A lot has been written about the Russian invasion of Ukraine, the reaction of the West, including the sanctions, and the reshaping of European and global geopolitics. I’d like to pick up on a few themes where I have
strong views, given my own history of having grown up during the Cold War and as economist.
First, as powerful as the initial response of the West has been in
terms of sanctions, it has become clear that this is far from sufficient. And it is the German government, which has refused to take a more prominent role and has all but ruled out cutting its dependence on Russian gas in the short-term and providing
the Ukrainian military with the necessary heavy arms to drive the Russian invaders out of Ukraine. One false argument is that as lesson of 20th century German history war should never be fuelled with German support. This is clearly a misinterpretation
of German history as Ukraine’s fight is clearly defensive and Ukraine suffered disproportionately during World War II from the Nazi invasion. And if one takes the view that Putin should not be provoked further by supporting Ukraine too much with heavy
arms, one clearly has not understood that Ukraine would not be the final stop for Putin. He has made it clear over and over again that he aims at restoring the old East bloc. So the political arguments are clearly fake and one has to look to economic reasons.
Second, an interesting and, in my opinion, very valid comparison has been made by Thomas Philippon
on Germany’s reaction to the crises in euro periphery countries a decade ago and its behaviour during the current crisis. During the eurodebt crisis, German politicians were quick in telling Ireland, Greece and Italy that austerity policies were the
necessary consequence of private and government overborrowing during the previous decade and thus to rectify macroeconomic policy mistakes by these countries. The same argument can be made now about Germany, which has increased its energy dependence from Russia
substantially over the past decades, a decision that many criticised even before the current conflict and that is now indefensible. However, Germany is not really accepting the consequences of this wrong decision, which would require to cut itself off from
Russian energy, even if this implies a heavy economic cost. As much as euro periphery countries imposed costs on the whole euro areas with imprudent macro policies, Germany has imposed security costs on all of Europe with its imprudent energy policies!
Third, this brings me to the important debate among German economists on the predicted economic damage that such an Russian energy import ban would imply. The first study,
by Ruediger Bachmann and others has shown that there would be economic damage, but would be most likely to be limited to 3% of GDP. A lot depends on the assumption of elasticities of
substitution and adjustment speeds. However, a lot also depends on the complementary policy actions taken by the government; importantly, keeping fossil energy prices high (rather than subsidise them) while focusing on income subsidies for poorer households.
As much as this initial study has been criticised by other German economists, other studies have more or less confirmed this assessment. This makes the aggressive dismissal of these estimates by Olaf Scholz as “being theoretical” even more
embarrassing. It is elected politicians who are to take such decisions, but dismissing serious research contrary to one’s priors is embarrassing and ultimately damaging for the political discourse and informed policymaking. At this stage it seems
that the German government is listening primarily to industry lobbyists who refuse to internalise the costs that energy dependence from Russia imposes on German and European security. And pointing to economic costs in the light of ongoing Russian aggression
and war crimes and the clear threat to European security and peace seems a rather cheap excuse anyway. In spring 2020 lockdown decisions were taken before any economic cost scenarios could be completed; why the hesitancy now?
Finally, the hesitancy of the German government to address the challenges immediately will simply kick the can down the road and increase the costs in the future. The longer Russia can rely on energy
payments, the longer it can finance its aggression against Ukraine and the bigger the human and economic damage. Cutting off Russian energy keeps the West in control, waiting until Putin might decide to cut off energy supplies to the West leaves the West at
his mercy. And not to speak of the long-run international reputation costs that Germany is currently incurring because of its hesitancy. Time for German leadership not hesitancy! Time to be on the right side of history!