Pressure gauges seen at Zsana’s warehouse in Zsana, Hungary, May 20, 2022. REUTERS / Bernadett Szabo
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LONDON, June 24 (Reuters Breakingviews) – Germany is facing a sudden acceleration of the gas crisis. A 60% drop in Russian supplies since early June threatens to plunge Europe’s largest economy into severe economic shock. But Berlin’s confusing response to Moscow’s latest move, its hesitations about energy policy and its attempts to slow the impact of higher energy prices on the economy risk making things worse.
Whatever its controversial reasons, Gazprom’s (GAZP.MM) sudden delay in its contractual deliveries has forced Berlin to declare a state of emergency. Economy Minister Robert Habeck, leader of the Green Party, has ordered an increase in the use of highly polluting coal in power plants. Meanwhile, Liberal Finance Minister Christian Lindner has proposed postponing the planned closure of the country’s three remaining nuclear reactors this year to help absorb the shock. He was immediately opposed by Chancellor Olaf Scholz’s advisers.
Germany is currently slightly below its gas storage target, with 59% of capacity restored from the winter. Its goal is to reach 90% in December just before the cold season. Russian President Vladimir Putin’s latest interruption calls this into question.
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Germany’s dependence on Russian gas has shrunk in recent months. Only 35% of gas imports come from Moscow, up from 55% before the war in Ukraine. But in the worst-case scenario, a complete disruption of Gazprom’s supplies to the country could still trigger a blow of up to 220 billion euros in 2022 and 2023, or 6% of this year’s GDP, German think tanks have calculated.
The crisis sheds a sharp light on the coalition government’s economic policies. Berlin decided this week to upgrade its emergency response to the gas crisis to “alarm” mode. But he refused to allow electricity producers to pass on higher energy prices to industrial consumers and households, thus depriving them of a powerful incentive to reduce consumption.
The government could do the sensible thing and allow price signals to work, while using its budget to initiate transfers to lower-income households or small and difficult businesses. But his dogmatic adherence to strict budgetary discipline, even in the midst of a major crisis, may prevent him from doing so. Germany was already on track to have one of the slowest growth and highest inflation rates in the Organization for Economic Co-operation and Development. He is now at risk of a good crisis going to waste.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
Germany moved to the second phase of its three-stage gas emergency plan on June 22nd after Russian supplier Gazprom cut supplies through its Nord Stream 1 pipeline to just 40% of capacity last week.
Economy Minister Robert Habeck said restricting gas supplies from Moscow was an “economic attack” on Germany as he announced a move to an “alarm” level that triggered the government’s plan to return to coal-fired power plants.
However, Habek said utilities could not automatically pass on higher energy prices to their customers, as moving to the alarm stage would theoretically allow.
Germany must “now look without taboos for all solutions” to increase domestic gas production, including fracking, said Leonhard Birnbaum, CEO of German energy supplier E.ON, in an interview with the WirtschaftsWoche podcast.
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Edited by George Hay and Streisand Neto
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