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Bachmann fuels the economists’ dispute: “Putin is playing cat and mouse with Europe”

Bachmann fuels the economists’ dispute
“Putin is playing cat and mouse with Europe”

By Jannik Tillar

In March, a group led by the German economist Bachmann presented a model calculation according to which a German embargo on Russian gas could be managed. A storm of indignation erupted in the professional world. Now the authors are following suit.

Can we make it through the winter without Russian gas – and if so, at what cost? Economists have been discussing this question for months, initially against the background of whether Germany should not voluntarily forgo Russian gas, now against the reverse question that Russia is cutting off our gas. There is no broad consensus, on Twitter a camp battle between different economists that has long since left the level of “scientific dispute” dominates. For months, the dissent has been carried out under the hashtag #Economists.

One of the triggers in March was the so-called Bachmann study, which considered a German embargo on Russian gas feasible. Other economists strongly disagreed, even Chancellor Olaf Scholz accused the study of being “irresponsible”. Now the authors have followed suit: Their new study is called “How to do it” and deals with the question of how much gas Germany has to save in order to get through the winter without Russian imports. Their conclusion: about 25 percent compared to previous heating periods.

The core message of the earlier paper is underlined with the current analysis. “Perhaps our communication in March was not optimal,” says study author Rüdiger Bachmann from the US University of Notre Dame to “Capital”. Individual authors would have joined embargo calls. “But we didn’t specifically call for an embargo on Russian gas in the paper,” Bachmann clarifies. “It was important to us: It doesn’t matter whether an embargo is imposed or not, we have to save gas.” This part is now central in the new study, since a German ban on imports of Russian gas has now been politically ruled out. Under these new conditions, Bachmann and ten co-authors investigated how much gas would have to be saved.

To do this, they compare the situation today with that in March. According to their calculations, consumption would have to be reduced by an average of 25 percent between August 2022 and April 2023 if Russia stopped supplying gas overnight. At that time it should have been 31 percent with a German embargo. Due to the almost 110 terawatt hours (TWh) that have effectively flowed from Russia to Germany since April, the Federal Republic has to save around six percentage points less gas.

Other economists disagree

Whether that is a lot or a little depends on the reading. Economists like Sebastian Dullien from the Institute for Macroeconomics and Business Cycle Research (IMK) take the view that six percentage points make a huge difference. This is not only due to the additional gas, but above all to the time factor given to consumers and companies – for example because they switch their production from gas to oil. “Restructuring production processes doesn’t work overnight. The additional gas deliveries give producers freedom,” says Dullien. DIW economist Dorothea Schäfer also takes this view: “Buying time is not a disgrace and is usually the first step in overcoming the crisis.” Tapering off Russian gas is healthier than cold turkey.

On the other hand, if you ask Rüdiger Bachmann and his colleagues, six percent is not very much. “In the meantime, Germany has suffered a massive loss of reputation because Putin can play cat and mouse with Europe. Things like the ruble exchange on a Gazprom account or the tiresome turbine issue with Siemens Energy – none of this would have happened with an embargo in March.” In addition, according to the authors’ thesis, companies would have gotten used to saving gas faster if there had been an immediate embargo than under the current circumstances. Now, five months later, little has happened. The pressure to save gas has only increased. After all, there is still enough time until winter.

Economists are currently arguing again whether it is really realistic to save a lot of gas by then. Many companies are already converting their production, including BASF, Veltins and Audi. The authors around Bachmann also state this. But whether the pace is sufficient is questionable. For Dullien, the companies are already at the breaking point: “The conversions are already in full swing there and have reduced vulnerability. Private households have also made great efforts to replace gas heating, for example, but because millions of households are involved, it takes longer.”

Bachmann and Co., on the other hand, criticize that the federal government still gives too few incentives to save gas. The price is still the most important mechanism here, as it has a massive influence on behavior. “Unfortunately, the discussion is only being conducted by individual economists and not by politicians,” says Bachmann. Federal Economics Minister Robert Habeck from the Greens was one of the few to understand the problem, but has so far accompanied it with calls rather than clear laws.

Two ideas for gas saving incentives

In their paper, the authors therefore propose two ways of encouraging consumers to save gas: first, a kind of credit on future bills from the energy supplier. In this way, those who save gas could temporarily compensate for the higher prices. Those who consume the same or more, however, have to pay extra. The second idea works the other way around: end customers would first have to pay a tax, which they would get back in full depending on their savings – and possibly even a bonus on top of that. Both mechanisms, Bachmann hopes, will relieve the burden on poorer sections of the population, although saving on gas will become more difficult with potentially poorer thermal insulation in the apartments.

What all economists agree on is that if Russia shuts off its gas, there will be no avoiding saving – as long as the consequences for the economy are cushioned. Economists like Tom Krebs see a potential of around 20 percent here. According to the new Bachmann study, it would have to be 210 terawatt hours by April 2023 to keep at least 20 percent reserve. The savings would have to be made primarily by industry and energy production.

According to Bachmann, the latter would have to save 46 percent or 60 TWh alone, for example by using less gas for electricity production. Industry would have to save at least 26 percent (90 TWh), households only 16 percent (60 TWh). That also means that everyone has to get involved, for example by cooling homes by 2.5 degrees. And that should be a high political hurdle.

This article first appeared on Capital.de.

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