Editor’s note: Sunday’s newsletter suffered a version control issue so a number of errors were accidentally sent out. A corrected version of the affected story is reprinted below.
As the week draws to a close (and Germany remains as reticent as ever about banning Russian gas imports), I find myself thinking about this chart:
I then find myself thinking about the Twitter reaction to the latest predictions from the Bundesbank that any cold turkey shutdown of gas imports to Germany “could lead not only to price effects but also to a rationing of energy use.”
The Bundesbank’s monthly report underlines that “one factor contributing to the severity of the situation is that, under the assumption in the analysis, there are no options for substituting fossil fuels in the current year.”
In the worst case scenario, they go on to note, the gas shut off would lead to a 3.25 per cent loss in short-term real GDP.
But when one turns to Twitter one sees commentary stuff like this:
Chancellor Olaf Scholz too is being given a tough time on Twitter for daring to suggest that arming Ukraine might not be a good idea because it could lead to a nuclear confrontation. However, some suggest this is a mere cover for the fact that Germany doesn’t want to stop taking Russian gas.
While I have no doubt that the German “fifth column” argument is grounded in considerable reality, realpolitik is where we are now. And shutting down imports, whether we like it or not, is not clever. It’s self-sabotage.
The time to have thought about independence was five years ago. And while we can strive towards independence eventually, we are never going to get there if we cut ourselves off essential imports today. Today, I’m sad to say, Putin has us by the balls.
He’s achieved this by emulating Russian hackers who steal digital data for the purpose of extorting ransom payments from their victims.
This time, however, the socially engineered victim is Germany. And if Europe wants Germany released unharmed it’s going to have to not just negotiate with Putin but likely pay up.
The only way out of this scenario in the long term is to learn from the original mistake and then take active measures to ensure it never happens again. Most obviously through steady reinvestment in nuclear, gas storage, LNG, and fossil – not necessarily with the intent to burn, but with the intent to maintain a vital fuel reserve to protect our energy independence.
The timeframe on achieving that independence is going to be two-to-three years at a minimum. That’s two-to-three years in which Putin, sadly, will retain the upper hand. The good news is, even Putin knows that that’s not really long enough to achieve Russian supremacy over anything, and that the clock will be ticking.
Yet if we stubbornly insist on self-sabotage rather than energy re-armament, it will take even longer to achieve energy independence and the chances of the entire European economy being stifled by runaway inflation grow ever larger.
In that context I find myself wondering what Paul Volcker would do under such circumstances…
It’s something Fed chairman Jerome Powell has been wondering too. As he noted this week at a conference:
“Chair Volcker understood that expectations for inflation play a significant role in its persistence. He therefore had to fight on two fronts: slaying, as he called it, the “inflationary dragon” and dismantling the public’s belief that elevated inflation was an unfortunate, but immutable, fact of life.”
There is no surer way of entrenching the idea that inflation is an unfortunate and immutable fact of life than by banning Russian gas imports.