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Germany Hopes to Outrace a Russian Gas Cutoff and Bone Cold Winter

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Russian natural gas has been burning furnaces for making molten stainless steel at the Clementsschmieds family foundry since his father opened a store in a garage in western Germany in 1961.

It never exceeded Clements’s belief that this flow of energy could one day become affordable or even stop altogether. Now, Chemise, like thousands of other chiefs of companies across Germany, scrambles for the possibility that his business will face tough distribution this winter if Russia shuts down gas. going.

“We faced many crises,” he said sitting at a company branch in the eastern city of Pirna, overlooking the valley of the river Elbe. “But never before has such an unstable and uncertain situation ever occurred.”

Such sentiment has been echoing in executive suites, kitchen tables and government agencies this week. Nord Stream 1, a direct gas pipeline between Russia and Europe, has been closed for 10 days of routine maintenance.

Germany, the end of the pipeline and a gas transport hub in other parts of Europe, is the largest and most important economy on the continent. And the fear that President Vladimir Putin may not restore gas is particularly serious as a sign of brinkmanship with countries opposed to Russia’s invasion of Ukraine.

In Berlin, authorities have declared a “gas crisis” and triggered an emergency energy program. Already landlords, schools and local governments have begun to lower thermostats, distribute hot water, close pools, turn off air conditioning, dim streetlights and recommend the benefits of cold showers. Analysts predict that Germany’s recession is “imminent.” Government officials are competing to bail out a company called Uniper, Russia’s largest importer of gas. And political leaders warn that Germany’s “social peace” could be unleashed.

The crisis not only triggered a desperate climb this winter to manage the potentially painful crunch. It also turned Germany into a global power and urged a reassessment of the economic model that generated huge wealth over decades.

Still, “Germany is in a worse position than the entire euro area,” he said. Jacob KierkegaardSenior Fellow of the German Marshall Foundation in Brussels.

More than any other economy in the region, Germany is above the industrial giants who are producers of powerful chemicals, automobiles, glass and steel, two-thirds of which consume huge amounts of imported fuel. It is made up of. The chemical and pharmaceutical industries alone use 27 percent of the country’s gas supply.

Most of them came from Russia. Russia provided 40% of Germany’s imported oil and more than 55% of imported gas before Mr Putin invaded Ukraine five months ago and imposed retaliatory sanctions from Europe, the United States and its allies.

Russia’s gas monopoly Gazprom cut deliveries in June, and if further cuts, German industry could soon face fuel shortages and reduce production, Kakegard said. Stated. “I don’t think there are many other European countries that have to do that,” he said.

In the next five to eight years, he added, the country will be “severely under pressure” until the ongoing transition to renewable energy is complete. “It’s a time when the German economy is basically fueled by fossil fuels.”

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

Much of Germany’s wealth comes from the export of industrial products. But even before the war, its production and exports were slowing.And now, Germany’s largest trading partner, China, has significantly Slow growth More than in the last decade, Friday’s report reported economic growth of only 0.4% in the second quarter. The slowdown could spread to other emerging economies in Asia and slow down its growth.

At the same time, Beijing is developing its own industrial producers, turning the former consumers and business partners of German companies into potential competitors.

Changing situations raise the questions raised. If fuel is very expensive, is an economy built on an energy-intensive industry sustainable? Can export-led strategies succeed if major trading partners are vulnerable to sanctions and countries are more sensitive to the security risks of globalized trade?

Some economists argue that the German business model was based in part on false assumptions, and cheap Russian gas wasn’t as cheap as it looks.

Nobel laureate economist Joseph Stiglitz said the market could not accurately assess the risk that Russia could decide to cut or withhold gas to put political pressure on it. ..

It’s like calculating the cost of building a ship, not including the cost of a lifeboat.

“They didn’t consider what could happen,” Stiglitz said.

In any case, the latest series of turmoil has caused political problems for the coalition government of Prime Minister Olaf Scholz. Energy prices are expected to rise further. Inflation was 7.6% last month. Investor confidence in Germany has fallen to its lowest point in 10 years.

Scholz gathered leaders of major German companies in Berlin this week to discuss how the Ukrainian war and economic sanctions on Russia are affecting their business.

Industry has long made exaggerated statements in German policymaking and enjoys relationships that have been criticized by some regions.

“It’s this lobby that’s brutal and keeps trying to set the course,” said a conservative lawmaker and former Minister of the Environment, who opposes the decision to build a second Nord Stream pipeline to Germany. Norbert Röttgen said. (Opening of the $ 11 billion pipeline was suspended in February.)

If gas distribution is unavoidable, homes, hospitals and essential services are considered priorities, but in Berlin industry representatives are suing.

Matthias Broyer, an associate professor at Columbia University’s Graduate School of Business, said: Influential businesses and politicians will argue that “keeping people hired rather than keeping them warm” is more important.

Whatever the policy choices, “everyone understands that this war means a truly great loss of wealth for everyone in the West, not just Russia,” he added.

Today, much of Germany’s economic debate revolves around how large these losses can be, especially if the energy supply from Russia is suddenly cut off. Conclusions ranged from mild to disastrous.

Tom Krebs, an economist at the University of Mannheim and an adviser to the Treasury, estimated that Germany’s domestic production could decline in May. 12 percentIn the past, the spillover effect on energy and industry beyond consumers was considered.

Looking ahead to winter, Mr Krebs said he was heavily dependent on temperature and Russia’s gas supply levels.

“The best case is a stagnation due to high inflation,” he said. But in the long run, he argues that Germany can be more competitive if it manages its energy transformations well and provides rapid and significant public investment to create the necessary infrastructure. Did.

Marcel Fratzscher, director of the German Institute of Economic Research, agreed. He said the success of German industry is based on added value rather than cheap energy. According to him, most German exports are “highly specialized products that give them advantages and make them more competitive.”

Labor policy also has an impact.

Wage negotiations in the industrial sector are scheduled to begin in September. The powerful IG Metall Union calls on 3.9 million members to raise wages by 8%. And from October 1st, the new Minimum Wage Act will establish a single domestic tax rate (12 euros per hour) for the first time.

So far, supply chain failures are still a headache, and companies that are just starting to recover from the Covid-19 pandemic are busy developing emergency response plans for gas shortages.

Beiersdorf, a manufacturer of skin care products, including NIVEA, has been deploying a crisis management team since May to develop a backup plan that includes the preparation of diesel generators to keep production going.

In Chemise, the high cost has already forced the shutdown of one furnace, reducing the ability of the foundry to meet deadlines. Customers awaiting delivery of stainless steel include companies operating large turbines used in icebreakers and artists using them in engraving.

Proud to have fostered a strong corporate culture, energetic Chemise plans to ask employees to work six days a week until the end of the year to ensure that all orders for the company are fulfilled. .. December. That is the period he is betting that Germany’s natural gas supply will be maintained if Russia completely shuts off the flow.

“The tragedy is that we have finally realized what we bet on this cheap gas from Russia,” said Chemise.

Katrin Benhold Contributed to the report from Berlin.

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