Chancellor Olaf Scholz said he’s sure Germany will avoid a recession this year, offering reassurance for Europe’s largest economy as it faces down Russia’s energy squeeze.
Germany is getting through the winter energy crunch in better shape than feared just a few weeks ago, and Scholz said that diversifying gas supplies has been critical in helping to keep the economy going.
“I’m absolutely convinced that this will not happen — Germany going into a recession,” Scholz said Tuesday in an interview with Bloomberg Editor-in-Chief John Micklethwait. He also voiced confidence about smoothing over a dispute with the U.S. over climate subsidies and managing China’s emergence as a political and economic power.
A rapid pivot to new non-Russian energy sources and lower demand from unusually warm weather have all but eliminated the risk of blackouts this winter, offering a boost to the 64-year-old chancellor as he looks to maintain public support for Ukraine’s war effort and keep his three-party coalition in line.
Energy concerns have dominated the start of Scholz’s tenure after Vladimir Putin’s invasion of Ukraine exposed the vulnerability of German supplies. With Russia providing 55% of the country’s gas before the war, Scholz was forced into urgent action to head off the threat of shortages during the coldest months.
The Social Democrat was the surprise winner of 2021’s federal election and was almost immediately plunged into turmoil by the Russian invasion. The chancellor announced a massive spending plan to revamp Germany’s moribund military and has started to adapt the economy to the shutoff of cheap Russian gas, but his broader promise of “Zeitenwende” — German for a historical turning point — remains a work in progress.
While he acted fast on short-term issues, Germany needs to accelerate its transition to renewable power for its industrial base to remain competitive, while its economic reliance on China has become a risk as Beijing increasingly flexes its power on the international stage and targets Germany’s role in advanced manufacturing.
Angela Merkel’s successor has made improving ties with the U.S. a priority after relations deteriorated under Donald Trump. The former U.S. president accused Germany of free-riding on joint defense expenditure and exploiting allies economically through its high trade surplus. Those tensions have lingered even if his rapport with Joe Biden is much more cooperative.
The past months have shown the limits on Scholz’s room to maneuver. He has the weakest backing of any chancellor since World War II, and his awkward coalition with the Greens and the pro-business Free Democrats has often become bogged down by infighting.
But the economic resilience offers prospects for Scholz to gain more authority. Output probably stagnated in the fourth quarter, defying widely held expectations that the period would mark the beginning of a recession on the back of soaring inflation.
“The risk to Germany was really the energy situation going into the winter,” Gary Cohn, a former economic adviser to Trump, said in a Bloomberg TV interview. “I think Germany's going to get through the winter fairly easily with energy, and I think they’re going to power through this. So I’m in agreement with the chancellor.”
Capacity from new liquefied natural gas terminals that have become sprouting up on the Baltic and North Sea coasts is giving Germany the flexibility to maintain its economy, Scholz said before heading to the World Economic Forum, where he will deliver a special address on Wednesday. He’s the only Group of Seven leader traveling to the gathering in Davos, Switzerland — a sign of how he’s trying to grab a larger role on the world stage after a rocky start.
“I’m sure that we will be able to go through the situation again, and this is because we are constantly increasing our capacities for importing gas,” Scholz said.
A stable domestic economy gives the German chancellor more leeway to stake out an agenda internationally, and he set out a firm line on Russia, saying he wouldn’t back off supporting Kyiv and it was up to Putin to its withdraw troops from Ukraine’s territory.
“We support Ukraine as long as it is necessary, with all the means that we can use,” he said, adding his customary caveat that NATO allies must avoid being drawn into direct conflict with Russia.
While Germany has been one of Kyiv’s biggest suppliers of military equipment, Scholz is under pressure to supply Leopard battle tanks. The prospect of sending some of the country’s most powerful combat vehicles to engage the Russian army is particularly sensitive for a German leader as it evokes images of battles on the eastern front in World War II. To that end, Scholz has been careful to coordinate deliveries with the U.S. and said he will continue this approach.
“We are never going alone, because this is necessary in a very difficult situation like this,” he said.
While U.S. relations are much improved, there has been friction between the transatlantic allies over President Joe Biden’s green investment plan. Germany and other European allies say the new law, known as the Inflation Reduction Act, unfairly subsidizes American companies and risks luring investment away from Europe. Again taking a reassuring line, Scholz said the issue can be resolved without a trade war.
“I’m sure that it will not happen — we are working very hard to avoid a situation like this,” he said.
Germany could ill afford to antagonize the U.S. as Scholz looks to reset relations with China. While Germany relied on Russia for energy supplies, its links with China are more complex, and Berlin is now on alert to the risks of building up too much dependence.
But with about €250 billion ($270 billion) in trade between the two countries, Scholz has been walking a fine line between cooperation and competition. He’s made a point of cultivating relations with other Asian nations such as India, Japan and Indonesia, and didn’t visit China until November — nearly a year into his term.
As the biggest car market in the world, China is critical for Volkswagen AG, Mercedes-Benz Group AG and BMW AG — all three German carmakers operate major joint ventures and sell more cars there than anywhere else. China last year accounted for nearly 40% of VW’s total deliveries. The exposure extends to hundreds of so-called Mittelstand companies — smaller, privately-held manufacturers that represent the backbone of the countries.
Like with energy, Scholz’s strategy is to diversify away from China and he still has time to avoid the kind of disruption caused by Russia’s energy squeeze.
“We have to learn our lesson from the war and a lot of other big problems we are facing,” said Scholz, “and this is we should differentiate our supply chains, we shouldn’t go for one country alone.”
