Realpolitik > Justpolitik!
Realpolitik > Justpolitik!
A short note on Germany's energy politics, its historical context and the Euro.
After the Russian invasion into Ukraine and the subsequent EU sanctions on Russia — energy security is getting worse.
Dutch TTF (A benchmark for European gas) is currently at 250 Euros/MWh, from slightly above 70 Euros/MWh before the invasion of late February.
As if the post-Covid inflation spike wasn’t enough, Europe is now suffering from persistent energy inflation too.
Russia reacted to the stated objectives of Europe to diversify away from Russian energy by pre-emptively tightening deliveries of gas to Germany via the Nord Stream 1 pipeline. The Russian excuse/reasons for restricting supply is problematic gas turbines, planned maintenance etc.
But whether those are excuses or not, the result is the same, Germany is severely energy insecure and domestic politics are blowing up! 🇩🇪💥
Some Historical Context
Germany was fully behind nuclear energy when it reversed course due to the 1986 Chernobyl incident (and other nuclear disasters) which spurred a massive anti-nuclear pro-environmentalism wave in the country.
The German Greens party finds its roots in that political wave. The Greens were always a second-tier political power in Germany as the CDU/CDU and SPD were always the two clear leaders, but things have been changing1.
In last year’s parliamentary election the SPD won the highest percentage of votes and proceeded to team up with the Greens and the FDP forming the “traffic light” coalition; named so after the colours of the 3 parties. 🚦
But the Russian invasion is now changing the balance since the last election significantly:
The SPD is now sliding in the polls 👇
The Greens are gaining momentum 👆
And the CDU/CSU previously led by Angela Merkel, which had been steadily sliding in the past two years, is now back on track and winning first place in the polls 1️⃣
☢️The 1998 Nuclear Consensus☢️
When the SPD and the Greens formed a government in 1998 - they reached an agreement with the four biggest German utility companies to phase out all nuclear power by 2022. That agreement is known as the nuclear consensus.
Now the SPD and the Greens are in power again and they won’t be abandoning their anti-nuclear objectives so easily. In fact, as per the polls the Greens are very close to possibly being elected as the first party in the next election. How could they change their message NOW?!
But the current energy crunch is making things untenable for Germany and its economy.
Nuclear Extension?
Messages are unclear from within Germany about their stated objectives. There has been talk that they are ready to extend the lifespan of the nuclear reactors that were planned for closure during 2022.
Some officials are signalling that it’s time this happens, others reject it completely.
“German Economy Minister Robert Habeck ruled out on Sunday extending the lifespan of the country’s three remaining nuclear power plants in order to save gas, saying it would save at most 2 percent of gas use.”
🤯 But 2 percent here, 2 percent there and pretty soon you're talking about real energy supply..
Meanwhile, Germany is quickening the pace of renewable energy infrastructure build-out, restarting Coal and Oil plants and has reached a deal with Uniper and RWE to build two floating LNG plants to allow for LNG imports via vessels. That isn’t a solve-all of course because global competition for LNG is also fierce.
Germany is doing everything possible to not backtrack on its anti-nuclear commitments..
German leaders are even preparing the ground for gas rationing to get past the winter. And then of course blaming their current state on things outside their control (like Russian Gas inflows), meanwhile they are still resisting in pivoting to a more certain and secure energy policy to get through this mess.
Because that would make them change their ideology, and they don’t want that.
So what’s REALPOLITIK?
a system of politics or principles based on practical rather than moral or ideological considerations.
At which level of gas prices will German politics be forced to change? When does the German economy go to the brink? When will practicality and reason supersede “just” politik?
(The term justpolitik did not exist. But it does now…🦉)
Russia is squeezing German politicians, and they are in turn squeezing their people and their economy. Something’s gotta give.
German Politics → The Euro
This German, and by extent, European energy insecurity is being directly reflected onto the Euro.
The ECB did raise rates by 50 basis points but the energy woes had much higher weight than the policy convergence.
“Why would the market buy the Euro with all this uncertainty”, one wonders.
Well, markets work in peculiar ways. Uncertainty is not absolute, it lies on a spectrum. Which means if we are at peak uncertainty now, and start to come off it even slowly, things will start to reverse.
There are many things Germany can do to relieve the pressure. But for the moment it is mostly sitting put.
Kubicki of the FDP called for the Nord Stream 2 to open if the Nord Stream 1 isn’t working. He said Germany must, “Do everything to ensure that we have more energy available".
His calls were faced with fierce backlash from within. But this isn’t the first time Germany has made an energy-related U-Turn (even temporarily) — so stay tuned.
While this is definitely hurting the Euro in the short-term, the Bundesbank gets it.
Bundesbank’s Nagel is vocal in his calls for more rate hikes to curb inflation — even in the face of recession. This should keep interest rate differentials between the Euro and the US in check, and a floor on the Euro.
In the meantime I will be keeping my eyes and ears open for progress on the geopolitical and energy security front.
Sincerely,
Philo 🦉
What do you think about German politics at the moment?
Picks from the archive
🤯 The psychology of “This time is different” and other cognitive-financial trappings.
🚀 The narrative follows the price, and not vice versa. A thread.
🇪🇺 With the opportunity of EUR/USD parity, let us take a minute to casually touch upon what brought us here.
German elections voting intention since 2005. From Politico.
I am from Germany and it is complete mayhem here, a fucking disaster. The coming winter could economically wipe out ordinary people and small businesses.