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Germany's 'no' to energy embargo may prove untenable
Robert Lind

As the war in Ukraine continues, Europe faces increasing pressure to impose an embargo on Russian energy. As of last year, nearly three quarters of Russia’s gas exports and half of its oil went to the EU. Cutting off this demand would impose huge and unsustainable costs on the Russian economy. Many believe this could help hasten an end to the war.

However, on March 23, German chancellor Olaf Scholz reiterated his government’s opposition to an immediate embargo on Russian energy imports. Scholz argued the imposition of such an embargo would be counterproductive as it could push the EU economy into recession with Germany being particularly vulnerable. Germany imports more than half of its gas supply from Russia. It has announced plans to gradually reduce that total over the next few years but mounting political pressure inside and outside the EU could make Germany’s ‘no’ to an immediate embargo untenable.

Meanwhile, the French and Polish governments have been making the case for an embargo alongside the Baltic states. It appears the U.S. has also been pushing Germany to impose more wide-ranging sanctions on energy. The critical question is whether Germany’s ‘no’ is a definitive position that won’t change or a holding position as it prepares for a potential embargo. I suspect it could be the latter.

Understandably, Berlin is cautious about a rapid further escalation of sanctions. To some extent, this reflects increasing concern among western experts about the unintended consequences of severe sanctions on the Russian economy. Imposing an energy embargo on Russia could backfire if President Vladimir Putin responds by further escalating the military conflict.

Yet, Berlin might also be playing for time. Over the last few weeks, EU gas imports have picked up (notably of liquefied natural gas). On March 25, U.S. President Joe Biden committed to help the EU secure an additional 15 billion cubic meters of gas by the end of 2022. With spring coming, there is an argument to delay an embargo until the EU’s gas demand-supply position is less precarious. Berlin knows that if it imposes such an embargo, it will have to maintain it for some time.

There is also the question of the impact on the German economy. A substantial decline in GDP would be painful, as sharply higher energy prices squeeze household incomes and corporate profits. If the EU imposes an energy embargo, governments would have to provide substantial fiscal support to their economies. Germany has the domestic fiscal space to do this, but it is also conscious of wider EU demands (notably from France, Italy and Spain) for more common borrowing. Governments would have to intervene more significantly to manage energy supply and demand and prices.

An energy embargo could also profoundly alter the balance of power within the EU. Over the last 20 years, Germany has been the EU’s hegemon, underpinned by a strong economy that has benefited from imports of cheap energy from Russia and massive growth in manufactured goods exports to China. The Russian invasion, with China’s implicit backing, is an existential threat to Germany’s mercantilist political economy.

Correspondingly, Emmanuel Macron’s France could become a more powerful and influential economy in the EU. Over the last 20 years, France’s relative economic underperformance has diminished its political weight. But France’s lesser dependence on Russian energy (and its ample nuclear capacity) could mean its economy becomes relatively stronger within the EU, enabling President Macron to exert even more influence on EU and eurozone policymaking.

Robert Lind is an economist with 36 years of industry experience. He holds a bachelor's degree in philosophy, politics and economics from Oxford University.

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