The current threat of a Russian gas supply freeze is dominating the political debate. Horror scenarios are painted on the wall, even mass unemployment and yellow vest protests are talked about. The threat scenarios cover – intentionally or unintentionally – some of the challenges that we are facing anyway. We are at the beginning of a decade in which, with high energy prices, a war in Europe, shortages of raw materials, a shortage of skilled workers and inflation, we have to shape what is probably the most radical restructuring of the economy that mankind has experienced since industrialization.
Despite these immediate challenges, it is now important to set new directions with foresight. In particular, we need to rethink our partnerships and trade relationships. Because Russia’s attack on Ukraine is accelerating the erosion of the rules-based world order and thus the basis of globalization. A power-based world order, in which the law of the strongest applies, is increasingly taking its place.
So we must be prepared to defend our freedom. Defense capability is getting a new priority – in government spending, but also in people’s minds. In addition to the army, economic strength and the resilience of the economy and society also play a decisive role in defensibility. It is clear that we must radically reorganize our relations with Russia. But China is also changing its strategy towards the West, partly under the guise of the corona pandemic.
Challenging decisions are pending
Therefore, we must reduce our dependence on exports to China, but also on processed critical raw materials that we obtain from there. If access to critical raw materials were at risk, the transformation to climate neutrality, for example, could not succeed. All of this will change the cost structures in Germany. Energy independence from Russia means, for example, that the prices of fossil fuels – and especially gas – will not return to their original levels in the medium term.
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In this difficult situation, there are now challenging decisions to be made. It is undisputed that renewable energies and the necessary transport infrastructure should be expanded as quickly as possible. We have to think in European terms in order to jointly leverage the greatest possible potential for energy security on the continent. But we are also facing a comprehensive transformation of industry and conventional power generation, which relies on gas as a bridging technology. That’s a lot more challenging.
Where will we get gas from in the future and at what price? Should we actually phase out coal-fired power generation by 2030? Who will then build the necessary gas-fired power plants? And where does the climate-neutral hydrogen come from that is supposed to replace gas in the long run? Here we will be dependent on extensive imports. If you travel to Australia, Scotland, Norway or the Near and Middle East, you learn that these countries will be able to supply us with renewable energies in the future, in the form of hydrogen or energy sources based on it, by ship or pipeline.
Renewable energies from Africa
In addition, investors are ready to finance major projects and the development of transport routes. But the ball is in our hands – all this will only get going if we conclude long-term and large-volume supply contracts. Far-reaching decisions must therefore be made in order to initiate the import of renewable energy sources. Government support will be needed to close the gap that initially existed between the procurement costs of climate-friendly hydrogen and the willingness to pay of European customers. This also applies to the initiation and securing of contracts.
In addition to countries that are already exporting fossil energy but see their future in the export of renewable energy sources, there are others that are almost predestined to export renewable energy, for example in Africa or South America. In order to be able to develop and develop many new energy partnerships, European cooperation is essential. Because every partnership must go hand in hand with the agreement of large import volumes in order to use economies of scale and keep energy costs low.
Diversification of the supply relationships of individual European countries works better with joint procurement in the European network and correspondingly greater demand. So there is considerable potential in energy supply to reduce our dependencies in order not to be as open to blackmail in the future as is the case with Russian gas. Will we be able to concentrate energy procurement and our trade relations with “friendly” countries? Considerable doubts are appropriate.
Reduce dependencies through diversification
While almost 29 percent of the world’s population still lived in western industrialized countries in 1950, in 1998 it was only 18 percent. In 2050, Europe and North America will be home to less than 12 percent of the world’s population. Do we really want to decouple ourselves from much of the world and thus lose power and influence as well as economic losses? Ultimately, this could even make geopolitical crises and conflicts more likely.
The division of the world into “friend” and “enemy” is also thought to be too static and ignores the complexity of international relations. On the contrary, instead of decoupling ourselves, we should reduce one-sided dependencies by diversifying our trade relations and make it attractive for as many countries as possible to work with us on the basis of a rules-based world order. However, this will not succeed if we try to impose our values on them.
Rather, what is required is cooperation at eye level. Based on new energy partnerships, more far-reaching forms of cooperation are certainly conceivable. For example, the development of these new supply chains and the expansion of the energy supply could take place in cooperation with European companies. In addition, based on the energy partnership, trade relations should be intensified to the benefit of both parties.
Multilateralism is more important than ever
In global competition, it will not be a matter of course – not least because of the propaganda of autocracies – that our social model automatically develops the greatest attraction. However, a look at history suggests that societies in which people can trust that they will reap the fruits of their labor are more successful than those that plan centrally and only demand performance from people. We should build on these strengths, which make us an attractive partner in the world, in all challenges.
Despite the reorganization of the world after Putin’s war, we must not lose sight of the fact that global public goods such as health or climate protection are becoming increasingly important. Multilateralism is therefore more important than ever.
The author: Veronika Grimm teaches economics at the Friedrich-Alexander University in Erlangen-Nuremberg and is a member of the Advisory Council for the Assessment of Overall Economic Development.
More: We must redesign globalization.