since I can remember, there is public outrage against SPD politicians, like Gerhard Schröder, Manuela Schwesig, and a group of other SPD grandees in Vladimir Putin’s pocket. The German media have reassessed 16 years of Angela Merkel, her energy policy, and her special relationships with dictators.

A lot changed in a week, but don’t be complacent about the sheer scale of what is yet to happen. And look at the small print. The Swift sanctions exclude transactions for oil and gas. Of course they do. Germany can’t keep importing gas, and then not pay for it. The weapons Germany is now ready to send Ukraine won’t affect the outcome of the war. On Nord Stream 2, Germany had no choice. The Americans would have sanctioned every shareholder, every customer, and every SPD politician involved with it. It was a smart move to pre-empt this.

What still needs to change in Germany, and what did not change last week, is what I would call supply-chain Mercantilism. It is a modern version of Colbertism, the pursuit of trade surpluses as a political objective. This is not about governments defending the interests of their companies. Everybody does that. It is not even about exports. It is about export surpluses. Germany would consider a current account deficit a policy failure. What you never hear in a German policy debate is that, globally, exports have to equal imports, and that savings have to equal investments. Until Germany addresses the neo-Mercantilist mindset, the change will be limited to superficial appearances, good enough to impress, but not with much substance.

The real issue is not now how we pay Russia, but what we pay Russia for. Germany has made itself dependent on gas from Russia, a dependency that will not be easy to reverse. Germany needs it both for electricity generation and heating. More importantly, it is dependent on Russian gas to cap energy costs for its corporate sector, a potential threat to competitiveness. Olaf Scholz has given the order to his government to examine alternatives to Russian gas. That’s a good start. But I see no way for Germany to compensate fully for Russian gas imports during a supply crisis. The dependence on Russia did not go away during the last week.

If you want to assess the scale of the German transformation, my advice would be to focus on long-term policy shifts. Robert Habeck, the economics minister, has been the driving force behind the strategy to invest in renewable energy sources. This will make energy cheaper and cleaner. But as a by-product, it also increases Germany’s dependence on gas. Since his Green party opposes both nuclear energy and coal, Germany will remain reliant on gas in two ways: as a transitional energy source until the renewable sources hit critical mass, and as a permanent source during periods when renewable output is low. The Greens and the corporatists in the SPD do not agree on much, but they agree on gas.

This means Germany will remain dependent on Russia for a long time, unless the EU builds up alternative gas supply sources and channels, such as the transport of liquefied natural gas from Spain. Until this happens, I would withhold judgement on the scale of the transformation. And the corporate sector remains powerful.

But starting from where we were, last week was a good week because it changed the debate. The test will come when Germany has to make some really hard choices. That has not happened yet.

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