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Wednesday, July 24, 2024

Europe escapes Putin’s gas embargo | World News


Weapons come in all shapes and sizes, from Javelins that blow up Russian tanks to F-16 Ukrainian aces that may soon be flying. As President Vladimir Putin’s invasion of Ukraine stalled last year, he reached for a weapon few imagined he would dare to wield: restricting the flow of gas from Russia’s vast gas fields to its key European customers. delivery. Especially for Germany and other countries that pump this stuff directly into their homes and factories, doomsayers predict dire consequences – think double-digit declines in GDP, soaring unemployment, not to mention freezing households up. Yet Mr Putin’s weapons of mass economic destruction have proven to be a dud. The crisis is all but over, and the damage has been far less severe than anticipated. Once they’ve breathed a sigh of relief, policymakers should reflect on what that means as they consider the next geopolitical challenge: how to “de-risk” the continent’s trade with China. If Putin’s superweapon fails, how much should Europe pay to wean itself off its dependence on China for imports of everything from rare earths to mobile phones?

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The impact of the Kremlin turning off the taps is far from the “catastrophe” some feared. (AFP)

In retrospect, the reliance of sleepy policymakers and short-sighted corporations on Russian gas was reckless: gas accounts for a quarter of Europe’s energy consumption and Russia a third. However, the impact of the Kremlin shutting off the taps (not quite, since some Russian gas is still being pumped all over the west via Turkey and Ukraine) is nowhere near the “catastrophe” some feared. Gas prices in Europe have plummeted from more than 300 euros ($324) per megawatt-hour last summer to as low as 30 euros in recent days. That’s high, but back in the normal historical range. Even though prices will rise after thermostats reboot for the winter, few expect prices to skyrocket.

How did Europe go from running out of gas to wondering where to store the stuff? Three economists, Benjamin Moll, Georg Zachmann and Moritz Schularick, recently compared the doomists’ vision with the reality in Germany. Europe’s largest economy didn’t plunge into the abyss, it just suffered the mildest of technical recessions. Some attribute this to luck, especially as a mild winter in much of Europe reduces heating demand. In fact, economists found that the weather pattern was consistent with recent years. If anything, other factors compounded the lack of Russian gas. For example, it turns out that French nuclear power plants need unexpected maintenance at the worst possible time.

Instead, millions of companies and individuals across Europe became unknowingly makeshift heroes. “Market economies have a tremendous capacity to adapt to changing circumstances,” said Mr Moore, a professor at the London School of Economics. family turn off the heat, at least in countries where politicians are not capping energy prices to appease voters. Factories that once relied on natural gas have found ways to switch to other fuels. The most power-hungry industrial sectors, such as the production of paper, cement, aluminum and some chemicals, are sometimes shut down. Instead, these products are imported: in effect, an alternative way of transporting energy to European shores.

The energy supply is also adapted. New pipeline gas discoveries from Norway, Algeria or Azerbaijan. Ships loaded with liquefied natural gas (LNG) are flocking to them because of sky-high prices. It was thought it would take years to install new facilities to offload such ships, but Germany did it in ten months. The mothballed coal-fired power plants were restarted and renewable energy installed. Countries around the world also contribute to Europe’s energy center of gravity. For example, a plant in Spain may struggle to survive without natural gas. But utilities in Vietnam or China (where demand has weakened due to covid-19 lockdowns) may have more options and their LNG cargoes may be diverted to Europe. The impact could be brutal: Pakistan faces power shortages because its utilities cannot outbid gas-starved Europeans.

From Nord Stream to No Stream

Europe won’t be reliant on Russian gas anytime soon — not least because the Nord Stream pipeline, which transports a lot of gas, was blown up by an unknown party in September. But the incident has politicians wondering what other nefarious forces might one day blackmail them. Driven in large part by the United States, Europe wants to ensure that it is not dependent on China. What good is disarming Russian gas weapons if a similar reliance on Chinese solar panels is replaced?

One coping mechanism is to replace imports with European-made products. The idea, popular with trade skeptics in France, became popular during the pandemic, when the EU was short of masks and paracetamol. Voters were promised that production would “resume”. Hence the mask factory (now gathering dust) in France; the paracetamol factory about to start, backed by millions in state aid. The Russian gas dispute adds to the list of products that statisticians believe Europe should produce domestically. Soviet-style goals have been set for various sectors. Generosity to microchip and battery factories has run into the billions.

Another approach is to continue buying from abroad, but diversify. Those that would flock to single-country suppliers, often Chinese, could be pushed to new shores. Pushed by more liberal (i.e. less French) forces in Brussels, this is being discussed: for example, open tenders for renewable energy projects would be penalized if the products come from countries supplying more than 65% of the EU market. This would prompt Companies are looking beyond the usual Chinese factories. Since the effect is gradual and leverages market forces, the cost will be much lower.

The failed Russian gas embargo is a useful reminder that the economy is more resilient than politicians think. But a recession was partly avoided thanks to costly government measures. All the more reason to learn the right lessons. It pays to think about where your stuff comes from. But some ways to reduce risk are smarter than others.

© 2023, The Economist Limited. all rights reserved. From The Economist, published with permission.Original content available at www.economist.com


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