Germany's Energy Dependency: Lessons from the Russia Trap
Created: 04/16/2022, 09:00
Prof. Achim Wambach has been President of the ZEW – Leibniz Center for European Economic Research in Mannheim since April 2016.
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The war in Ukraine is a sad reminder that economic issues are inseparable from security issues.
The possibility of economic blackmail limits the scope for action in terms of security policy.
Avoiding dependencies is now the focus of economic policy, writes Prof. Achim Wambach in the guest article.
Mannheim – Germany is currently losing international reputation.
The reason for this is the refusal to agree to an energy embargo on Russia.
Nobel Prize winner Paul Krugman calls this position "shameful" and criticizes the "irresponsibility" of earlier German energy policy.
The federal government shies away from this embargo because it expects massive effects on the German economy - Germany has made itself too dependent on Russian energy supplies.
Crisis management is necessary and frantic steps are being taken to reduce dependency.
What can be done better in the future?
Corona pandemic is changing economic policy thinking
For a long time Germany lived well in the belief that economic policy and security policy were independent policy areas and that it was precisely trade that contributed to stability.
Federal Foreign Minister Hans-Dietrich Genscher put it in a nutshell as early as 1987: "Foreign trade has an eminently peacekeeping function."
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The international orientation of the economy and the liberalization of the energy markets bring prosperity, but make them more vulnerable.
This insight is not entirely new.
For several years, due in particular to China's striving for dominance, there have been increasing calls for a "sovereign Europe" that should be less dependent on third countries.
The interruptions in supply chains experienced during the corona pandemic had a similar effect on economic policy thinking, as a result of which goods such as masks and vaccines were scarce at certain – sometimes crucial – moments.
In this context, questions of resilience, i.e. the resilience of the system, were asked anew.
Energy embargo: Europe should become more sovereign
One approach to more sovereignty is to relocate production to Europe.
The expansion of renewable energy in Europe reduces the need to access energy sources from third countries outside Europe.
The EU Commission wants to locate the production of semiconductors, which are currently in high demand, more in Europe.
In addition, the chip law was passed that allows states to support investments in production facilities with subsidies.
The federal government's initiative to conclude pandemic preparedness agreements with vaccine manufacturers in order to relocate vaccine production to Europe is also taking this path.
In addition to on-site production, diversification, i.e. the development of parallel supply chains, offers the possibility of reducing dependencies.
Diversification is part of the purchasing policy of every company, "dual-sourcing" strategies, ie the contractual relationship with two or more suppliers for the same component, are common.
If one supplier fails, the other can step in.
One consequence of the new focus on dependencies should therefore be to make this diversification easier for companies: The construction of an LNG terminal as infrastructure allows cooperation with other gas suppliers;
Politically driven energy partnerships with the Emirates, for example, open doors for such deals.
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Banking sector: experience in dealing with systemic risks
Another important instrument are international trade agreements that simplify supply relationships across borders and can open up alternative markets.
The EU should therefore accelerate the planned agreements with Latin American (Mercosur) and Asian countries (ASEAN).
It is difficult to understand that CETA, the European trade agreement with Canada, is still only provisionally in force.
However, diversification by companies is not enough when it comes to systemic risks that can cause an entire system to malfunction.
Systemic risks are known from the financial crisis of 2008, in which the collapse of Lehmann Brothers paralyzed the entire banking system and states had to step in with massive aid programs.
There are also systemic risks in the energy market, such as those that occurred in Texas in 2021, when the power supply was interrupted for several days due to the weather, which led to serious damage.
Experience in dealing with systemic risks from these sectors can be used to counter such risks along supply chains.
In the banking sector, banks are now required to write a “living will”, i.e. to document now how they are to be processed in the event of insolvency.
The European Central Bank conducts regular stress tests to check the resilience of the banking sector.
In the electricity sector, many countries rely on capacity markets, in which long-term contracts are concluded to ensure security of supply.
Avoiding dependencies is an important part of economic policy
Similar considerations should be included in planning for greater European sovereignty: In important areas, companies should have to prove that they have sufficiently diversified their supply chains and that they are secured against shortages, including through long-term contracts.
Stress tests, such as simulating a delivery stop from China, would help to check the resilience of the respective markets.
Avoiding economic dependencies is a necessary part of economic policy for security reasons and for reasons of supply.
The contribution that companies can make to this should move more into the focus of politics.
Facilitating the diversification of supply chains and transferring experience from markets with systemic risks can help make the economy more resilient.
About the author: Professor Achim Wambach has been President of the ZEW – Leibniz Center for European Economic Research in Mannheim since April 2016. Wambach has been a member of the Monopolies Commission since 2014 and also its chairman between 2016 and September 2020. The economist is also a member of the Scientific Advisory Board of the Federal Ministry of Economics, which he chaired from 2012 to 2015.
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