Germany is spending $200 billion to fight Putin’s energy squeeze. Will it end up dividing Europe?

Nikhil Kumar

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Germany’s Chancellor Olaf Scholz calls it a “defensive shield”: 200 billion euros (nearly $200 billion) worth of measures to protect German households and businesses from an energy crunch this winter.

The scale of the package, as well as Scholz’s language, reflects both the magnitude and the origins of the threat Germany faces. As Russian President Vladimir Putin has pounded Ukraine with heavy weaponry, he has also been squeezing Europe by turning off critical energy supplies. No single country has been more exposed than Germany. Over more than a decade, Berlin, lured by the promise of a cheap and reliable supply of Russian natural gas, grew increasingly dependent on the Kremlin to heat and light German homes, and to keep the country’s factories going. By the time Putin invaded Ukraine, more than half of Germany’s natural gas supplies originated in Russia. Last year alone, Germany paid Russia around $25 billion for energy imports. This year, even as it tries to cut its dependence, Berlin has had no choice but to continue buying Russian fossil fuels, which, because of the war, have become costlier: In the war’s first six months, Germany is estimated to have spent around $19 billion on Russian energy imports.

In other words, Germany has learned a lesson the hard way: Russian gas wasn’t that cheap, and it would prove anything but reliable.

When Russia began to squeeze the supply, timing its move to the end of the warm months of summer, Berlin was left grievously exposed: Businesses and households in Europe’s largest economy faced the prospect of severe energy shortages, or at a minimum, sudden spikes in what they pay for electricity and heating. As Scholz’s energy and climate minister, Robert Habeck, put it when the “shield” was announced: “The energy crisis is undermining social peace, and we are counteracting this.”

The shield’s main features are designed to keep energy prices artificially low by putting brakes on gas and electricity prices, reducing taxes on gas, as well as promoting investment in renewables.

In Scholz’s telling, it is “good news for all who are looking with concern” at rising costs. “There is hardly a country that is not taking similar measures,” he said on the sidelines of an informal summit of European leaders in Prague earlier this month.

But Berlin’s critics say that “similar” isn’t quite right — and many fear Germany’s response could threaten Europe’s unity and resolve in the face of the Russian aggression. Putin’s invasion has so far had the effect of bringing Europe together: Leaders have spoken with one voice against the Kremlin and for Ukraine. Germany’s shield, which provides a far more generous benefit to Germans than other Europeans are likely to receive, has already upset other nations on the continent. There is also a concern that the German package may actually drive energy prices higher for everyone else.

“It brings up old divides within Europe,” Noah Gordon, a fellow in the Europe program at the Carnegie Endowment for International Peace, told Grid.

“Germany was the taskmaster [in Europe], telling countries to watch their policies and how they have spillover effects in the rest of Europe, and then you have this policy which was really uncoordinated and barely signaled to the French and other Europeans when it was announced.” he added. “And when Germany moves, it’s such a big country, such a big economy, that it has real effects on the rest of Europe.”

The roots of division

The main point of division between Germany and the European critics of its shield is the sheer size of Berlin’s relief plan. The economics are clear enough: The headline cost of nearly $200 billion reflects the financial demands of helping both households across Germany, the majority of which rely on gas for heating, as well as supporting industry in what remains one of the world’s manufacturing superpowers.

“Capping energy prices for the whole population, all households and businesses as well — it costs a lot of money to do that,” Nick Andrews, Europe analyst at the investment research firm Gavekal Research, told Grid.

All told, the package, which will be funded with new government borrowing, amounts to around 5 to 6 percent of German GDP, or the overall size of its economy. If you factor in earlier measures, the figure rises to around 8 percent, according to analysts. (Germany itself says the figures are lower: As parts of the package are spread over two-and-a-half years, Berlin says the actual cost is around 2 percent of GDP.)

What this means: Germany’s overall support for its economy in the face of the energy crisis is at least three times as large as relief plans put in place by most other eurozone countries, according to Financial Times calculations. In other words, Scholz is stretching the truth in saying that those other countries are all employing “similar measures.”

Germany can afford to do this because of the size and strength of its economy; the government can borrow money more cheaply than its weaker European counterparts. Other, weaker European nations simply cannot match the largesse of the German shield.

Beyond a rich-poor divide, there is the impact the shield is likely to have on energy prices. By capping energy costs to ensure that its own people’s homes and businesses don’t face sky-high energy bills, Germany may also be disincentivizing conservation; if German consumers know a generous support mechanism is coming, why should they sacrifice their own consumption? That raises the possibility of 84 million Germans buying more energy, boosting European demand and thereby driving up the cost of gas for other countries.

On the one hand, it stands to reason that German officials are making policy for the benefit of German citizens. But on the continent that is home to the European Union and NATO and the European Commission — all institutions to which Germany belongs, and indeed dominates — the shield looks like a finger in the eye to other member nations.

“The richest country, the most powerful E.U. country, is trying to use this crisis to gain a competitive advantage for their businesses on the single market,” Poland’s Prime Minister Mateusz Morawiecki said in response to the package, summing up the feeling among many critics of Berlin’s plans. “That’s not fair.”

From Italy, outgoing Prime Minister Mario Draghi — a former European Central Bank chief widely respected in policy circles across the continent — also took aim at Germany: “Faced with the common threats of our times, we cannot divide ourselves according to the space in our national budgets.”

Controversy over the German measures even shook the Brussels-based European Commission, the bloc’s pan-continental executive body, with two top officials — one from Italy, the other French — penning a joint op-ed slamming Berlin’s approach.

As Putin renews attacks on civilian targets in Ukraine, it was, they said, “more important than ever that we avoid fragmenting the internal market, setting up a race for subsidies and calling into question the principles of solidarity and unity that underpin our European project.”

In southern Europe, feeling the pain

That “race for subsidies” — a competition among European countries to keep energy costs low for their citizens — could have a catastrophic effect on weaker European economies, analysts warn.

At particular risk are countries in the south of Europe.

Compared to Germany, Italy, for example, “is much more under pressure in terms of budgetary spending,” Andrews, from Gavekal, told Grid.

Italy already relies on massive European Union support to keep its economy going. And in the markets, it faces higher costs when it borrows money, as investors factor in the weakness of its economic position.

Germany’s generous subsidies may force Italy to increase support for its own citizens — and that could have the effect of upsetting what is a fragile economic balance in Rome.

“This year, the Italian government’s energy relief packages have been quite carefully planned to the extent that they are basically … neutral [in terms of the country’s budget],” Andrews explained. “So any measures they’ve taken to subside consumers and some businesses have been offset, more or less by [other measures to balance the books].”

In the wake of the German shield, other countries are considering whether they may need to spend more on such relief packages than they can afford. That in turn could set off a crisis in weaker European economies. Among the others that are vulnerable, Andrews singled out Greece: “They’ve still got very high levels of debt.”

In it together?

For Germany’s critics, these risks underline the need for Europe to act together in the face of a common threat.

One idea is to put a cap on what Europe as a whole will pay for gas supplies. Proponents of this idea argue that Europe is a giant buyer, one with enough clout to demand lower prices from international suppliers beyond Russia. By banding together to purchase gas, the bloc could thus ensure that its citizens are shielded from price spikes. “The theory is that if they do that, they will have more power,” Andrews explained.

Opponents argue that big gas suppliers such as Qatar could respond by simply diverting supplies to non-European buyers — much as Russia itself has done. The rationale: Why sell below the market price to Europe when others in Asia and elsewhere are willing to pay up?

Until very recently, Germany’s was among the most prominent voices in the latter camp, arguing that “if the price is capped, people will just sell their [supplies] to Japan instead, for example,” Gordon, from the Carnegie Endowment, explained.

That opposition has softened in recent days, with Scholz saying his government was now discussing “the possibility to limit price spikes” across the continent by putting in place a mechanism to cap costs. But how exactly that would work remains unclear.

Criticism of Germany’s shield has also led to a softening of Berlin’s opposition to using joint, Europe-wide borrowing to fund energy subsidies for weaker nations. There is a template for such collaboration from the covid pandemic, when the bloc came together to enact a $700 billion-plus recovery fund, underpinned by joint borrowing; the idea was to use the economic power of the bigger European players such as Germany to help fund support for smaller and weaker economies.

Again, the details of a potential Europe-wide relief plan are unclear; much still needs to be worked out. But the pressures created by the war in Ukraine, analysts say, mean that something needs to give to ensure that Europe writ large can withstand the twin crises of energy and inflation. And to ensure that Putin is denied his wish of sowing discontent and divide among Ukraine’s European allies.

As the French Finance Minister Bruno Le Maire warned when Germany announced its shield package, “if there is no consultation, no solidarity, no targeted support for business, if there is no respect for the level playing field, we risk the fragmentation of the eurozone.”