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Sunday, June 23, 2024
The Observer

From popular German talk show to the Washington Post: Notre Dame economics professor’s policy brief garners international attention in German debate over Russian gas

The controversy began with Twitter, then the German chancellor called out the economic research on a popular talk show, and soon enough, the Washington Post was on the trail, phoning Notre Dame economics professor Rüdiger Bachmann.

Bachmann was watching “Anne Will,” a German talk show viewed by millions, when German Chancellor Olaf Scholz criticized a policy brief explaining that Germany could cut off Russian oil imports without detrimental economic impacts. Bachmann was a co-author of the only brief published at that time.

“I knew immediately who he meant,” Bachmann said. “It wasn’t particularly subtle. It was all but by name.”

Cited in a Washington Post article on March 29, Bachmann became one of the economists pitted against the chancellor without ever speaking to him.

“I find it funny that the Post would pick this up,” Bachmann said. “The whole narrative of me fighting the German chancellor was amusing.”

Since co-authoring his brief, Bachmann said additional economists have conducted analyses showing that Germany can ban Russian oil imports without detrimental economic effects. However, the chancellor maintains that a Russian oil embargo would result in economic disaster.

Despite the chancellor’s remarks that it is “irresponsible to add up numbers that don’t work,” Bachmann said the policy brief has made an impact.

“I do think we’ve moved the needle a little bit,” Bachmann said. “There was a lot of resonance in the parliamentary circles.”

Bachmann said he and his co-authors never intended to recommend an embargo on Russian gas and oil. They merely set out to determine the economic effects of the potential supply shock — whether due to a voluntary oil embargo by Germany or a forced sanction from Russia.

“It was pure scientific curiosity,” Bachmann said. “We wanted to know what the maximum damage could be.”

Unlike the prevailing notion that the economic impacts of cutting off Russian oil would be similar in magnitude to the Great Depression, Bachmann’s policy brief found the impacts would be similar to those of the COVID-19 pandemic at worst. The paper predicted at 0.5% to 3% GDP decline, compared to a pandemic hit of 4.5%.

Bachmann acknowledged the difficulty of the current situation for German politicians but held to the paper’s conclusions. 

“To be fair, there are a great deal of uncertainties to doing this,” Bachmann said. “[Politicians] only get to play this once.”

William Donahue, a professor of European studies who has been studying German for decades, said he supports blending the views of those in favor of an embargo and those against.

“I’m trying to balance the two sides and take a sympathetic view,” Donahue said. “When the German chancellor says this could be economically devastating, I do take that seriously, but since he’s made that claim, there’s been a number of economists suggesting that this is something Germany could stomach.”

If given the chance to speak to the chancellor or other top German politicians, Bachmann said he would stand behind his work.

“I would lay out my economic analysis and try to convince them that they are exaggerating the cost,” he said. 

Although Germany would have to take important steps to prevent a recession, especially before the winter when natural gas is in much higher demand for heating, Bachmann said the potential recession can be mitigated.

“We’re not saying it’s going to be easy,” he said. “We’re not saying it’s not going to be a recession, but there are things you can do to mitigate costs before winter.”

Those steps — detailed in the policy brief — include three key components: increasing supply, decreasing demand and introducing fiscal policy safety nets.

Because oil is more substitutable than gas, Bachmann said those steps need to focus on natural gas, given its unique chemical properties and complicated transportation infrastructure. Germany currently sources 55% of its natural gas from Russia, compared to 34% of its oil.

“Natural gas is the bigger problem,” Bachmann said, calling it a “de facto local good,” one that is not easily substituted or outsourced from other countries, especially for industries that rely on its chemical profile.

Donahue agreed that natural gas presents the biggest conundrum for an embargo.

“Germany could embargo oil much more quickly because the dependency is lower and resupply is easier to arrange,” Donahue said. “The natural gas is the real puzzle, and there I just don’t have the answer.”

Bachmann said Germany has already begun pursuing liquified natural gas (LNG) as a potential answer. Replacing the supply of gas currently pumped into Germany from a pipeline to Russia with imported LNG would require more floating LNG terminals in the medium run and more permanent, landlocked LNG terminals added in the long run, he added.

When it comes to decreasing demand, Bachmann said Germany could incentivize households and affected industries to consume less natural gas while limiting negative economic impacts through fiscal policy.

In order to minimize the effects of a potential embargo on Russian oil and gas, Bachmann said Germany would need to institute short-term work programs for laid-off workers, protect banks connected to the chemical industry and redistribute some money to lower-income people who may have a harder time affording food and other necessities as rising gas prices inflate the cost of necessary goods.

Bachmann said these policies are feasible because Germany could have up to half of a year to enact economic measures if they declare an embargo or lose access to Russian natural gas soon.

“In the summer, nothing dramatic would happen,” Bachmann said. “They would have half a year to make this a manageable thing.” 

Although Bachmann’s policy brief argues that adequate policy would minimize the Russian oil embargo's economic effects, he said trade unions and lobbies play a role in the German reluctance to stop importing Russian oil.

“This is one of the most well-connected industries with huge lobbies and trade unions,” Bachmann said.

Donahue said some right-wing German politicians are also involved in opposition to the embargo.

“Imposing embargos on Russian gas and oil, while supported by a majority of Germans, is particularly unpopular among the right wingers,” he said.

In addition, Donahue identified other sources of uncertainty towards a potential embargo, including the chancellor’s political conservatism, his concerns with rising unemployment that could aggravate the right wing Alternative for Germany (AfD) party and the interconnectedness of Germany’s economics.

“The economic results might extend well beyond Germany itself, since it is the world’s fourth largest economy,” Donahue said.

Weighing the other side of the scale, Donahue said Germany’s reputation of upholding human rights — built through years of refugee support — is at stake.

“If Germany fails now to act boldly, it risks sacrificing the ‘redemption’ narrative that it earned after it took in over a million refugees in 2015,” Donahue said. “It may furthermore send the message, however unintended it may be, that it’s on the wrong side of war crimes.”

Donahue said Germany’s history will come into play as apparent Russian war crimes come to light.

“I think the real tipping point is going to be the further discovery of Russian atrocities and war crimes in Ukraine. German intelligence recently heard Russians discussing indiscriminate killing north of Kyiv,” Donahue said. “This includes targeting civilians, and that’s going to put more pressure on Germany to act, given its history of the Holocaust.”

Bachmann also mentioned the historical importance of Germany’s actions, highlighting their post-Holocaust commitment to “never again” allow for crimes against humanity or wars of conquest.

“I, as a young German, grew up with that slogan ‘never again.’ Never again has to mean something — not just some warm, fuzzy buzzword,” Bachmann said. “If we don’t want to fight Russia ourselves, everything else should be on the maximum dial.”

Bachmann said he would pose one final question to German leaders still reluctant to sanction Russian gas and oil.

“How do you want to be remembered in 50 years when the history of this war is written?” he asked.