Merkel's legacy clouded by Russian energy dependence, lost economic decade

This is an opinion article by an external contributor. The views belong to the writer.
Merkel's legacy clouded by Russian energy dependence, lost economic decade

As Angela Merkel is feted on her farewell tour after nearly 16 years as German chancellor does longevity assure her a place in the pantheon of great post-war political leaders who forged and enhanced the European project?

Will her legacy match pioneers such as Konrad Adenauer, Alcide de Gaspari or Robert Schuman or their successors such as Helmut Kohl, Francois Mitterand, Jacques Delor, Simone Veil or even Margaret Thatcher – all of whom played important roles in pushing the EU to its high water mark in the late 1990s?

Indeed when historians broad brush, the EU's 21st century Merkel will stand out as the most influential politician of her time. But when you analyze the key events of her "time'' in office that is when the shine fades. By key events I am talking about two issues that underpin the European economy: energy and the euro.

I would argue most other crucible controversies, including Brexit, immigration, Euroscepticism, Russian relations, eastern European illiberalism and others are all subsets with distinct cause and effect links to energy – in this case the EU dependency on foreign sources such as Russia – and the lost decade tied to the near collapse of the euro.

When I first arrived in Brussels in the mid 1990s as a correspondent covering EU affairs it had become very clear that EU dependency on Russian gas as source of more than 50 percent of its gas needs was a concern. The European Commission highlighted the issue in one of its ubiquitous "communications'' that keep Berlaymont bureaucrats busy. But that was a time when Boris Yelstin's pro-west tilt was still Kremlin policy and budding oligarchs were divvying up the country's industrial and energy resources in what was thought to be part of a transition to a market economy.

Of course that all changed when former KGB agent Vladimir Putin took power in 2000. By the time Merkel took office in 2006 it was clear that Putin was determined to bin democracy in favour of kleptocracy and gas exports piped through Ukraine would be a key weapon to achieve that goal. At the same time the writing was also on the wall about climate change and the need to move away from dirty fossil fuels such as coal.

But two key energy policy decisions taken under Merkel's watch not only enhanced EU and Russian gas dependence but have shadowed the EU's role as world leader in the fight against climate change. Moreover you can draw a fairly straight line from those policy decisions to the current energy price crisis and the holes in the EU claim to be the world leader in the fight against climate change.

The first key and fateful Merkel energy policy decision, of course, was the decision to phase out nuclear power in 2011 after the Fukushima disaster in Japan. That move might have cheered environmentalists and soothed public opinion over safety issues despite more than 50 nuclear power stations operating across the border in France. But clearly the nuclear power move was a knee-jerk reaction – especially for a country with an economy over-dependent on exporting goods manufactured by energy-intensive industries.

Without getting knee-deep into the pros and cons of the nuclear power debate, including waste disposal, the key point is this: in 2021 and with the nuclear power phase out nearing completion, burning coal – the dirtiest and most unhealthy of fossil fuels – currently provides approximately 25 percent of the Germany's power needs.

The fuel source is not targeted for phase out for at least another decade – if not more. Anyone who argues that the nuclear power decision has not prolonged the burning of a fossil fuel that has far more immediate negative environmental, health and social impacts than nuclear power, is simply in denial.

The second decisive energy policy decision taken under Merkel's watch was to move ahead with the Nordstream 2 pipeline that allows Russia and its state-owned gas monopoly Gazprom to bypass Ukraine and Poland in order to transmit gas under the Baltic Sea directly to Germany. Again the negative economic, environmental and geo-political impacts of that decision are with us today more than ever.

Putting aside all the background to the Nordstream 2 decision – and that includes the 2014 decision by Putin to turn off the gas leaving millions of EU citizens without heat - Merkel's refusal to intervene on what she claimed was simply a "commercial'' issue will go down as one of the great blunders of her tenure.

Now to the euro. Or more specifically the 2008 financial crisis and subsequent bank bailouts, sovereign debt defaults, and, most important, a triple dip recession and a lost decade of economic growth – all of which occurred during Merkel's term. Clearly the trigger point for the 2008 financial market meltdown occurred in the United States and its deregulation of the banking industry.

But Merkel and her stalwart finance minister Wolfgang Schauble certainly played a key role in why the crisis dragged on far longer in Europe than it did in the United States.

Instead of recognizing the German banking industry had been as reckless as U.S. financial institutions Merkel and Schauble rebuffed every Obama Administration effort to convince them to follow the U.S. lead and adopt a big bang European bank recapitalization plan. They also rejected a Keynesian demand-side economic approach even when it had become clear it was working on the other side of the Atlantic Ocean.

Instead the German government continued to play the blame game and preach austerity. That might have been appropriate for Greece and a couple of other small EU countries but it certainly was not beneficial for the EU as a whole.

The finger-pointing German response to the crisis was exposed when the vicious cycle between sovereign debt and failing European banks – or the doom loop as it became known - nearly torpedoed the euro. Fortunately ECB President Mario Draghi's "do whatever it takes'' speech in July of 2012 calmed financial markets enough to give the euro zone leaders space to adopt the European Stability Mechanism (ESM) as a backstop that broke the link between banks and sovereign debt.

A key condition that Germany imposed for finally giving its support to the ESM was centralized European bank supervision. It is the first of three pillars in the so-called banking union that still has not been completed nearly a decade later. And the Merkel-led German government has an outsized role in that failure.

From the beginning of the banking union negotiations Germany quickly went from protagonist to antagonist. It imposed inconsistent demands, including an early attempt to exempt its savings and cooperative banks – many of which had required massive government bailouts – from the new EU bank supervisor. The final pillar of the banking union – an EU bank deposit guarantee scheme – is still blocked primarily because of German opposition.

Obviously none of these flaws undermined Merkel's popularity among German voters. So clearly the woman known in Germany as "Mutti'' or mother has had an astute political antenna. Throughout most of parts of the EU her staunch pro-Europe convictions and calm demeanor have been a steadying force against the old and new breed of Trump-style Eurosceptic populists that lurk in her own country as well as in many others.

That said, clearly the European project is on much shakier ground now compared to when she took office.

By Joe Kirwin

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