Bruegel boss Wolff supports high tariffs on Russian gas and oil

Economic relations with Russia would have to change fundamentally as a result of the war, Wolff demands. “German companies will no longer be able to do business as they did in the past as long as Putin is in power.” Instead, Germany should strive for deeper trade relations in Asia.

Read the entire interview here:

Mr. Wolff, the German economic research institutes have just calculated that an energy embargo against Russia would have a relatively minor economic impact on Germany. So should the federal government impose an import ban on Russian oil and gas?
The economic costs of a full embargo are difficult to quantify. The forecasts known so far range from minus one to minus five or a little more percent. In this respect, the effect is comparable to the corona pandemic.

We got through it relatively unscathed economically. So could we handle an embargo?
Of course, certain branches of industry would be badly affected. Depending on how cold the winter gets and how much we’ve been able to fill up our gas storage beforehand, there could actually be a shortage. But companies that get into trouble as a result could be supported by the state. We should therefore leave the church in the village.

The federal government sees it differently. She warns against shutting down entire parts of the industry.
Industry is no longer the largest sector of the German economy, so the effect on the economy as a whole is limited. And the argument that the entire chemical industry is about to collapse seems a bit daring to me.

So should we impose an embargo?
Personally, I am in favor of high tariffs on gas and oil imports from Russia. With such tariffs, a large part of Putin’s profits could be skimmed off. Given that the Kremlin has no alternative short-term buyers for its oil and gas imports to Europe, it would have no choice but to continue supplying Europe at higher costs, while the increase in gas prices in Europe would be less than the revenue that Europe derives from the tariffs achieved.

Wouldn’t Putin just turn off the tap? Just to save face?

Political predictions about the behavior of dictators are always difficult. But if it’s designed to leave a small win for Putin, I’m confident. But of course, in an emergency we have to accept turning off the gas tap completely. In any case, the situation now is untenable.

In what way?
The talk of an embargo is driving gas prices higher and higher. At the same time, we are giving Russia the resources to continue funding the war. And I’m also a bit disappointed in German politics. It needs to communicate much more clearly that households need to save on gas. The industry is already reacting to the prices. Therefore, political ideas of fully compensating the industry for higher gas prices are the opposite of what needs to be achieved. High prices should lead to lower consumption so that we can fill up gas storage and be in a better negotiating position with Putin.

The federal government claims that Putin cannot do anything with the money we send him for his gas exports.
We deliberately exempted the banks that handle energy imports from sanctions. And Putin can very well use the money to service his debts. That is why we must act.

More on the subject of energy supply during the Ukraine war:

How can medium to long-term economic relations with Russia look like, especially if Putin stays in power for a longer period of time?
German companies will no longer be able to do business as they did in the past as long as Putin is in power. Some in Germany may not believe this or even deny it. But the international pressure and that of civil society will be far too high, especially after Bucha or the possible use of chemical weapons. You can’t just do business again as if nothing had happened.

Does Germany have to become more self-sufficient economically and also more independent of China?
The pandemic and the Ukraine war have shown how vulnerable the whole system is. If Shanghai is locked down, it will have a dramatic impact on international supply chains. If a port in China is tight, that drives up prices in Europe. China’s economic decoupling process in particular would have immense economic consequences for Germany, much greater than those of the Ukraine war. But I don’t think we’re slipping into a self-sufficient economic model. And also not that globalization comes to an end.

Why not?
Because globalization makes sense for consumers and this logic will ultimately dominate. But that doesn’t mean we shouldn’t become more independent. We need to diversify our suppliers. For example, we can’t just get high-tech chips from Taiwan, that’s just too risky.

But China itself follows the maxim “As much trade as necessary, as much self-sufficiency as possible”. How to prevent decoupling when China is striving for it itself? With its Silk Road Initiative, China is building a large trade network with which it wants to become more independent from the West. At the same time, the peak of trade relations with China may be behind us. In this respect, a block formation of the world economy is already conceivable. But Europe must seize its opportunities. In the future, the growth engine of the world will be Asia, which is where the greatest struggle is taking place. Europe should try hard to get involved in trade agreements without China in Asia in order to deepen trade relations there.

What do you think of a new edition of the TTIP trade agreement with the USA?
We must, of course, seek closer trade relations with the US, and this must be based on high standards. I don’t see why it should be rejected.

Do you share the concerns of some of your colleagues that a decade of stagflation is upon us?
We see two special effects with the pandemic and this very extreme military confrontation. Both drive up inflation. At the same time, productivity will not catch up. Until recently, I could hardly have believed it either, but we have to be prepared for the fact that this constellation will continue to weigh on us for years to come.

What does this mean for the German debt brake? Does Germany have to say goodbye to some rules, or should we be more careful not to lose our role as an anchor of fiscal stability?
We really have to talk about enormous additional expenditure, which cannot be financed in the long term just through deficits. We must continue to retain a certain political stability anchor.

Is there a foreign policy lesson that can be drawn from the debacle of past German Russia policy?

Many now say it was realpolitik at the time – which of course went completely wrong. The warning signs were actually unmistakable, at least since the annexation of Crimea. Precautions should really have been taken in the last five or six years – for example to turn around much earlier with Nord Stream 2.

Why do you think it took so long?
I believe there were indeed tangible personal economic interests that stood in the way. For example, with our former Chancellor. But there was also a great deal of political naivety. In this respect, I believe that the mistakes of German foreign policy must be dealt with really hard.

In southern Europe, comparisons are often made with the euro crisis. Just as Greece has for years obtained interest rate advantages through its lax fiscal policy, Germany has obtained price advantages for energy imports. Applying the recipe from back then to today would mean an embargo, even if Germany slips into recession.
The situation is indeed comparable in many respects. In Germany we had an economic model that was based, at least in part, on the fact that energy was relatively cheap. In Greece, the adjustment was very painful at the time. Whether shock therapy or a gradual change is best for Germany is open to debate. But the tariffs discussed at the beginning must now come quickly.

Is that also the Brussels perspective that you are describing?
The impression here is that Germany is putting the brakes on sanctions, for example, because it is too dependent on Russia for energy.

The sluggish arms deliveries are also internationally criticized.
I am not sure what is the main reason in Germany why this gun issue is so difficult. I don’t think that’s just for economic reasons, but also because we don’t think strategically about such issues. The widespread pacifism in Germany makes it a kind of taboo subject. However, I believe it would be an important measure to supply heavy weapons to Ukraine.

How do you classify the Ukraine war geostrategically? Is this the biggest caesura since the fall of the wall?
After the fall of the wall, there was indeed this period that one would call the peace dividend. Many of us thought that a new age was coming, characterized by regulated international relations. This world has been over for some time now. This is not only due to Putin, but also to China’s more self-confident political orientation and the election of Donald Trump. I think we have arrived at a reality in which we, as Europeans, have to realize that we cannot rely on things staying the way they used to be.

Mr. Wolff, thank you very much for the interview.

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