Nord Stream Failure Spells Doom for Germany's Economy and the Environment
(Image Source: Axel Schmidt)
By Will Denny
It goes without saying that we would all like to see an expedited transition towards renewable energy sources. That being said, today’s difficulties surrounding energy supply reveal the unexpected challenges that hinder the green revolution, as seemingly small changes in these commodities can have disastrous impacts on entire economies and the lives of ordinary people. Recent developments in Germany serve as a perfect example, having been hugely impacted by the war in Ukraine—due to relatively small changes to their energy supply, experts now believe that Germany is now on the path towards a severe recession by as soon as next year.
So, why exactly is Germany headed for economic peril? Firstly, the nation generated about 12% of its electricity with natural gas in 2020, with the majority having come from Russia through Nord Stream—a set of two pipelines between the two nations. Due to Germany's stance as an ally of Ukraine, Russia has restricted Germany’s supply of natural gas through the Nord Stream pipelines since the beginning of the war, and has shut off supply for reasons they claim are related to “maintenance,” although the west has remained skeptical. To make matters worse, a number of devastating leaks caused by explosions were recently found in Nord Stream 1, leading to its indefinite closure—an incident that EU leaders claim was deliberate, as the result of Russian sabotage. Economists believe that this dramatic supply decrease and price increase will serve as a tipping point for recession, likely leading to unpredictable misery for many Germans. Since the nation has few other pipelines through which they can source natural gas directly, and lacks the infrastructure required to take shipments of liquefied natural gas and re-gasify them in order to go through existing pipelines, their economy will ultimately suffer immensely as this source is not easily replaceable.
Not only does this situation have devastating economic and social impacts on Germany, but it already has and will continue to wreak havoc on the environment. The pipeline explosions alone are responsible for leaking an estimated 300,000-500,000 tons of methane from the pipe before ocean pressure stopped emissions. Although this incident has created an environmental catastrophe in its own right, in the grand scheme of things the long-term environmental damage caused by resorting back to fossil fuels will likely prove to be orders of magnitudes more devastating. Increased fuel prices induce a need for governments to switch to dirtier fuels like coal and oil to keep the lights and heat on, which is especially important for the upcoming winter. Thus, climate experts have expressed that the long-term consequences of this crisis will prove far more disastrous than the Nord Stream leakage alone, which was equivalent to just a single day’s worth of global methane emissions from oil, gas, and coal combined.
These developments put the German government between a rock and a hard place. Its current plans show a focus on balancing between feeding its own people and supporting the people of Ukraine, while shifting climate targets to the back-burner. Examples of its legislation include requiring all natural gas storage vessels to be filled or temporarily leased to the government, and pushes for developing new liquefied natural gas infrastructure. Much emphasis has been placed on one solution: subsidies for electricity geared towards consumers and producers alike, with the price breaks backed by the Economic Stabilization Fund, a fund started by the German government during the pandemic to help stabilize the economy. The government also plans to re-fire oil and coal power plants in the short term, claiming that nuclear power would not be able to sufficiently offset gas shortages. Unfortunately, although the German government has expressed an interest in promoting sources of renewable energy during the war, these proposals often lack the tangible detail or numbers needed to support legislation such as electric subsidies, which will have a direct effect on prices.
So, what exactly is the economic effect of a global energy war on Germany, and why does the government seem so keen on filling the short-term gap in supply instead of investing into the transition towards renewable energy? Well, German economic forecasts have already been cut down this year due to surging energy prices, and the country is now headed into a recession by next year. Not all German industries will be affected equally by this economic downturn—those that have cornered particular markets will be able to export the inflation in their costs of production globally, as explained by a specialized metal furnisher that expects to withstand this looming economic turmoil. Unfortunately, most producers do not have this luxury, and may be forced to close by rising costs. This economic downturn has obvious effects on unemployment in the country, and the rest of the world as well, considering the role of Germany’s industrial heart as the largest economy in Europe.
For those interested in this macroeconomic effect causing unemployment, and simultaneous inflation, it is made simpler with the historical example of the economic environment caused by the gas crisis in America during the 1970’s. This supply shock produced a devastating economic phenomenon dubbed “stagflation”—an economic environment in which both low economic growth and high inflation are unusually combined. This environment naturally encourages raising interest rates as a means of combating inflation, consequently increasing unemployment. In the end it proves a sticky economic situation that not only creates high unemployment, but simultaneous inflation. The gas crisis incited the genesis of the “misery index,” combining both the annual rate of unemployment and inflation, which peaked at 19.9% (7.9% of which from unemployment) at the peak of the American gas crisis.
These circumstances highlight the true difficulties of governmental decision makers when it comes to simultaneously juggling geopolitical affairs, the well-being of their constituents, and the ever more challenging environmental crisis. With the history of the 1970’s gas crisis in mind, it becomes alarmingly clear why Germany is so desperate when it comes to trying to mend its energy supply gap. On the bright side, it is possible that these economic pressures will place even further pressure on Germany’s transition towards renewable energy as the crisis subsides—prior to the crisis, Germany was well on its way to a 100% renewable energy supply by 2035. Furthermore, German Chancellor Olaf Scholz noted that measures to re-fire coal and oil-based power plants will only be temporary, and claims his government remains steadfast on doing “everything” to combat the climate crisis. Such a perspective has also been expressed by U.N. Climate Chief Simon Stiell, who said last month that he was hopeful that the returns to coal and oil are a “temporary regression,” suggesting that countries would further accelerate their climate agendas once the energy crisis subsides.
Will Denny is a senior from Connecticut studying economics at NYU, with a deep interest in the intersection between energy, financial markets, and macroeconomics. Will loves his dog Skip, and enjoys playing video games when given the chance.
