German Economy and Climate Minister and Vice Chancellor Robert Habeck visits a cavern facility of the gas trading company VNG AG during a two-day tour under the heading of “Economy and work in times of crisis”, due to Russia’s invasion of Ukraine, in Bad Lauchstaedt, Germany, on Thursday. reuters

London: Faced with the dismal performance of his troops in the war against Ukraine, and the underwhelming effectiveness of his weapons, Vladimir Putin has played his trump card: natural gas. On Monday, the Russian state-owned Gazprom announced it would further halve gas deliveries to Europe via Nord Stream 1 down to 20 percent of the pipeline’s capacity from Wednesday. The company cited equipment repairs to a previously unnamed turbine as the reason, but nobody believes a single word coming out of the Kremlin nowadays. ‘Putin is playing a perfidious game’, said Germany’s energy minister, Robert Habeck on Tuesday, ahead of the summit in Brussels to find a solution to the imminent problem. ‘He is trying to weaken the great support for Ukraine and drive a wedge into our society’. Russia supplied the EU with 40 percent of its gas last year, and since the invasion of Ukraine European leaders have held talks over how to reduce its dependence on Russian fossil fuels. In May, the EU agreed to ban all Russian oil imports that come by sea by the end of the year, but a deal over the ban on gas has taken longer. The vast majority of gas arrives through the huge network of pipelines from Russia and Norway. Very little arrives in Europe in the form of liquefied natural gas (LNG) in tankers, the only alternative to pipelines. Gazprom has cut gas supplies altogether to Bulgaria, Denmark, Finland, the Netherlands and Poland over their refusal to comply with a Kremlin order to pay their bills in roubles, instead of euros or dollars. The Brussels summit ended with a voluntary agreement to reduce 15 percent of gas use between August and March, in case Russia halts supplies altogether. It’s packed full of compromises and some countries will have exemptions to avoid rationing. One EU diplomat said the plan looks like Emmental cheese – full of holes. Germany, which imports by far the most Russian gas of any member state, faces a reduction of 30 percent. However, many point the finger of blame at Germany for the problem in the first place. The fiasco is a legacy of Angela Merkel, the former German Chancellor, who ignored fifteen years of warning from her top energy experts that over-reliance on Russian energy would make the country vulnerable to Putin’s blackmail. Despite the repeated warnings about the risk of this reliance, successive German governments have only deepened it, opening the country to the risk of Russia exploiting exactly what Putin is now doing – using gas as a weapon of war. Germany is uniquely vulnerable to Russian threats to reduce gas flows. The sheer volume of gas that Berlin imports, almost 52.5 billion cubic metres in 2020, is almost double the next closest nation, Italy, on 28 billion. As Germany produces almost none of its own gas, imports account for 95 percent of annual usage, powering key manufacturing industries as well as heating hospitals, care homes and houses. Gas is delivered to Germany almost exclusively through pipelines and, unlike other EU nations, there are no existing LNG facilities in any of its ports. Nord Stream 1 is by far the most important route for getting Russian gas into Germany, which means that by shutting off a single pipeline, Russia more than halves Germany’s gas imports. Already morale among German businesses has plummeted as rising prices for fuel and goods severely damages prospects for growth. The fall in confidence represents a new downward trend, following more than a year of recovery since the lows seen in 2020 when the coronavirus pandemic broke out. ‘The massive slump in the business climate reflects the deep fear among German businesses of a gas crisis’ said Jorg Kramer, chief economist at Commerzbank. If Putin completely turns off the gas, an increasingly likely scenario, huge swathes of German industry would have to close or go on part-time working. Europe’s economic powerhouse would grind to a halt, and with it the rest of Europe. The European Central Bank (ECB), under pressure from Germany, has started to wind down its Quantitative Easing, a euphemism for printing money. This means it now cannot easily buy up the massive sovereign debt incurred by many EU countries, in particular Italy. As well as an impending economic crisis, Italy is undergoing simultaneously a political crisis, which has become the norm in this unstable country. Its Prime Minister, Mario Draghi, an internationally admired former head of the ECB, hailed for ‘saving the euro’, was never elected but was called upon in 2021 to lead a temporary government of national unity. That unity ended last week, when the coalition government decided to boycott a confidence vote. The collapse of Draghi’s government dismayed other European leaders and created incredulity among many Italians. When new elections are held in the autumn, current polls suggest that the vote will deliver the most extreme right-wing government in Western Europe, comprising Giorgia Meloni’s post-fascist Brother of Italy party, the nationalist League, and former Prime Minister Silvio Berlusconi’s Forza Italia party. As leader of the largest party, Ms Meloni, whose illiberal politics closely resemble those of Hungary’s Prime Minister, Victor Orban, would be favourite to become prime minister. This prospect would be alarming in any context. Set against the continental backdrop of Putin’s war in Ukraine, a related energy crisis and the risk of recession, it constitutes a menace to European Unity on multiple fronts. Of course, the EU has survived setbacks in the past, from the first Eurozone crisis in 2011-12 to the migrant crisis of 2015, but this was not without great economic pain, including mass unemployment among the young and much political disruption. Now it faces the biggest crisis of all at the time when many of its leaders are considered to be weak. The EU’s much-vaunted unity in the face of adversity will be tested to the limit, particularly in the new gas-reduction agreement, which is already beginning to crack. The ECB belatedly increased interest rates last week, ending eight years of negative rates; the deposit rate is now a massive 0 percent! Financial experts consider this move to be too little and too late, as both the Bank of England and the US Federal Reserve have been raising rates for some time. The euro has already slumped to near parity with the US dollar and Eurozone inflation averages 8.6 percent and rising. In Spain inflation is 10 percent, Greece 12 percent, and in Estonia it’s a massive 20 percent. In fact, much of the EU is in the grip of stagflation – as inflation soars, growth in the three biggest economies, Germany, France and Italy, has slowed down or stalled. Goldman Sachs reported on Wednesday that the euro area is already contracting and the recession will last at least until the end of the year, citing the disruption of energy supplies from Russia and political instability in Italy as the main causes. The picture looks totally different in Moscow where, despite sanctions, the rouble is at an eight-year high and the Kremlin’s coffers are brim full from soaring oil and gas prices. Putin calculates that he’s in a much better position to weather a fall in gas revenues than the EU is to survive the stopping of Russian gas supplies – and he’s right. His cunning plan is that as winter bites, having turned the screws on Europe and created economic and political turmoil on the continent, the EU – led by Germany, France and Italy – will press President Zelenskiy to come to some sort of arrangement with Russia. If this happens, it will be yet another shameful episode in modern European history.

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