Jamaican Shipwreck: Will Merkel Go Down with the Ship?

For more than a month, representatives of German Chancellor Angela Merkel’s Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), have been engaged in preliminary discussions about creating a coalition government with two other smaller parties—the pro-business liberal (in the European sense) Free Democratic Party (FDP) and the environmentalist Greens. Following a long German habit of identifying political parties and their coalitions by traditional colors, the linking of Christian Democrats (Black), Liberals (Yellow), and Greens has been referred to as a “Jamaica” Coalition, reflecting the colors of the Caribbean nation’s flag.

Jamaica is a popular vacation spot, an island of tropical dreams. Today, however, it represents a disturbing political reality. The collapse of those negotiations has plunged Germany into its deepest political crisis since reunification.

Such a coalition is a new development in German politics, having been tried out so far only on the state level in Saarland (from 2009-2012) and currently in the far northern state of Schleswig-Holstein. It is a sign of increasing political fragmentation in Germany, as the relative decline of the larger parties has made broader coalitions necessary, and of the desire of centrist parties to cooperate in the face of extremist challenges from both the neo-communist Linke (Left) and the nationalist-populist Alternative for Germany (AfD).

It also happened, in this case, to be Angela Merkel’s only mathematical chance at a majority after the disappointing results of national elections on September 24. Despite her high international profile, the CDU/CSU suffered significant losses, winning barely a third of the overall vote. Merkel’s coalition partner, the center-left Social Democratic Party (SPD), fell even further. The once-proud SPD gained barely 21% of the vote, and on election night, its leader, Martin Schulz, announced that the Social Democrats preferred to go into opposition to regroup than to continue as a shrunken junior partner in another (increasingly less) Grand Coalition. Unwilling to include the AfD, who rode a wave of anti-immigrant and anti-establishment sentiment to 13% of the vote, let alone the Linke, Merkel and colleagues claimed to welcome the chance to make Jamaica a reality.

Supporters of the Jamaica idea have hailed it as a creative solution to political stasis, providing an alternative to the stale cooperation between the CDU/CSU and SPD. The very idea that the CDU/CSU and the Greens could contemplate a coalition would have appeared ludicrous to politicians in the 1980s, when the Greens first emerged out of the peace movement to denounce the pro-NATO policies of CDU Chancellor Helmut Kohl. It certainly says a lot about the changing German political landscape that such cooperation has functioned reasonably well at the city and state level, and has become a national possibility. Both sides have altered their positions on key issues, especially as a degree of environmental consciousness has become part of the mainstream consensus, and they have also displayed a degree of pragmatism in finding common ground. Critics, however, pointing out significant policy differences on migration and environmental policy not only between the CDU/CSU and the Greens but also between the FDP and the Greens, denounced the idea as far-fetched and doomed from the start. Unsurprisingly, the leaders of the AfD have been especially harsh, viewing Jamaica as merely the last bastion of a political elite determined at all costs to keep the AfD from government. But even sympathetic European centrist observers such as Timothy Garton Ash have called it an “improbable pantomime horse.”

Well, that horse broke a leg on Sunday night when the telegenic leader of the FDP, Christian Lindner, announced that his party was abandoning the preliminary coalition talks. The trip to Jamaica has been at best postponed, and at worst canceled.

Two questions come to mind:

  • What happened?
  • What’s next?

Answering the first question depends heavily on where one stands politically. Lindner portrayed his decision to break off talks as a blow for political principle. Blaming the Greens for their insistence on liberal policies on the reunification of migrant families, Lindner claimed there were compromises he was not prepared to make. “It is better not to govern than to govern incorrectly” (Besser nicht regieren als falsch), was the slogan that appeared with suspiciously immediate ubiquity on all FDP social media platforms. Supporters of the other parties, however, have rejected this portrayal. CSU Chair Horst Seehofer (himself an advocate of stricter immigration policies) claimed that an agreement was “within reach,” while other Christian Democrats and Greens denounced the FDP as inflexible.

Lindner is also pursuing a clear, if risky, political calculation. He succeeded in returning the FDP to the Bundestag with a campaign that hinted at a more pro-business and nationalist liberalism, with enough criticism of Merkel’s immigration policies and of the European Union to appeal to those middle-class voters who were upset with Merkel but perhaps not quite willing to vote for the AfD. Looking around the European neighborhood, Lindner may have seen possible role models in the equally young and telegenic Emmanuel Macron in France (who basically created a new political party riding a wave of frustration with the political establishment) and also Sebastian Kurz in Austria (who has embraced a hard line on immigration to build a center-right coalition). Finishing behind the AfD but slightly ahead of the Greens was a notable but incomplete success. Although a coalition with the CDU/CSU alone would have appealed to many center-right voters, it was not clear that being part of a government with the Greens would be good for the FDP’s long-term strategy of appealing to dissatisfied but respectable conservatives. (Indeed, the AfD was founded by defectors from both the CSU and the FDP, so this would be a kind of reunion strategy.) A few years in parliamentary opposition may serve that purpose better, giving the FDP a chance to hone its message. Indeed, Lindner and the FDP reacted especially strongly to Martin Schulz’s announcement that the SPD would not be available for another Grand Coalition—not out of any affection for the existing arrangement, but because it provided a target-rich environment for the FDP’s rhetorical jabs. After Schulz’s demurral, it would have been hard for the FDP to say no to negotiations. Lindner may have even been serious about participating in the government if the terms were right. Nevertheless, it’s not surprising that Lindner chose this dramatic step, and has even suggested that new elections are necessary. Especially by suggesting that immigration was the sticking point, Lindner is clearly preparing the FDP for a campaign in which it runs hard to capture conservative votes.

As for what happens next, that depends on how the parties and their leaders manage the details of the German constitution. Merkel has met with Federal President Frank-Walter Steinmeier, who has the constitutional responsibility to approve coalition negotiations. Assuming that Steinmeier, who comes from the SPD and served as Merkel’s Foreign Minister in a previous Grand Coalition, cannot convince his old party to return to government, and that the FDP is serious about rejecting Jamaica, the only remaining options would be a minority government (either of the CDU/CSU and Greens, or, less likely, the CDU/CSU alone) or early national elections.

There is no tradition in postwar German history of minority governments at the national level, which would make every parliamentary decision a drama as the government sought supplementary votes from other parties. It is not an appealing prospect now, especially at a time when Germany faces both domestic and international challenges—from immigration to the Brexit negotiations—and has to deal with difficult international interlocutors including Xi Jinping, Vladimir Putin, and Donald Trump.

That makes new elections appear inevitable. Here again, however, the constitutional rules do not make it easy. First, the Bundestag would have to go through the process of voting on Angela Merkel as Chancellor candidate of the largest party. If she fails to receive a majority vote, the Bundestag would have two weeks to reconsider before voting again on whomever is nominated to be chancellor. Only after that second round of voting was complete would it be possible for the Federal President to dissolve the Bundestag, with elections taking place sometime in the late winter or early spring.

Either way, Germany and Europe face months of further political uncertainty. To make matters worse, at the end of it all, there is no guarantee that the election results would provide any more clarity. Current polls suggest a picture at least as fragmented as the September elections. Lindner may believe he can gain votes, but it is also possible that a campaign that includes multiple parties offering anti-establishment rhetoric will only serve the purposes of the AfD. One of their leaders, Alice Weidel, has already announced that the AfD welcomes new elections. It is very likely that the next Chancellor will face many of the same problems, and the individual parties will face many of the same existential choices of whether to retreat into opposition or to take up the responsibility of governing.

All of this leads us back to the woman who has stood at the center of German, European, and in some cases, even world politics since 2005—Angela Merkel. The September elections were always going to be her last in active politics. Despite ongoing criticism for her handling of migration and of the ongoing Euro crisis, her apparent political recovery over the course of the past year led pollsters to assume that she would enter a fourth and final term with a range of coalition options. Instead, she finds herself with few, and with her reputation as the stable hand on the tiller guiding Germany through choppy seas facing its greatest challenge.

Merkel’s critics, from the AfD to the broader Euroskeptic press (sometimes together) are gleefully proclaiming that “Merkel is finished!” Whether she is or not will depend on how she manages this last crisis. At stake is not only her personal political fate, but the future of German and European politics. Merkel may not guide the Germans to Jamaica after all, but we can hope that her failure doesn’t send everyone back to Weimar.

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Russia’s Existential Threat to NATO in the Baltics

NATO seems more united today than it has been at any time since the end of the Cold War. An aggressive Russia, unbowed by Western economic sanctions after its annexation of Crimea and intervention in eastern Ukraine, has driven NATO member countries closer together. However, if given the opportunity, an aggressive Russia could also put NATO in a position that could strain its cohesion and ultimately undermine its existence. One place where that could happen is in the Baltics states of Estonia, Lithuania, and Latvia.

Bigger, Not Necessarily Stronger

As part of NATO’s eastward expansion after the Cold War, the Baltic countries joined the Alliance in 2004. But geographically separated from nearly all of NATO and having small militaries, the Baltics have always been vulnerable. From the start, military planners understood that NATO would have to commit substantial resources to properly defend the region from a Russian invasion.

At the time, NATO’s European governments were unconcerned. Russia, they believed, no longer posed a real threat. So, rather than make the costly outlays needed to protect the Baltic states, they cut their defense budgets. It was little surprise, then, that Europe’s conventional military forces saw their numbers and combat readiness fall. Today, France, Germany, and the United Kingdom would each be hard pressed to rapidly deploy a single combat-ready armored brigade. NATO’s reduced fighting capacity was also evident in its air campaign over Libya in 2011. After less than a month of combat, European air forces ran short of precision-guided munitions.

Moreover, given how easily Russia could sever the land and air routes into the Baltics, one might have expected NATO to have boosted its amphibious capacity in case it needed to send reinforcements across the Baltic Sea. Instead, NATO’s combined sealift capacity, excluding U.S. amphibious forces, has fallen to such a low level that it can ferry little more than two infantry brigades. Even worse, almost all of that capacity is based far from the Baltic Sea. And even if NATO could transport those brigades to the Baltics (through what might be a gauntlet of Russian air and missile strikes from Kaliningrad) it is doubtful whether they would be enough to stop a mechanized Russian invasion.

Peril of the Interregnum

Should NATO prove too unprepared to help the Baltics, Russia could achieve a quick victory. That would mean that NATO would have to mount a counteroffensive to liberate the region in order to fulfill its treaty obligations. But before it could do so, the Alliance would need time to fully mobilize its armed forces. During that interregnum, between Russia’s victory and NATO’s counteroffensive, NATO leaders would have time to contemplate what was to come.

They would have a lot to consider. Since the only land route into the Baltics runs through the 100-km wide Suwalki Gap, a narrow corridor between Lithuania and Poland, NATO ground forces would have little choice but to mount a frontal attack. Massed Russian artillery could turn the gap into a killing zone. Meanwhile, Russia’s coastal defense batteries and attack helicopter battalions could inflict heavy losses on any amphibious assault.

The conflict could also escalate beyond the Baltics. As a prelude to any counteroffensive, NATO commanders would naturally want to use their air power to attrit Russian forces and logistical capacity as well as suppress Russia’s supporting artillery, air defense, and coastal defense batteries. That would require strikes against targets on not only Baltic soil, but also possibly Russian soil. Moscow could seek reciprocity. It could launch air or missile strikes on similar targets in Western Europe and the United States. Russia could even escalate to a nuclear confrontation. In effect, it could thrust upon NATO leaders the decision: “Is Tallinn worth Berlin?”

Ultimately, the near certainty of high casualties, the uncertainty of battlefield success, and the possibility of a wider war might cause NATO leaders to think twice about liberating the Baltics. Russian information operations would likely exacerbate those concerns to sow doubt and division within NATO countries. If NATO leaders were to hesitate during the interregnum and agree to a settlement that left any part of the Baltics in Russian hands, then no NATO member could fully trust NATO’s security guarantee again. The rationale for NATO would be lost and its future existence put at risk.

The Tripwire Fix

NATO faced a similar danger during the Cold War. At that time, the Soviet Union and its Warsaw Pact allies had amassed such enormous conventional forces that they threatened to overwhelm those of the Alliance. Observers wondered whether the United States would risk a nuclear confrontation with the Soviet Union if it quickly occupied Western Europe. The question put to American leaders was: “Is Bonn worth Washington?” NATO responded by stationing large U.S. military forces close to the frontline, in part, to act as a tripwire. They would incur the first casualties of any Soviet invasion. Those losses would bind the United States and its nuclear arsenal to the defense of Western Europe, and thus deter the Soviet Union from invading it in the first place.

NATO appears to be trying a similar tactic in the Baltics states. For years, NATO has rotated tiny military contingents through the region. But over the last year, their sizes have grown. Currently, a German-led battle group of 1,000 soldiers is in Lithuania. Later this year, a Canadian-led battle group will be in Latvia and a British-led one will visit Estonia. Though still too small to stop a Russian invasion, they could serve as a tripwire to bind the rest of Europe to the defense of the Baltics. However, that only works if NATO can prevent Russia from achieving a quick victory, since the prospect of a costly counteroffensive could still render NATO’s tripwire ineffective.

Conclusion

To reliably avoid Russia’s existential threat, NATO must ensure that Russia is unable to score a quick victory in the Baltics. That requires NATO members to pledge more than words of resolve. That requires more resources for more troops, better equipment, and, above all, higher combat readiness.

Most exposed to the Russian threat, NATO’s Eastern European members are leading the way. Poland created a new Territorial Defense Force of reservists who will number 53,000 in two years. It also ordered 128 upgraded Leopard 2PL main battle tanks.[1] All three Baltic countries have acquired new light armored vehicles. Better yet, they are beginning to acquire the firepower needed to slow a Russian advance. Lithuania recently bought PzH2000 self-propelled howitzers, and Estonia is in discussions to purchase K9 long-range artillery.[2]

The rest of NATO needs to do the same. After all, one of the key reasons why NATO was so important in the most successful unfought war of the last century, the Cold War, was because its member countries were conscious to brook no ambiguity about the Alliance’s combat readiness to take on its main adversary.


[1] Remigiusz Wilk, “Polish Territorial Defence Force expanded to 53,000 personnel,” Jane’s Defence Weekly, Nov. 17, 2016; Remigiusz Wilk, “Poland orders 128 upgraded Leopard 2PL main battle tanks,” Jane’s Defence Weekly, Jan. 4, 2016.

[2] Nicholas de Larrinaga, “Estonia begins K9 artillery negotiations with South Korea,” Jane’s Defence Weekly, Feb. 7, 2017; Nicholas de Larrinaga, “Lithuania receives first PzH 2000 howitzers,” Jane’s Defence Weekly, Jun. 28, 2016.

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NATO’s Baltic Defense Challenge

As NATO expanded eastwards after the Cold War, the geography that the Alliance needed to defend changed significantly (See map). Rather than a relatively narrow front in Central Europe (dashed line), NATO now had to contend with a far wider front across Eastern Europe (solid line) stretching its defense capabilities. When the Baltic countries of Estonia, Latvia, and Lithuania joined the Alliance in 2004, they created an even greater operational challenge for NATO.

Lay of the Land

Sitting on the Alliance’s eastern edge, all three Baltic countries border Russia, NATO’s most likely adversary. But only one, Lithuania, is connected to any other NATO country. Lithuania’s border with Poland, just 100 km wide and with a single highway running through it, forms a bottleneck that NATO planners call the Suwalki Gap (named after a nearby Polish town). Worse still, on one side of the gap is Kaliningrad, a large Russian military enclave, and on the other side is Belarus, a close Russian ally.

Figuring out how to overcome that problematic geography became more pressing for NATO after 2007, when Russia suspended its participation in the Conventional Armed Forces in Europe treaty, which had limited the number of troops and equipment that NATO and Russia could station in continental Europe. Since then, Russia has steadily strengthened its military forces across its western regions, including Kaliningrad. One recent study estimates that if Russia were to invade the Baltics today it could mobilize 25 battalions of armor, airborne, and mechanized infantry (supported by ten battalions of artillery, six of attack helicopters, and five of short-range ballistic missiles). By contrast, the Baltic countries could field only 11 battalions of light infantry, most of which are reserve units.[1] Plus, without any fighter aircraft of their own, Baltic forces would be completely exposed to Russian air power.

Clearly, without NATO support, the Baltics could offer little serious resistance to a Russian invasion. From St. Petersburg, a Russian column could advance into Estonia to seize Tallinn. From Pskov, another column could advance into Latvia to take Riga and pivot south into Lithuania.[2] Simultaneously, Russian forces in Kaliningrad could seal off likely avenues for NATO reinforcements. A Russian thrust toward Marijampolė would close the Suwalki Gap and another toward Klaipėda would close NATO’s most accessible Baltic port. To ensure battlefield success, Russia could use its strategic reserve of airborne and Spetsnaz forces.

From the Sea

Should Russia sever the land and air routes into the Baltics, NATO may be forced to send its reinforcements across the Baltic Sea. However, doing so would face serious hurdles. First, NATO lacks enough military sealift to transport the volume of troops and equipment necessary to stop a Russian assault. As a work-around for its sealift shortage, NATO could commandeer car ferries and other civilian shipping. But NATO could not as easily work around the threat of Russian long-range anti-ship cruise missiles. Launched from K-300P Bastion-P coastal defense batteries in Kaliningrad, such missiles could inflict heavy casualties on any NATO reinforcements.

Since the U.S. Navy would not likely want to expose an aircraft carrier battle group to such a threat in the confined waters of the Baltic Sea, the job of escorting NATO’s troop transports would then fall on smaller warships with less sophisticated anti-ship cruise missile defenses. That could put already scarce troop transports at higher risk.

Even worse, if Russian forces were to capture all the ports in the Baltics, NATO might have to mount an amphibious assault to reestablish itself on land. That would be difficult to pull off, despite the spectacle of NATO’s Baltic Operations (Baltops) exercises. Amphibious assaults have never been easy; but they are even more difficult today, given that modern precision-guided munitions could make short work of landing craft, helicopters, and even MV-22 aircraft.

Conflict Escalation

Given the potential for Russia to interdict their seaborne forces, NATO commanders would naturally want to suppress Russian coastal defense batteries. After all, a successful missile strike on a single transport could result in the loss of hundreds of troops and their equipment. Multiple missile strikes could swiftly sap the combat strength of any NATO relief force.

At first glance, the suppression of Russian coastal defense batteries (and the air defense systems protecting them) would appear to be a straightforward affair. NATO air forces based in Germany and Poland could easily reach and strike Russian positions in Kaliningrad. However, were NATO air forces to do so, they would be hitting targets on Russian soil. That, in turn, could prompt Russia to expand the conflict beyond the Baltics. NATO could expect retaliatory Russian strikes on its German and Polish air bases.

In addition, one could reasonably expect NATO commanders to want to stem the flow of Russian forces and supplies into the Baltics, either to slow a Russian invasion or as a prelude to a NATO counteroffensive. To be most effective, that would require NATO strikes on Russian logistical facilities near St. Petersburg and Pskov. Such strikes would hit targets deep into Russian territory. That could also prompt Russia to escalate. It could launch retaliatory strikes against NATO logistical facilities in Antwerp, Hamburg, and Rotterdam. Russia could even use submarine-launched land-attack cruise missiles to hit targets in the United States, like Naval Station Norfolk or Pope Air Force Base, which normally support U.S. operations abroad.

Ultimately, Russia could threaten to use nuclear weapons. Indeed, in 2016, Russia moved Iskander 9K720 intermediate-range nuclear-capable missiles into Kaliningrad.[3] It may have done so, in part, to ensure that NATO leaders think twice before attacking targets there, since a strike on Russian nuclear forces could quickly escalate into a nuclear confrontation. In any case, even if armed with conventional warheads, those missiles could hit and devastate targets as far away as Germany.

Conclusion

The best way for NATO to overcome its operational challenge in the Baltics is to make sure it never manifests itself. To do that, NATO must convince Russia that it could not achieve a quick victory in the region. Already NATO has rotated small air and ground detachments through the Baltic countries to stiffen their defenses as well as to create a tripwire to guarantee a forceful NATO response in case of a Russian attack.

But more needs to be done before Russia is really convinced. Forward-deployed NATO battle groups need to be stronger—strong enough to hold open avenues for NATO reinforcements. Moreover, NATO countries need to revive their conventional war-fighting capabilities and maintain them at a higher state of combat readiness than they do now. Finally, NATO forces need to be able to react more quickly to Russian actions. That means Western governments need to give NATO’s commander the authority to not only put their national military forces on alert, but also order them into the field for limited periods. In short, NATO should, once again, adhere to the old aphorism that “if you want peace, prepare for war.”


[1] David A. Shlapak and Michael W. Johnson, Reinforcing Deterrence on NATO’s Eastern Flank: Wargaming the Defense of the Baltics (Santa Monica, CA: RAND, 2016), pp. 4-5.

[2] Should Belarus allow them to do so, Russian forces could also pass through Belarusian territory to advance on Vilnius from Minsk.

[3] Brooks Tigner, “Kaliningrad becoming a more dangerous military threat for NATO, say officials,” Jane’s Defence Weekly, Nov. 10, 2016.

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Effectiveness of Economic Sanctions on Russia’s Economy

In early 2015, Western leaders thought they had Russia cornered.  A year earlier they imposed on Russia economic sanctions, which ranged from restrictions on access to Western capital markets to bans on the export of oil-production technology, to punish it for its role in dismembering Ukraine.  Those sanctions and the Russian boycotts that followed threw Russia’s economy into turmoil.  With some justification, President Barack Obama declared that “Russia is isolated with its economy in tatters” in January 2015.  But two years later, Russia has stabilized its economy, annexed Crimea, and kept its “little green men” in eastern Ukraine.  What went awry?

Peak Pain

In financial terms, Russia felt the most damaging impact of the West’s economic sanctions within the first year of their imposition.  Suddenly, Russian companies, holding dollar and euro-denominated debt, had to repay their loans without the ability to refinance them.  Russian banks targeted by Western sanctions saw their overseas assets frozen.  That created a cash crunch.  Many companies were forced to suspend operations and slash jobs; some even required government capital injections to survive.  But they did survive.

Commodity Price Stabilization

Unfortunately for Russia, the West’s economic sanctions coincided with a steep drop in global oil prices.  That, more than anything else, exacerbated Russia’s economic woes, since much of the country’s economy depends on the production of commodities, primarily oil.  Oil prices plummeted from over $100 per barrel to under $35 per barrel in late 2015.  But then they began to recover the following year.  So too did the prices of other major commodities that Russia produces, including iron, aluminum, and copper.  No doubt global economic growth, which boosted commodity prices, helped Russia to better ride out Western sanctions.

Floating Currency

But the stabilization of commodities prices did not save Russia’s economy.  With economic sanctions darkening the country’s outlook, the value of the Russian ruble was cut in half.  At first, Russia’s central bank tried to defend it, consuming $200 billion in foreign exchange reserves in the effort.  But ultimately, Russia’s central bank took a leaf from the International Monetary Fund’s market-based playbook and allowed the Russian ruble to float.  That freed Russia’s central bank from having to defend the ruble and prevented an even greater outflow of hard currency that would have further undermined Russia’s economy.

Moreover, since commodities are generally priced in dollars, the sharply devalued ruble meant that though Russian companies faced falling prices for their goods, the dollars they did receive could be converted into more rubles.  That softened the economic blow—enough so that Russian energy companies could continue to reinvest in their businesses.  As a result, despite the sanctions on oil-production technology, Russia is able to produce more oil today than it did before the sanctions were imposed.

Inflation Control

With shortages of imported goods and more rubles in circulation, inflation became a real threat.  Rising prices ate away at the purchasing power of ordinary Russians.  But rather than reflexively enact price controls, Russia’s central bank used another market-inspired lever.  It raised interest rates, up to 17 percent by December 2014.  Credit naturally dried up, further depressing the Russian economy.  But fortunately for Russia, inflation was quickly brought under control.  That allowed Russia’s central bank to gradually lower interest rates to 10 percent, giving Russian companies much-needed breathing room to recover.

Fiscal Discipline

In the depths of its economic recession, Moscow could have increased government spending to boost economic activity.  But with falling revenues from Russian oil production, a surge in spending would have pushed Russia’s government budget deep into the red and fueled a potential economic crisis.  Instead, Moscow exercised fiscal discipline.  It held its spending in check and ran a budget deficit of only 3 percent of Russia’s GDP last year.  When more funds were needed, Moscow raised taxes and dug into its two sovereign wealth funds, draining a third of their assets before oil prices stabilized.

Wavering Western Resolve

Meanwhile, European companies, particularly German ones, gave Moscow hope.  They were never keen on the economic sanctions against Russia.  From the start, they lobbied German Chancellor Angela Merkel to water them down.  After they were imposed in 2014, German direct investment into Russia evaporated.  But only a year later, German companies returned, investing $1.8 billion into Russia.  Last year, they invested another $2.1 billion, more than they had in the year before economic sanctions were imposed.  Such continued investments have encouraged Moscow to question the strength of Western resolve.

Conclusion

The West’s economic sanctions have bent but did not break the Russian economy, despite its structural vulnerabilities.  What steadied it was a combination of several factors, the most important of which were the stabilization of global commodity prices and the market-oriented policies implemented by Russian authorities.  They made Russia’s economy more resilient and prevented an even deeper recession.

Ultimately, economic sanctions can make countries more vulnerable to global economic forces.  But rarely do they deliver a knockout blow themselves.  Western economic sanctions against Russia have proven the rule, rather than the exception.  Ironically, the West’s success in spreading open-market ideas at Russia’s central bank may have inadvertently weakened the effectiveness of its own economic sanctions.  If so, the further spread of such ideas could make economic sanctions even less effective in the future.

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Are You Staying, Or Just Passing Through? The Geopolitics Of Asylum

European politics have been roiled over the past few years by the question of how the EU as a whole and its individual member states should deal with refugees seeking asylum from the ongoing wars throughout the Greater Middle East. Most attention has been focused on the stream of unfortunates coming across Turkey and the Aegean from Afghanistan, Iraq, and especially Syria. Their stories have tugged at European heartstrings, even as some have worried that the crowds of apparent refuges could also include potential terrorists.

Germany in particular has chosen to accept hundreds of thousands of refugees. Chancellor Angela Merkel’s confident proclamation “Wir schaffen das” (We can handle it) has earned her praise from humanitarian groups but also brickbats from analysts and political critics who claim she has undermined national security in quixotic pursuit of moral redemption for the German people’s historical sins.

At the root of the debate has been the question of German and European responsibility for helping the victims of wars on Europe’s periphery—wars in which Europe has been unwilling or unable to take an active role—and the potential danger such migrants pose to European society. Critics of Merkel’s policy point to recent terror attacks as proof of the dangers of unchecked immigration, and argue for robust interdiction and higher fences.  Supporters of a more open policy, such as Assistant Secretary of State for Democracy, Human Rights, and Labor John Shattuck, have argued the opposite, that accepting refugees will allow Europe (and the United States as well) to display their commitment to human rights, counter Islamist assertions that the West is at best indifferent and at worst actively hostile to the well-being of Muslims, and thus actually enhance both the reputation and the security of the West. 

So far, neither side in the debate has scored an undisputed victory, and it is unlikely that they will any time soon. But the discussion of migration and asylum, so focused on the actions of European governments, often leaves out the actions of the migrants themselves.  Although one will occasionally see discussions of the need for the refugees and asylum seekers themselves to integrate into European culture, the primary policy question for Europeans has been framed as “do we let them in or not?”

The closer one looks, however, the more one sees that it is not just a matter of who comes in, but how they come and go once they have found asylum, and the political activities they choose to engage in while enjoying the protection of that status.

All of which leads us to the saga of Yahya Badr al-Din al-Houthi. Al-Houthi is a Yemeni activist, the brother of the leader of Yemen’s Houthi rebels, currently involved in a bitter civil conflict with the government of Yemen. That conflict has developed into a proxy war between Shiite Iran (which backs the Houthis) and the Sunni monarchies of the Gulf, led by Saudi Arabia, which backs the Yemeni government.

[For those interested in more detail, the conflict in Yemen was the subject of the February 2015 episode of FPRI’s “Geopolitics with Granieri,” which addressed its local, regional, and global complexities.]

Al-Houthi’s exploits have recently been the subject of a two-part summer series in the print edition of the Saudi news magazine Majalla (available in English as well as Arabic). The series highlights the significant questions about German capacity and willingness to hold political refugees to the legal conditions of their stay, and the implications for this case for future asylum policy.

Although even less well known to American audiences than the Syrian Civil War, the war in Yemen has entered its second year with no clear end in sight, and is producing its own flow of displaced refugees. Its wider implications have also increased the significance of Houthi activists abroad. Al-Houthi himself fled Yemen more than a decade ago, and found political asylum in Germany.  Far from staying out of the politics of his homeland, however, al-Houthi has been an active supporter of the rebel cause, appearing on a variety of media outlets (including the Arabic service of Deutsche Welle, Germany’s version of the Voice of America), meeting with Iranian representatives and other supporters of the Houthi cause, including Hezbollah, and even traveling back and forth to Yemen to participate in the rebellion.

Such activity stretches the legal meaning of asylum, and poses a difficult political problem for the Germans. There is of course historical precedent for rebel groups and self-styled “governments in exile” to set up shop abroad. Usually, however, such actions depend upon the formal approval of the foreign host. The Germans have extended no such formal support to al-Houthi and his compatriots, but at the same time they have not acted to shut down his behavior either. Either decision would bring political challenges that Berlin appears to prefer to avoid. The resulting ambiguity, however, is not only embarrassing for the German authorities, but also raises uncomfortable questions about the broader responsibility of even the most welcoming governments for the political activities of those whom they chose to shelter.

In this atmosphere of increasing tension about how to deal with the challenge of integrating political migrants and asylum seekers, European policy discussions should include an understanding of this particular case. So far, it offers no satisfying solutions, but many questions well worth pondering.

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Greek Debt, Austerity, and the Myth of the Hypocritical Hun

Sunday’s referendum in Greece, in which more than 60% of voters rejected the latest offer from the so-called “troika” (International Monetary Fund, European Central Bank, and the European Commission) provided a resounding electoral victory for the government of Prime Minister Alexis Tsipras, though it is unclear what it will mean for the next stages of the ongoing Euro crisis.

Tsipras called the referendum last week rather than continue negotiations with Greece’s creditors, which he claimed were going nowhere. His abrupt decision led to the expiration of aid to Greece on 30 June and the withdrawal of troika’s last offer, though that was the offer that Tsipras called upon his people to accept or reject. European leaders warned that a “no” vote would mean no more negotiations at all, while Tsipras claimed a no vote just meant the Greek people rejected austerity, and that negotiations could then continue on a more solid basis. Tsipras and his Finance Minister Yanis Varoufakis (who called Greece’s creditors “terrorists” for their attempts to encourage a yes vote) heatedly denied that “no” meant Greece wanted to leave the Euro (“Grexit”), let alone the European Union, even as many of their European partners warned otherwise. Most Greeks, facing mounting economic chaos and armed with only a vague idea of the specific deal, apparently welcomed the chance to denounce austerity without jeopardizing Greece’s place in Europe, and believe they can retain the Euro.

Such assumptions are, to put it mildly, optimistic, though the resignation of Varoufakis this morning indicates that Tsipras still hopes to restart negotiations. The coming weeks will show whether Tsipras’ gamble will pay off, and future historians will have to decide whether or when the entire Greek drama will end up a tragedy, a comedy, or a farce.

This latest twist in a years-long saga has been accompanied by an increased wave of criticism of the troika and especially of Germany, considered the sinister mastermind behind austerity.

Criticism of Chancellor Angela Merkel now also includes a historical angle as well. Many Facebook feeds over the weekend were flooded with images of Greek and other European states signing the 1953 London Agreement, which greatly reduced the debt burden on West Germany, and is correctly considered a key moment in the postwar German “Economic Miracle.” Some journalists on the pro-SYRIZA Left have gone so far as to accuse the Germans of hypocrisy in refusing to give Greece the same consideration. Superstar Economic Thomas Piketty has taken the argument a step further, asserting that Germany “has never repaid its debts.”

Such assertions fit into a popular narrative that combines two popular villains (bankers and Germans) into one. Angela Merkel and Finance Minister Wolfgang Schäuble are now not just Mr. Potter, according to this narrative they are hypocrites to boot.

Although one can understand the depth of frustration on all sides of this debate, this particular historical analogy requires a great deal of correction. It can be helpful in encouraging creative thinking about how to resolve the Greek crisis, but not if it is viewed in the ways encouraged by Piketty and the Guardian, which are at best incomplete if not tendentiously false.

It is certainly true that in 1953 West Germany and its creditors reached an agreement that greatly reduced the debt burden on Germans. That agreement encouraged economic growth that helped not only Germany but also Europe as a whole. But that agreement did not spring fully clothed from the minds of the world’s bankers, nor was it a simple act of charity.

West Germany in 1953 was indeed treated differently than Greece in 2011-2015. What the Facebook meme forgets is that West Germany got that debt deal after the destruction of a war (which Germany did indeed start), four years of military occupation, major loss of German territory (West Germany included barely 60% of the total territory of Germany as of 1937), waves of refugees that needed to be resettled, national division, hyperinflation and a currency reform—and, it should be added, the writing of a new constitution that created a new democratic state, the Federal Republic of Germany in 1949. Successful negotiations also required West Germany after 1949 to assume legal obligation for all debts of all previous German states and to agree to pay reparations for crimes committed by the Nazi regime (even as the other German state refused to do either). Finally, that agreement only came after the government of Konrad Adenauer demonstrated its willingness to submit both West German heavy industry (in the European Coal and Steel Community) and its military (in the ill-fated European Defense Community) to supranational European authority. West Germany also behaved differently than Greece—demonstrating a willingness to make compromises for Europe, and also enduring a period of austerity and slow wage growth, in order to help create the political atmosphere that made the 1953 debt agreement possible.

Added to all this was the geopolitical encouragement of the Cold War and the larger significance of the German economy for European recovery, as noted by Leonid Bershidsky.

All in all, it’s more than just Germany got some sweet deal they are denying the Greeks.

The 1953 deal was not automatic. West Germany received such consideration only as a result of policies consciously adopted by Chancellor Konrad Adenauer and his Economics Minister Ludwig Erhard, in the face of not inconsiderable domestic opposition. Adenauer strongly believed that West Germany’s future lay in cooperation with the democracies of the West (Westbindung), and in the integration of Western Europe. He was prepared to make significant sacrifices in the immediate term in order to guarantee West Germany’s place in that future Europe. For his trouble, opposition leader Kurt Schumacher denounced him as the “Chancellor of the Allies.” Schumacher and many of his colleagues in the Social Democratic Party (SPD) believed that Germany should be part of the West and should receive economic aid, but believed Germany was so important to the West that Adenauer’s concessions on German national interests were dangerous and unnecessary. The SPD would modify many of these positions in the years to come, but Schumacher made statements in the early 1950s—insisting upon nationalization and refusal to participate in European integration yet demanding assistance from the Allies—that would fit well in an Alexis Tsipras speech today. It’s hard to imagine that strategy succeeding in the 1950s, just as it is hard to imagine an agreement today without mutual compromise.

The simple image of hypocritical Germans rests on a misreading of the historical facts.

All of which is not to say that the Germans in general—then or now—enjoyed some inherent moral advantage over the Greeks. Those kinds of assertions, which one can find in many contemporary discussions about the Euro crisis, are just as misguided and unhelpful as the mythologies of Piketty. The Germans have a large European responsibility, and the government of Angela Merkel is on the spot to offer clear leadership, and she has proven so far to be far too cautious.

The 1953 analogy has much to teach us, but not in the ways that it is currently being used. A clearer historical perspective should help us see that things could have turned out rather differently in the 1950s, but turned out the way they did as a result of conscious choices made by leaders in Europe and the United States. Adenauer pursued his vision of German Westbindung with ruthless consistency, and found partners in French colleagues such as Robert Schuman and Jean Monnet, Italians such as Alcide De Gasperi, and Belgians such as Paul-Henri Spaak, with whom he shared a vision for European integration that helped overcome national suspicions, as well as with the Truman and Eisenhower administrations, who were the key to any international financial accord.

They did not solve all those problems, and left many for future generations. Any hope that we may have of a sensible resolution to the current crisis will require much wiser and more creative leadership than we have seen thus far. Comparing West Germany in 1953 and Greece in 2015, it’s clear that Alexis Tsipras is no Konrad Adenauer. Alas, when it comes to a willingness to speak clearly in favor of European cooperation even at the short-term expense of German national interests, Angela Merkel isn’t either. 

 

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Bundeswehr 2.0: A German Military for a New Normal

A visit to Germany’s military history museum in Dresden reveals just how deeply ambivalent modern Germany is about its military, the Bundeswehr.  One account described it as “a meditation on mankind’s addiction to state violence.”  No wonder that Germany—despite being Europe’s most populous and wealthiest country—has continuously cut the size of the Bundeswehr since the end of the Cold War.  While much of that was warranted, given the disappearance of the Soviet threat, today’s Bundeswehr is not only a fraction of its former self (and half the size of the French military), but also apparently in a state of disrepair, according to an independent review of the Bundeswehr’s combat readiness last September.[1]

Germany Military

Hence, when German Chancellor Angela Merkel travelled to Moscow to persuade Russian President Vladimir Putin to end his aggression in Ukraine, she did so without the benefit of military power to back her efforts.  Instead, German diplomats have sought to use Germany’s economic power as leverage to shape Russia’s behavior.  Far better, they argue, to avoid competing with Russia on military terms, in which Germany is weak and Russia holds “escalation dominance.”  But economic power clearly has its limits, as Russia has yet to end its intervention in eastern Ukraine.  That has led even those Germans who have long been sympathetic to Moscow to consider whether there has been a fundamental shift in Russian posture—one that might require Germany to address through a stronger defense.  For the first time in decades, Bundestag legislators have begun to discuss the need to strengthen the Bundeswehr.[2]

But what kind of Bundeswehr is needed?  Surely, it must be one that is consistent with Germany’s vision of itself, if Germans are ever to embrace it.  It should be tailored for a mission that most German citizens can agree is in Germany’s national interest, such as the security of Central Europe.  It should also be one that can meaningfully contribute to NATO’s collective defense, but does not put its neighbors ill at ease.  As such, one could envision a Bundeswehr that is designed—through its armaments and force structure—to be fundamentally defensive, yet still beneficial to NATO.

From the way the German army chose to pare back its equipment after the Cold War, it is clear that its leaders sought to preserve as much of the combat capabilities of its heavy armored units as possible.  But by 2010 that was no longer possible, as the numbers of its main battle tanks (MBT) and armored infantry fighting vehicles (AIFV) plunged.  Rather than rebuild its army on a foundation of MBTs, Germany could equip it with more defensive weapon systems, like AIFVs that are fitted with long-range anti-tank missiles.  Such systems wound provide an effective defense against armor without having the offensive strength of MBTs.

Meanwhile, the German navy could focus its attention on the defensive mission to protect NATO’s sea lines of communication to the alliance’s Baltic member states.  Given the maritime environment of the Baltic Sea, that mission would primarily entail coastal diesel-electric submarines, corvettes, and minesweepers, rather than larger oceangoing combatants.  As a corollary to that mission, the German navy could contribute to NATO’s ability to send reinforcements to Estonia, Latvia, and Lithuania with landing ship tanks (LSTs).  Finally, the German air force could focus its resources on filling an air-superiority role (which it apparently already has begun to do), rather than a more offensive ground-support role.  Such an air force would have the added benefit of being able to enforce future defensive no-fly zones.

Even so, if the Bundeswehr is to be seen as non-threatening to its neighbors, one must also consider its force structure.  The Bundeswehr should be appropriately sized relative to those of its neighbors, France and Poland—small enough that they would not find it menacing, but large enough that, when combined with the capabilities of other NATO countries, it would be useful to fend off a foreign threat to the alliance.

Within those criteria, one could envision an expanded German army that includes two armored brigades equipped with Leopard 2A7 MBTs and six mechanized brigades equipped with a new generation of missile-armed Marder AIFVs.  When operating alongside Poland’s heavily armored units (which include 900 MBTs), the German force could help respond to any aggression from the east.  Similarly, a German navy equipped with 12 coastal diesel-electric submarines, 12 corvettes, and 36 minesweepers could help NATO keep its sea lines of communication open to its Baltic member states.  Moreover, the navy could help NATO develop a credible sealift capability with 12 LSTs that could transport relief forces and supplies to Estonia, Latvia, and Lithuania.  Finally, the German air force—if equipped with 240 air-superiority fighters (a mix of European-built Eurofighters and American-built F-22 fighters)—could help ensure that NATO controls the skies over Central Europe.

Such a Bundeswehr would be a largely defensive force, essentially incapable of offensive action without the support of its NATO allies.  But it would be one that could make a meaningful contribution to the security of Central Europe and the integrity of the NATO alliance.  Of course, this sort of transformation would not be costless.  It will consume every bit of the military spending increase that Germany promised its NATO allies in the 2014 Wales Summit Declaration.  But in making that investment, Berlin could create a force that is worthy of praise from its allies and, perhaps, Germans too.

[1] “Consultants list Bundeswehr blunders,” Deutsche Welle, Oct. 6, 2014, http://dw.de/p/1DR9m; “Merkel peeks over Bundeswehr shortfall parapet,” Deutsche Welle, Oct. 3, 2014, http://dw.de/p/1DPdX; “A German army museum reopens,” Economist, Oct. 15, 2011.

[2] Anton Troianovski, “Ukraine Crisis Spurs Calls in Germany to Reverse Years of Trimming Army,” Wall Street Journal, Mar. 9, 2015, p. A10.

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Merkel in Westminster

Angela Merkel makes for an unlikely cheerleader. Nevertheless, as the European Union’s senior head of government, and the leader of Europe’s largest economy—not to mention the Continent’s most successful and longest serving current democratically elected leader who is not Vladimir Putin—the famously reserved German Chancellor often finds herself called upon to lobby her partners for greater efforts toward European solidarity and cooperation. Such a position would probably be inevitable for any contemporary German chancellor, but is even more necessary now that other candidates for the job of EU Head Cheerleader are either too anonymous (the colorless European Council president Herman van Rompuy, who is not even the first “Herman van” to show up on a Bing search) or far too well known for the wrong things (the colorlessly colorful ladies’ man, French President Francois Hollande, who has managed to gain the affection of at least two gorgeous and accomplished women in his lifetime and lose the affection of the French people as a whole in less than a year).

 

Merkel’s latest lobbying tour is taking her to London, where she is making a one-day visit that includes not only a reception at Buckingham Palace with the Queen, but also a speech to both Houses of Parliament and assorted dignitaries at the Palace at Westminster. Merkel follows in the footsteps of previous historical worthies who have been granted this honor, from Nelson Mandela and the Dalai Lama to Charles de Gaulle and Ronald Reagan. Invited by his ideological soul sister Margaret Thatcher, Reagan famously used his June 1982 speech, delivered during one of the chillier periods of the late Cold War, to proclaim his conviction that the free peoples of the world should work together to see Communism consigned to the “ash heap of history.”

Merkel can only dream of her speech having such historical resonance, though she arrives in London at a moment of similarly high political tension. The EU is still trying to dig itself out of a major economic crisis that has also undermined its political legitimacy. Meanwhile, her colleague and fellow conservative David Cameron finds himself in a serious political bind of his own creation. The United Kingdom has always had an ambivalent relationship to European integration—unwilling to run the economic risk of staying out, but equally unwilling to run the domestic political risk of embracing closer integration and being accused of betraying Britain’s sovereignty.  Cameron’s Conservatives have been generally Eurosceptic since the days of Thatcher, but Cameron has tried to massage that message since his election. He expresses sympathy for criticisms of Brussels, most famously refusing to accept the Eurozone’s fiscal compact in 2011. But he also has been lukewarm on the possibility of British withdrawal, hoping to head off such demands by promising a referendum on British membership after the next British general election, and using the intervening time to win his colleagues over for reforms to the EU’s Lisbon Treaty that would satisfy British reservations. So far that strategy has only managed to embolden British Euroskeptics and annoy many of Britain’s EU partners, neither of whom have much faith in Cameron’s ability to thread this particular needle.

Cameron counts on Merkel to be his advocate within European councils. The size and shape of the German economy means that there is at least some sympathy for British criticisms of current EU policy, and Cameron views Merkel’s successful management of a coalition government as a potential model for his own political future. The other members of the EU, however, are also counting on Merkel to act as their advocated with the British, to encourage Cameron’s government to work more cooperatively on dealing with the current Euro-malaise.

Attempting to satisfy both the British and the other European partners is a heavy burden on the blazer-clad shoulders of Chancellor Merkel.  That burden grows heavier as elections to the European Parliament (EP), scheduled for late May, draw nearer. Although the EP is still far from the pan-European legislature its founders hoped it would become, its practical authority has grown over the years, especially since the Lisbon Treaty granted it the power to approve or dismiss the EU’s main executive body, the European Commission. Aside from its limited practical role, however, the EP has often served as a symbolic rallying point for European sentiment, and that symbolism could further deepen the EU’s current crisis of legitimacy. Opinion polls suggest that the two more reliably Europhile caucuses—the Christian Democratic/Conservative European People’s Party (EPP) and the Party of European Socialists (PES)—will continue a disturbing trend of historic electoral lows as their once dominance position shrinks to a bare majority. The decline of Europhile factions is mirrored by the rise of Euroskeptical parties such as the United Kingdom Independence Party (UKIP), the French National Front (FN), or even the Alliance for Germany (AfD), who each could score significant increases. Those parties both profit from and encourage the frustrations many Europeans feel about the EU. The specific nature of those frustrations varies according to national situations. Some feel Europe is too expensive and oppressive, while others wish Europe would be more generous with the Euros of the wealthier members. Nevertheless, all agree that Europe is not sufficiently responsive to their concerns, and thus speculate about reorganization, expulsions, or even withdrawals. Cameron is especially worried about the UKIP. Its rise threatens the future of his own government, as elements of the Tory base turn away from his Euromuddle in favor of more clarified Euroskepticism.

Faced with such a complex situation, Merkel chose to say everything and nothing in her speech.  She flattered her hosts, praising the British parliament as a bastion of representative government and extolling the virtues of Anglo-German partnership. But she also remained committed to European integration, refusing to embrace the idea of a British referendum, and politely sprinkling cold water on British hopes for “fundamental reform of the European architecture.” Reforms are possible, but only if all partners work together, Merkel concluded, which led to her central pitch. “We need a strong United Kingdom with a strong voice inside the EU,” she said. “If we have that we will be able to make the necessary changes for the benefit of all.”

Thus a speech ends with a call for more speaking. The advantage of that approach is that keeping everyone talking means that no one will leave the conversation. The disadvantage is that even the friendliest conversations need to lead somewhere, if the conversation is to have any meaning at all. It is still not clear that Cameron, Merkel, or anyone else in Europe is willing or able to say exactly what they want to see happen, let alone how they plan to do it, or when they hope to see it. That kind of programmatic vagueness is fatal to even the most well-intentioned speech. It’s not all Merkel’s fault, of course. Even the most effective cheerleaders can’t rally the crowd if they don’t know what it takes to win the game.

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Winds of Change: Comparative Energy Security Policies

The meltdown of three reactors at Japan’s Fukushima Dai-Ichi nuclear power plant, following the Tōhoku earthquake and tsunami on March 11, 2011 (3/11), was a terrible event.  But for some renewable energy advocates, it also created an opportunity.  There was an immediate revulsion toward nuclear power around the world.  Even in France where three-quarters of the country’s electricity comes from nuclear power, popular opinion unambiguously swung against its continued use.  Across the border, Germany abruptly declared that it would abandon nuclear power and hasten its transition to renewable energy sources such as wind and solar.

How countries change their reliance from one energy source to another is often a hotly debated issue.  Nuclear power was once heralded as a low-cost and environmentally-friendly energy source—a way to end the need for dirty coal and oil.  But after Three Mile Island’s partial meltdown in 1979 and Chernobyl’s catastrophic meltdown in 1986, nuclear power fell out of favor.  But by then, many countries, including Japan and Germany, had already integrated nuclear power as part of their national energy mix and change would entail costs.  But what those costs would be were uncertain.

Until the Fukushima Dai-Ichi meltdown, Japan operated 50 nuclear power plants, generating 30 percent of the country’s electricity.  In fact, in 2002 the Japanese government sought to increase the share of nuclear power in the country’s energy mix to 40 percent by 2017.  Similarly, Germany operated 17 nuclear power plants, providing almost 20 percent of the country’s electricity.   For years, conventional energy supporters and renewable energy advocates clashed over just how quickly and how painful a transition from nuclear power to renewable energy sources would be.  Conventional energy supporters warned of a major economic shock if such a transition was not done gradually.  Meanwhile, renewable energy advocates played down the potential for economic pain after a transition was made.

But after Japan’s 3/11 disaster, both sets of advocates were proven wrong (and right).  The warning from conventional energy supporters was disproved first.  Within two months, Japan shut down 33 nuclear power plants, and two years later only two remained in operation.  Meanwhile, in Germany, eight nuclear power plants that were offline for testing or repair were kept shuddered.  A combination of increased use of coal-fired power plants and renewable energy sources and energy conservation measures—particularly stringent ones in Japan—made up for much of the electricity shortfall.  The economies of both countries muddled through 2011; no economic calamity ensued.

However, renewable energy advocates were also shown to be off the mark.  Two years on, the sudden change from nuclear energy to other energy sources has gradually eroded both countries’ economic competitiveness through higher electricity prices.  As a result, Japan has begun to look to imported natural gas, shipped to the country as liquefied natural gas (LNG).  Japanese electric utilities now seek LNG sources for new gas-fired power plants.  But despite long-term LNG contracts, such plants do expose the country to natural gas price and currency fluctuations over time.  For example, the recent 10 percent decline in the Japanese yen vs. the U.S. dollar pushed up natural gas prices roughly the same amount because natural gas is priced in U.S. dollars.  Japanese industry has long worried about the impact of higher energy costs and has begun to lobby its government to restart idle nuclear power plants.  And with the Japanese economy trapped in multi-decade stagnation, Tokyo seems willing to try, not only to help Japanese industry, but also raise consumer consumption.

Similarly, electricity prices in Germany are now 15 percent higher than the average in the rest of the European Union.  German consumers already pay more for electricity than most other Europeans and have seen their electricity bills climb 40 percent over the last five years to pay for renewable energy subsidies.  Hence, some in Germany have come to wonder whether its Energiewende [energy transition] will lead to lower future economic growth as businesses—particularly those in energy intensive sectors such as machinery and steel—have shown signs of disinvesting in Germany and locating elsewhere.

Moreover, Germany’s shift to renewable energy sources has made the country’s electrical grid more difficult to manage.  The amount of electricity put on a gird must precisely match the amount that is consumed; otherwise variations in voltage could cause rolling blackouts.  Unfortunately, wind and solar energy sources can only generate electricity intermittently.  So even as these sources have become a larger part of Germany’s energy mix, the country’s electrical grid needs a way to smooth out their unpredictability.  That can only be done with conventional energy sources.  And since Germany is committed to phasing out its coal-fired power plants, it is now reconsidering the potential of fracking to fuel gas-fired power plants.

Thus, while it is possible to quickly change from one energy source to another without major mishap, the process cannot escape market fundamentals altogether.  Japan and Germany still need reliable and cost-effective energy sources to remain industrially competitive in the world.  Otherwise some industries will migrate to comparable countries, like the United States where fracking has contributed to a revival of American industrial production.  Renewable energy sources have demonstrated that they can meet a substantial share of modern electricity demands, but certainly not all or even the bulk of it—at least not until an innovator creates the better battery.

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