In 2020, advanced economies found themselves in an extraordinary and unexpected emergency. Lockdowns in response to the novel coronavirus produced a sudden shutdown in many sorts of economic activity, which eventually manifested itself as drops in GDP of 5-10%. In the face of this emergency, governments acted, providing huge amounts of fiscal support both to households and to companies. This has left a legacy in terms of higher levels of public debt but as a welfare measure it worked: thanks to that fiscal support, no advanced economy saw social disorder or industrial collapses on any scale. It is too soon to assess the long-term health consequences of Covid-19, nor even the political ones, but the pandemic clearly demonstrated the social and financial resilience of the European Union, the UK, North America and Japan.
This very recent memory, from a pandemic that is not even truly over, makes it both remarkable and, shall we say, disappointing that the debate in Europe over whether or not to stop paying Russia $400 million a day for piped natural gas is being couched not as a war tactic but rather in terms of whether to do so will cause a new recession, especially in Germany and Italy which are the countries most dependent on Russian gas. That was the position taken by Olaf Scholz, Germany’s Chancellor, when he told the Bundestag in March that “hundreds of thousands of jobs would be at risk, entire industries would be on the brink” and used that as his reason for rejecting it. He has even dismissed economists’ use of mathematical models in the debate about how severe the recession would be as “irresponsible”. But this is as ridiculous as it is outrageous. Regardless of what you think about economists and their models, it is Chancellor Scholz who is being irresponsible.
He is being irresponsible because he is ducking his own responsibility. If a recession were to be the consequence of cutting off purchases of Russian gas, it would be the responsibility of the German government, as of others, to respond to it, in exactly the way they responded so effectively to the lockdown recession of 2020. The responsible thing for Chancellor Scholz to do would therefore be to tell the German public what such support would cost. He, and they, know that the loss of hundreds of thousands of jobs and the collapse of entire industries would be avoidable, at least in the short term, for that is precisely what government fiscal support for households and companies avoided in 2020. Presented with such an estimate, reasonable people could then decide whether they were willing to bear that burden, to pay that price.
For the real issue surrounding Russian gas is not the one of whether or not cutting it off would cause a recession. That could be dealt with: Wir schaffen das, we can do it, as his predecessor Angela Merkel famously said in 2015 during the Syrian refugee crisis. The real issue is whether or not it would bring the war more speedily to an end, an end of the sort desired by the West, namely a Ukraine victorious in the sense of retaining its independence and sovereignty and a Russia defeated in the sense of having failed to conquer, terrorise and otherwise subdue its neighbour.
After all, let us remember that it is not normal during wars to continue to trade freely with your adversary. Partly that is for practical reasons but also both sides know that blockades, sieges and broad economic strength play a vital role in wars and how they are concluded. The West has recognised this through the impressive and continuing range of economic and financial sanctions it has imposed on Russia. These have not just been symbolic gestures, not just raps on Russia’s knuckles, but rather have been designed and intended to weaken that country, weaken Putin and make it likelier that the war will end soon and in something like the right way. The question is whether to go further. The question is how serious are we about forcing this war to an end.
Would cutting off purchases of Russian gas, along with other energy, have such an influence on the war? It is impossible to know for sure. There is no doubt that oil and gas revenues play a big role in financing Russian public expenditure of all kinds: this article by two Russian economists, cited by Bruegel, showed that in 2021 at much lower market prices, taxes on oil and gas accounted for 40% of the Russian budget. The proportion will be much higher now. Cutting off a major source of that funding would plainly have an impact on a country that is already suffering a severe economic squeeze. One piece of evidence for that is arguably the fact that Putin has not deployed the gas weapon himself: despite repeated threats of cutting off gas to any country that refuses to pay in rubles rather than the contracted currencies of euros or dollars, he has shrunk back from doing so.
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There is, it is true, a risk that cutting off oil and gas revenues would provoke Putin to escalate the war further, perhaps by using chemical or — God forbid — nuclear weapons. That fear could, if well founded, be a reasonable ground for arguing against weaponising gas purchases. Personally, I would disagree with it: he is already escalating through his terror tactics on civilians. Risks have to be taken to convince him to withdraw and agree to a ceasefire. Military strategists and their political overlords are the ones best qualified to take a view on this.
What I can say is that, however well-meant it might be, Europe’s pledge to wean itself off Russian gas more slowly, over the next 2-5 years depending on how much you believe the pledges, is actually a worse tactic. It tells Putin that his best chance of financing his war with gas revenues is now. It weakens a basic negotiating tool, by claiming that regardless of what happens in Ukraine Europe no longer plans to buy Russian gas. And it is not really credible that if peace were to break out and oil and gas prices were to fall that Germany and others would not wish to buy Russian gas any more. Putin surely knows that in many circumstances they would be back.
A much, much bigger risk is that Europe especially, and the West in general, will become divided the longer the war goes on. European and Western unity has been impressive. But you need look no further than the re-election of Putin’s closest EU friend, Viktor Orban in Hungary last weekend, or at the closeness in the polling for the final round of France’s presidential election on April 24th between Emmanuel Macron and the pro-Putin Marine Le Pen to see how fragile the West’s unity actually is. This makes it even more surprising that Putin has not tried harder to test that fragility by cutting off gas sales, but perhaps he believes divisions will happen anyway.
A proper, responsible debate in Europe would revolve around whether cutting off oil and gas purchases will bring the war to an end more swiftly, and it would revolve around the fiscal costs of dealing with the consequences, just as during the pandemic. My vote would be for cutting off oil and gas purchases. In my view, if we don’t do that we are showing we are not serious about winning this war. Admittedly, I might be inclined to wait until Macron is safely re-elected in two weeks’ time. How I wish that Olaf Scholz and others opposing the weaponisation of gas were doing so for that sort of tactical political reason rather than to pander to their business supporters and to save a euro or two. Irresponsible is too mild a word for that.
This article was first published in Bill Emmott’s Global View. Subscribe here.