Russian natural gas has fired the furnaces that produce molten stainless steel in Clemens Schmees’ family foundry since 1961, when his father opened a shop in a garage in western Germany.
It never occurred to Clemens that this flow of energy could one day become unaffordable or stop altogether. Now Mr. Schmees, like thousands of other chiefs at companies across Germany, is scrambling to prepare for the possibility that his operations could face severe rationing this winter as Russia turns off the gas.
“We’ve had many crises,” he said, sitting in the company’s branch office in the eastern city of Pirna, overlooking the Elbe valley. “But we’ve never had such instability and uncertainty, all at once.”
Such sentiments are echoing this week in executive suites, at kitchen tables and in government offices like North Stream 1, the direct gas pipeline between Russia and Europe was shut down for 10 days of scheduled maintenance.
Germany, the terminus of the pipeline and a gas transit hub for the rest of Europe, is the continent’s largest and most important economy. And the fear that President Vladimir V. Putin may not turn the gas back on — as a show of selflessness with countries opposing Russia’s invasion of Ukraine — is particularly acute.
In Berlin, officials have stated that “gas crisis” and activated 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 lights and encouraging the benefits of cold showers. Analysts predict a recession in Germany is “imminent”. Government officials rush to rescue the largest importer of Russian gas, a company called Uniper. And political leaders warn that Germany’s “social peace” could unravel.
The crisis has not only sparked a frenetic scramble to manage a potentially painful crunch this winter. It has also led to a re-evaluation of the economic model that has made Germany a global superpower and spawned vast wealth for decades.
Still: “Germany is worse off than the eurozone as a whole,” he said Jacob Kirkegaarda senior fellow at the German Marshall Fund in Brussels.
The war between Russia and Ukraine and the world economy
A far-reaching conflict. The Russian invasion of Ukraine has had a ripple effect around the world, contributing to the misery in the stock market. The conflict has led to dizzying spikes in gas prices and product shortages, and has prompted Europe to reconsider its dependence on Russian energy resources.
More than any other economy in the region, Germany’s is built on industrial giants — powerful chemical, automobile, glass and steel producers — that consume vast amounts of fuel, two-thirds of which is imported. The chemical and pharmaceutical industries alone use 27 percent of the country’s gas supply.
Most came from Russia. Before Mr Putin invaded Ukraine and retaliated five months ago sanctions from Europe, the United States and its allies, Russia supplied 40 percent of Germany’s imported oil and more than 55 percent of its imported gas.
Gazprom, the Russian gas monopoly, cut deliveries in June, and if they are further reduced, German industries could soon face fuel shortages that will force them to scale back production, Mr Kirkegaard said. “I don’t think there are that many other European countries that have 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. “That is the period in which the German economy will in principle still be fueled by” fossil fuels.”
High oil and gas prices and a difficult energy transition are not the only challenges.
Much of Germany’s wealth comes from the export of industrial goods. But even before the war, production and exports had slowed down. And now ChinaGermany’s largest trading partner, is expected to significantly slower growth than in the previous decade, reported Friday that the economy grew only 0.4 percent in the second quarter. That slowdown is likely to affect other emerging countries in Asia and slow down their growth as well.
At the same time, Beijing has developed its own industrial producers, turning one-time consumers and business partners of German companies into potential competitors.
The changing landscape raises focused questions: is an economy built on energy-hungry industries sustainable when fuel is very expensive? Can an export-oriented strategy succeed when key trading partners are vulnerable to sanctions and when countries are more security risks of globalized trade?
Some economists have argued that German business models were based in part on a false assumption and that cheap Russian gas was not as cheap as it seemed.
The economist Joseph Stiglitz, a Nobel laureate, said the market failed to accurately price in the risk — as unlikely as it seemed at the time — that Russia might decide to cut or withhold gas in order to exert political pressure. to practice.
It would be like calculating the cost of building a ship without including the cost of lifeboats.
“They didn’t consider what could happen,” said Mr. Stiglitz.
In any case, the latest wave of disruptions has caused political problems for Chancellor Olaf Scholz’s coalition government. Energy prices are expected to rise further. Inflation last month it was 7.6 percent. Investor confidence in Germany has fallen to its lowest point in ten years.
Mr Scholz this week gathered the leaders of major German companies in Berlin to discuss how the war in Ukraine and economic sanctions against Russia are affecting their businesses.
The industry has long had an inordinate voice in German policy-making and enjoys a relationship that has been criticized from some quarters.
“It is this lobby that is brazen and continues to try to set the course,” said Norbert Röttgen, a conservative lawmaker, a former environment minister and an opponent of the decision to build a second Nord Stream pipeline to Germany. . (The opening of the $11 billion pipeline was suspended in February.)
Households, hospitals and essential services will be seen as priorities if rationing becomes inevitable, but industry representatives have argued their case in Berlin.
“The industry will pretty much play a big part in dictating how things go and what measures will be taken and which ones won’t,” said Matthias Breuer, an associate professor in Columbia University’s Graduate School of Business. Influential business and political figures will argue that it will be more important to “keep people working than keeping them warm”.
Whatever the policy choices, he added, “everyone understands that this war really means a great loss of wealth for everyone in the West and also in Russia.”
Much of the economic debate in Germany now revolves around how big those losses could be, especially if power supplies from Russia are suddenly cut off. The conclusions ranged from mild to disastrous.
Tom Krebs, an economist at the University of Mannheim and adviser to the Ministry of Finance, estimated in May that Germany’s national output could fall no less than 12 minutesRipple effects on industries other than energy and consumers were once considered.
Looking ahead to winter, Mr Krebs said a lot depends on temperature and Russian gas supply levels.
“The best case is stagnation with high inflation,” he said. But in the longer term, he argued, Germany could become more competitive if it manages the energy transition well and ensures rapid and significant public investment to create the required infrastructure.
Marcel Fratzscher, president of the German Institute for Economic Research, agreed. Germany’s industrial success is based more on added value than on cheap energy, he said. Most German exports, he said, are “highly specialized products – that gives them an advantage and makes them competitive.”
Labor policy will also have an impact.
In September, wage negotiations for the industrial sector will start. The powerful trade union IG Metall is seeking an 8 percent pay increase for its 3.9 million members. And from October 1, a new law on the minimum wage will set a single national rate for the first time: 12 euros per hour.
For now, supply chain failures are still a headache, and companies just beginning to recover from the Covid-19 pandemic are busily devising contingency plans for gas shortages.
Beiersdorf, maker of skincare products including Nivea, has had a crisis team in place since May to prepare backup plans – including getting diesel generators ready – to keep production running.
At Schmees, high costs have already led to the closure of one furnace, which means that the foundry is no longer able to meet deadlines. Customers awaiting deliveries of stainless steel include companies that spin huge turbines used in icebreaker ships and artists who use it in their sculptures.
Mr. Schmees, an energetic man who prides himself on fostering a strong corporate culture, plans to ask his employees to work six days a week until the end of the year to ensure that all orders from the company can fulfill by the end of the year. December. That’s how long he’s betting that Germany’s natural gas supply will hold up if Russia completely cuts off power.
“The tragedy,” said Mr. Schmees, “is that we are only now realizing what we have gambled with this cheap gas from Russia.”
Katrin Bennhold contributed reporting from Berlin.