Germany is again the sick man of Europe

Created: 12/08/2022 10:07 am

By: Prof. Hans-Werner Sinn

Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, was President of the Munich Ifo Institute for Economic Research and Advisor to the German Ministry of Economic Affairs.

© N. Bruckmann/M.

Litzka/Imago

An energy supply entirely from wind, sun and water: many people in Germany dream of that.

But the war in Ukraine is now relentlessly revealing the impasse Germany has gotten into as a result of its energy policy, writes Prof. Hans-Werner Sinn in the guest article.

Munich – You can say what you want about the Russian President.

With his war he opened the eyes of the Europeans.

This not only affects the realization of how dangerous it is to neglect military security, but also their green dreams of a new, better energy world that functions solely on the basis of an electricity economy powered by wind and sun.

Ever since an unknown military power destroyed Europe's most important gas pipeline through the North Sea, Europeans, especially the Germans, have known how much they depend on this cheap energy source.

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Not long ago, some people dreamed of being able to put pressure on Russia by stopping gas from there.

Today, the countries of Europe are noticing the burden of the lack of energy imports from Russia and are arguing about the insufficient amounts that are still left.

Gas Shutdown: Welfare cuts have little to do with GDP

The proponents of the embargo demands argued that the renunciation of Russian gas is insignificant for an economy and can easily be compensated because the effect on GDP is only small.

A new study recently blew the same message.

The German economy can no longer produce around 300 products if there is no gas.

It could easily be obtained on the international markets with few economic consequences.

In fact, however, the welfare losses due to a gas shutdown have little to do with GDP, because they mainly affect the buyers of the gas and the gas-intensively produced goods in the form of price increases for imports.

GDP is the gross income that results from the domestic production of goods, but the welfare losses arise from the increase in the price of the imported goods that are acquired from this income (terms of trade - effect).

This increase in prices is not included in the calculation of real GDP.

It does not follow that there are no GDP effects.

They add to the difficulty.

In the chemical industry, for example, it is about the production of methanol and ammonia, which is the basis of fertilizer production.

It is doubtful whether the downstream and complementary value-added areas will still be competitive if the raw materials are no longer manufactured in Europe but have to be bought in America.

A great many jobs could be affected until a new balance is found.

It's no wonder that BASF, Europe's largest chemical company, has decided to invest five billion euros in setting up a chemical plant in China.

Despite renewable energies: Controllable energies are still required

Another insight from the war, which is only gradually penetrating public awareness, is that the green substitute energy from wind and sun, which is being propagated today to compensate for fossil fuels, cannot be used at all without these fuels.

It depends on the weather, is extremely volatile and can hardly be controlled.

In order for the green flutter current to be usable at all, it must be combined with controllable energy that varies in counter-rhythm in order to meet demand at all times.

In the extreme case of the dark doldrums, when neither the wind is blowing nor the sun is shining, the controllable energy has to meet the entire demand on its own.

And if one day three to five times as much electricity will be needed as it is today because traffic is electric and houses are heated with heat pumps,

For the time being, controllable energy in industrialized countries consists only of nuclear power, coal and gas.

For Germany's energy transition away from coal and nuclear power, this means that the country would depend almost exclusively on gas if the agreed roadmap were to remain.

But it can't stay that way, because the gas is missing now.

The war is a natural experiment in history that ruthlessly exposes the shortcomings of the green energy transition.

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Good advice is valuable now.

Many hope that the batteries in electric cars will act as a buffer to smooth out the green fluttering current.

When internal combustion engines are banned and largely replaced by electric cars, these batteries will one day indeed be able to help smooth out the very short-term fluctuations that occur within a day.

The main problem, however, is the seasonal fluctuations in green electricity.

Above all, the difficult winter months until March must be bridged with electricity generated from the autumn storms.

Car batteries are out of the question because the cars have to be driven.

These batteries are not even sufficient to store the energy that e-cars need even in winter in the fall and to store it until it is used.

Energy policy: Germany is the sick man of Europe

In a distant future there will only be an option to smooth out the weather-dependent electricity by power plants that run on hydrogen, because the hydrogen is the better battery.

However, the hydrogen itself must be obtained from an already smoothed stream so that it can be produced at least halfway economically.

He thus presupposes what he is yet to create himself.

How this dilemma can be solved economically is still up in the air.

In this respect, countries like Germany, which are on the green energy course, have little choice but to buy the extremely expensive liquid gas to buffer the green electricity, drill for new gas sources themselves and rely on nuclear energy, including that of its neighbors in France and return to the Czech Republic.

But the learning process will be painful.

Because of its extremely ambitious energy policy, Germany is once again, as it was 20 years ago, the sick man of Europe.

About the author: Prof. Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, was President of the Munich Ifo Institute for Economic Research and advisor to the German Ministry of Economic Affairs.

His latest book is entitled: The miraculous increase in money: National debt, negative interest, inflation, Herder, Freiburg 2021.