Matt Klein on How Germany Wound up So Dependent on Russian Gas

they're really extraordinarily dramatic. Obviously, we've seen the Russian financial sector get pounded, all kinds of disruptions, Russian equities listed abroad, their value in many cases going to zero, numerous companies often just voluntarily sort of washing their hands at the Russia business. But of course, as everyone understands, the one

huge I guess it's the elephants in the room. One area that has not been directly targeted is is energy, right, and this is really I don't want to say the crux of the whole issue, but certainly this is something that has played into the fact that Putin invaded Ukraine in the first place. There's a huge reliance on Russian natural gas in Europe and I think this is well

understood and well established now. And even before the recent actions, prices had been going up, people were talking about inflation and energy crisis, and then this all made it worse. But on the one hand, all of this plays into the geopolitical situations. So there's an argument to be made that Putin feels more empowered in invading Ukraine because he knows that Europe relies on his country for its gas needs. And of course, sorry, I don't know where I'm going

with this. There's a lot to say there. There is an extraordinary meant to say. I guess one of the questions is why wasn't Europe more prepared or why wasn't Why hadn't Europe already taken steps to perhaps wean itself off Russian natural gas and oil and coal, And of course there was the annexation of Crimea, So it's not like these geopolitical concerns suddenly just came out of nowhere. No,

this is where I was going with it. Actually was that Putin has a really good grasp of the energy situation. It seemed to understand that Europe needs Russian gas. But at the same time, it doesn't feel like Europe necessarily understood that, or if they understood it, it it doesn't seem like they did anything about it. Everything just sort of went on as it did before and even even after the first invasion of Ukraine and you know the situation

in Crimea. In Even after that, you didn't really see Europe back away from Russia in any meaningful way, even though, as we discussed with Sultan Posar recently, you did see Russia takes steps to sort of insulate itself from the West. And of course we're talking about Europe broadly, but there's obviously sort of a specific you know, the the key country in Europe from the sort of Russian gas reliance

that a lot of this revolves around is Germany. Because it is an extremely rich and successful country, it also is extremely reliant on natural gas. And you know, it's sort of taken some odd energy choices because this is a country whose leadership has talked a lot about going green and sustainability and all that, and yet it's actually really not done well on hitting some of its emissions goals.

It's phased out nuclear, but it also that means it's more reliant on cold, more reliant on gas, and maybe in the long term one day beyond wind power and solar power and be all renewables, but that seems very long term right here. And now its emissions are going up and it's dependence on Russia is acute. Yeah, and I think that's become very very apparent in the way, well, just the way the whole crisis has unfolded. I will say, we're recording this on March second, and I'm looking at

that gas the spot price on the Bloomberg terminal. Now it jumps sixty earlier today, and of course it's another fresh record, but it's been at fresh records for multiple times in recent days and indeed in recent weeks. So you can feel all of these tensions and all of this pressure, all of these potentially um bad policy choices UH manifesting themselves in these record energy prices exactly right.

So we want to like push the conversation forward and get more insight into this crisis, this war, and the German situation specifically. I'm very excited for this conversation. We've had our guest on one time before we're going to be speaking with Matt Klein is the founder and publisher of The Overshoot, which is a phenomenal newsletter on economics and the economy, and of course he is the co author of the book Trade Wars Are Class Wars. Matt Klein,

thank you so much for coming on coming back. Thank you very much for having me. So, you know we talked the last time we talked to you, I think maybe it was maybe it was, and you had published this book trade wars are class wars, and of course, you know, going back to nineteen around that time, when you think trade wars, obviously you think US China attention because of course there were the various uh Trump tariffs

and so forth. But a big part of your book was not just about US China, of course, but also this third actor Germany specifically, what do you like talk about to us about like what was their role in the story before we even get to the current crisis. Why were they like sort of like a key player or actor to be understood in the sort of global context.

The basic argument of the book is that for a very long time and maybe years or so, that the world economy as a whole has been suffering from the systematic shortage of consumer demand, and that's ended up creating a lot of tensions as businesses are trying to capture this finite demand and as consumers over you know, in different parts of the world trying to compensate for the

lack of income. That is a result of this, and so one of the major drivers of the shortfall of consumer demand was Germany and then later Germany, uh you know, extended to the rest of Europe as a whole macro policy in terms of both business investment being weak in terms of government policy essentially over taxing, underspending, and squeezing demand for goods and services, and then that ended up redounding in all sorts of different ways in terms of

higher debt levels and financial crises and stuff. And the argument of the book being that policies in Germany, not just government policies, but really the policies of business leaders and other elite actors in society ended up leading to systematic problems for the world as whole, and that ended up leading problems for people in Europe and people outside

of Europe. And even if that wasn't something we think of in the trade war context, as you were saying, like the Trump and China stuff, was very you know obvious what this was, and it was nevertheless leading to tremendous amounts of tension within Europe. And you can see that throughout the eurok crisis in terms of the conflicts, and you know, you have people like the Dutch finance minister blaming lazy Southern Europeans for things, and then you

have Southern Europeans talking about fascists in the north. And then that was all really, I think a reflection of the fact that you had really bad economic outcomes driven by bad econnotic policy. So you mentioned, um like a bad situation caused by policy decisions. Could you maybe just elaborate on that a little bit more as it relates to the current Russia situation and the energy landscape that we were talking about a little bit in the intro.

How much does a country like Germany actually depend on Russia for its energy needs. Germany is quite dependent on Russia. So for the European Union as a whole, if we look at basically the period right before the pandemics, the pandemic kind of distorts things a little bit. It about of all energy came from Russian imports, So that's a lot of that includes natural gas, that includes coal, that includes oil. Natural gas is the most significant one for

these purposes because it's not easy to substitute it. You know, if Russia doesn't sell oil to Europe, someone else is going to buy that oil. Europe can therefore buy oil from whoever you know previously was not buying Russian oil, so it's it's more fungible. Gas, on the other hand, is mostly transported by fixed pipelines, and so therefore you really, you know, you can substitute to a degree, but it's

much more challenging to do that. Germany sort of compounded this problem in a couple of ways, some of which one is that they made the decision after the Fukushima nuclear disaster in Japan to start decommissioning all of their own nuclear power plants, and so a is quite substantial source of clean and uh you know, reliable, local, locally sourced energy shut off, and I think they basically they're

either about to. I think that they had been currently scheduled had been scheduled to turn off the last of the nuclear plants, I think at the end of this year. I think now that's starting to change, but that was basically something that had been going on over the past ten years, turning off nuclear power. Another thing that they've done, which I think we can relate sort of more to their macropolicy mix, is that they didn't invest enough in

coming up with replacements. So while there has been a real commitment since I think about towards greening the energy makes they called the energy transition. They have invested a lot in wind and solar power. Particularly wind power hasn't been enough to offset the loss of nuclear and so one of the things that actually have been you know, bridging the difference was that they increased their coal consumption quite a bit, which is ironic given their desire to

be more environmentally friendly. The other thing they did, of course, that they imported even more Russian gas. So the story the connection between Russia and Germany on gas is, you know,

it goes back quite a long time. Basically, you can really sort of argue that it goes back to the nine sixties before Eve Russia had gas, when the German government under Willie Brandt decided that they wanted to call ast politic and the idea that the Germany would sort of be a bridge between the rest of the West and the Eastern Bloc and have sort of friendly relations and you know, just their own sort of distinct history and culture, and they would be trying to be more

friendly to the USSR and the rest of the Warsaw Pact countries. And so one of the ways that that manifest is once Russia started developing gas fields and wanted to export it that Germany was pretty eager and building pipelines, and this goes back to the early nineteen eighties, they start building the pipelines. In fact, this is something that the Raning administration criticized the German government for at the time, because they thought it would be increasing Europe's dependence on

the Soviets and potentially become a security risk. The German argument was engagement is going to be better. We want to integrate Russia into you know, the Western economy. That's going to moderate their behavior. And if you look just at the nineteen eighties, maybe that was a good argument because Russian in fact, did you know, the Soviet Union rather did in fact become you know, more moderate over the course in nineteen eighties, and that did become a

constructive relationship. Nevertheless, though as time progressed that, you know, the question is why do they keep sticking with this? You you mentioned that the first Russian invasion of Ukraine, the annexation of Crimea, might have led to a shift in behavior. It did not. The project that Russia and German businesses had been working on for quite some time called nord Stream to another pipeline basically to increase the Russian gastles or Germany had been in progress before that,

and continue to accelerate after this. Total German imports through the first North Stream pipeline, which goes under the Baltic Sea went up, and so actually overall energy imports of gas were significantly higher by the time you get than you were even, which is the exact opposite of what you'd think would have happened if if you know, European policymakers were concerned about reliance on Russia, and it now puts them in a situation where it's kind of challenging,

which is, you could theoretically cut your gas consumption by you know, a significant amount or whatever. But is that actually something you can do on a dime? Maybe? Um? I mean, I guess the good news that winter mostly over so they don't need it for heat, But you know, that does create a lot of leavorage. I mean, as you mentioned, Tracy, the pricing of natural gas is so high because the supply was already being constrained. I mean, I think one thing that hasn't been appreciated enough. I

was surprised to see it myself. Is that, you know, until they stopped making their website publicly accessible, gas Prom, which is the Russian company that produces and transports the gas, they published daily data on how much gas they shipped to European Union customers and which route, and the last data we have this is the weekend before they invaded Ukraine. But you know, what you can see is that in basically starting around sort of the end of August, the

gas flows start falling dramatically. And basically, if you look at the beginning of two so you've been going down kind of steadily, and if by the time you get to the beginning of so like from January one to February was bright before the invasion, we're talking about thirty six percent lower deliveries to EU customers compared to the January through August one average, So it's a really dramatic drop. And basically they're there are a whole bunch of different pipelines.

A bunch go through Ukraine. There's one that goes directly to Germany, and then there's one that goes through Belarus and Poland to Germany. And with the exception, the only one that really had maintained its flow was the one that goes straight to Germany. The other ones we're getting really squeezed. I don't know what has been happening in the past year week and a half that those data are no longer available, but I mean the price signals

suggested maybe they've squeezed it even further. You know, that's Tracy saying like that that I think that it was reasonable for Putin to conclude that this did give them, the Russians, of fair amount of leverage and that they were in fact trying to use that. So it's interesting you mentioned that the German Russia figurative and literal pipeline

has gone back several decades. I learned on our last episode that we did actually that our current Secretary of State, Anthony B. Lincoln, several years ago even wrote a book on called Ali Versus l I America, Europe and the Siberian Pipeline Crisis about this dispute in on this exact thing. So I kind of want to read that book because now it's come up in two separate podcasts, and so

it seems highly relevant. Something I'm you know, something I'm curious you know, to sort of like bridge this and I guess this is really the key question is so we talked at the beginning about this sort of and this is what your book is about, this sort of demand constraining policy, macro policy from Germany. You know, in theory, you could run balanced budgets and do better on nuclear

or sorry, do better on energy investments. And theoretically they could have invested more in renewables or domestic sources of energy or energy terminals that would have allowed them to become less reliant on Russia, still maintaining a balanced budget, whether that's wise or not. But can you talk a little bit more about the sort of like macro stance that the German state has had for the last five years and the sort of sclerotic under investment that they've

seen in the energy sector. The context here is is that when the Berlin Wall fell in nineteen nine and West Germany prepared the Federal Republic of Germany, West Germany prepared to absorb the states of East Germany into a new and large federal republic. There was a surge of spending both by the government and my businesses to make that transition happen. And you basically have the last like great boom in the German economy. For I guess there's

point over thirty years. The Buddhist Bank, which is Germany Central Bank at the time, responds by really aggressively raising

interest rates because they're worried about inflation. Then you have you know, pretty dramatic reversal by the federal government in terms of spending cuts after a couple of years later, compounded by the fact that it turns out that you know, a lot of the optimism that people had about the ability to transform East Germany into a part of Germany that be is productive as West Germany, that optimism was not validated for well ever enough a very long time. They there was a hope that a lot of East

German businesses could be transformed. Um, you get this huge boom from privatization and better management. That didn't happen. You just had the government instead ended up taking a huge loss. They finally wrote it down in and then they basically spend a long period of time afterwards, there's a really nasty recession, all these people East Germany losing their jobs. You have the high interest rates in the early nineties.

Even then you have essentially the budget you know, restraint cutback because the German government felt they just spent too much, and they just signed a treaty UM with their European neighbors that they that they themselves have pushed for UM for balanced budgets as part of preparation for the creation of the common currency. All that led to a huge squeeze and you can look at things like you know,

construction activity, other measures of business investment. You have this massive decline in the nineteen nineties and a very long

period stagnation. It was really painful and in fact was was the reason why the German left had its best elections ever in after years of you know, despite the four of reunification that was done under the German Conservative Party the Christian Democrats, you know, in the beginning of the nineteen nineties and the late nineteen eighties that the Social Democrats and the Green's come into power for the first time as a coalition in and incidentally, the person

who led that coalition, Gerhard Schroeder, then later went on to become a very prominent person in gas, prominent leading the North Stream to project. I think he might still be on it, Yeah, I think he's technically as of right now, I think he's still which is kind of remarkable. Yeah, so they so that was the context there. So Schroeder comes into into power with this coalition government, and one of the things they want to do is you know,

increased spending. They want to have lower interest rates, and especially after the downturn of the early two thousands, which is Germany pretty hard. It's a global downturn. The tech bus that it was not in unique United States, and

they can't. Ironically, you know, we thinking now to Germans being you know, the major blocks on you know, looser monetary policy and the e c B, the Germans being the major constraint on ability for governments to borrow and spend in responsive downturns because we have a run you know, the recollection of how things were and say two thousand ten, two thousand, eleven, twelve, but if you go to like two thousand, two thousand one or even that was it

was the opposite. Actually, the Germans were pressuring the e CP for looser policy because relative to their domestic needs, ECB was way too tight, and the BCP just this to no, like, you know, I there's a there's a press conference you can find. I don't remember exactly what the day was. It's in the book where some journalists asked the ECB about the request they've been getting from from Schroeder and from his finance minister Oscar La Fontaine and the head of the c B as well. I hear,

but I do not listen. And you know, okay, so you know that they have another like severe downturn, and you know, they they sort of push for some modest exemptions to the budget caps. So that basically the the EU treaty that they signed um in Masstrich in the other ones back was that you can't have a budget

deficit more than three percent of GDP. That number, as it happens if you go back in the history, it was basically selling that some French, relatively young French bureaucrat made up in the eighties and thought it was you know, you know, three was a nice round number. That they reminded him of the Trinity or something. But there's no

economic significance to this, but it was a constraint. And so Germany and France which are both having a rough period, uh you know, downturns in early two slow recoveries pushed to get the limit of that, but it wasn't really they didn't really exceeded very much, and it didn't really help that much. They were still relative constraint in their budgets.

And and the way these things generally work is that if you have a limit on how much you can spend on your budget, it's easier to cut the investment side than anything else, because what the alternative is, you're not you're gonna lay off a lot of you know, school teachers and and cut you know, unemployment benefits a lot of people like That's that compared to, well, we're gonna delay you know, fixing this road or building that bridge or whatever. It's much easier to cut the investment spending.

And this is particularly true in a it's like Germany, where you know, in some ways, like the United States, is is very much of a federal system and a lot of the spending is done by the German states or by local even you know, sublocal you know, substate of local governments, and those were also subject to sort of a national constraint, and so they really are being pressured because they can't, you know, their ability to borrow is very limited so they're going to cut investment spending

much harder. That sort of the setup going in really for you know, the past twenty years, and you know that the German governments certainly did also cut you know, welfare spending over this period as well, they're trying to

meet its budget commitments. They later than you know, became convinced that this was such a good idea that they actually put in what's called the debt break or the schulten Brems that that was you know, very extreme, basically saying that you can't have a a cyclically adjusted budget death sit for the government as a whole of more

than like half percent of GDP. And the problem of course with this, among other things, is that you know, it's very sensitive to how you define what the cycle is and and you know, if if you set it up, especially when they did after a very long period of growth being very very slow um and arguably you know, significantly below where Germany should have been, then you sort of locked yourself in permanent stagnation and that really limits your options. So even though the government did try to

invest more, it didn't really get anywhere. I mean, one thing that's really striking and this is you mentioned this in the book. I mentioned it more recently as well.

Is that if you look at investment spending in Germany after subtracting depreciation, which is an important thing to be considering, you know, you know what's like the new investment and net appreciation maintenance, it was negative for basically some like two thousand two until two thousand and eighteen, So you basically had a long situation of the you know, the public capital stock shrinking in real terms, and you know,

unsurprisingly that's that's going to create problems. I mean, I don't think they anticipated the specific problem, but that's going to create problems all sorts of things. You had bridges collapsing and roads being shut, you know, in the twenty tents because they were just unusable and they hadn't been maintained. This is obviously much more extreme, but it's a it's

a symptom of the same problem. So when it comes to spending, there is this perception out there that you know, maybe maybe it's something in the German character and they just don't like um spending money that much. But as you mentioned, you know, in recent years, it does seem like we've seen inklings of a break in that attitude, and I guess my question is, what are the chances that recent events build on that momentum and you actually see a place like Germany become more willing to spend

and invest in either public infrastructure or energy security. I'm actually very optimistic about this. I mean, I was optimistic before this recent crisis, um, for the reasons that you're laying out, you know, these cultural I mean, I'm not saying culture doesn't matter, but I think it's very easy to sort of over attribute economic outcomes to cultural differences.

There are a lot of examples of places where you know, people are very confident the culture is one thing, and then later they do exactly oppositely say it's the same culture.

It's like, that can't be the case. Um. So I think there was a recognition even among I think the reason it was so challenging because you had such political stability in Germany for so long, stability and also stagnations so basically in the early two thousands, partly because of these constraints that they didn't really have much of a choice.

You had the center left parties being the ones that actually really pushing austerity in the early two thousand's in terms of things like cutting unemployment benefits and basically squeezing investment to make room for other spending within the constraints uh, you know, Europe's budget rules. And then in two thousand five, what happens is that you have a very weird situation where the left wing parties as a whole end up winning a majority of the seats in the Bunshtad. But

they don't think. The reason that happens is because you have a split of the left where basically people on the left side of the Social Democrats ally with people who had had been sort of like ex communists in East Germany and we're protesting these policy changes by the government that time. So in theory there was sort of like a you know, majority left coalition, but in practice that would never have happened because it was, you know,

an opposition in existing policies. And so then you have, you know, the first of many grand coalitions where the conservative Christian Democrats ally with the Social Democrats and then end up pursuing the exact same policies. And in fact the way Merkel uncle and Merkel who becomes Prime Minister, chancellor,

chancellor at this point in time. Basically Newter is the opposition for what that felt like a generation because she's like, oh, yeah, this was great that the Social Democrats did was brilliant, and we want to continue their legacy and safeguard with all the good stuff they did for Germany, which basically means that Social Democrats have a really hard time competing, and in fact, what ends up happening for many years is that they just keep allying as junior partners with

the Christian Democrats, and so you have the two biggest parties at the center left and center right allied doing this. And so even though there is and there always was opposition within Germany, both politically and among sort of people who knew what they were talking about, it was never enough to really break through that deadlock, and it took a very long time for there to be movement there.

The thing that changed was one you finally had an election where and this is partly due to the pandemic, partly due to sort of the good fortune of the fact that the Christian Democrats chose a singularly unpopular and incompetent chance there candidate, but they ended up losing and being cut out of power and that created an opening for the Social Democrats to come in without cooperating with

Christian Democrats. They had come in with the Greens. There was originally sort of a question of would the Ally with the Greens alone with the Ally with the Greens and maybe the Left and some sort of reconciliation that didn't end up happening because they didn't win enough seats, or what ended up happening was Ally with the Free Democrats, which there was a lot of speculation there about this being negative because the Free Democrats had long positioned themselves

as being the most austere and the most committed to

low taxes and budget restraint and the death break. But one thing that had been you know, showed up in the campaign and I'm I'm pleased to say that I forced out of this, you know, last summer before the elections in September, was that, you know, they do say these things, but they also left themselves very open to the fact that you could get around these death break rules with some financial chicanery, and they didn't seem the mind because basically, the way the Germany's debt rules work

is that if you have a you know, a sort of segregated government enterprise that does its own with its own budget, as long as it doesn't take money from the state because it's losing money. You can issue as much debt as it wants to fund investments. And that's within Germany's rules. It's incidentally not within the European rules. That could potentially be a problem, but with the Germany's rules it's fine. And the FDP repeatedly said, were implied

they will be okay with that. And so you had a situation where the Greens very actively saying we need to invest more and we need to get rid of the death break to invest more. The FDP says, we don't need to get rid of the deathbreak, but we're willing to sort of look the other way. And then the STP, which for SPD for long, the Social Democrats for a long time, having been sort of on the same side as as the Christian Democrats, they had come into their own over the previous few years. They've been

calling for more investment. In fact, Schultz, who's the current chance that he was the finite UH finance minister in the previous government, you know from one and while that was he was in charge, there actually investment did go up. It was the first time that investment in appreciation was positives. There was already kind of a positive set up here and people saying we need more investment. There was a

recognition of the Germany that need to change. The business groups in Germany were saying there need to be more public investment, and they said, you have enough like major road and bridge bridge closures. You have people, you know, mocking Germany's train systems for being terrible compared to places like Spain. That's eventually does have an impact, I mean for twenty years, but people did pay attention and so you know, even leading up to this, there was already

that momentum and I was optimistic about that. Then we see this happens, and the German response has been dramatic, absolutely dramatic. I mean, aside from the fact that ost politics throwing out the window, which was you know, the Social Democrats creation, you have a situation where the FDP, which again known for really strict you know, budget discipline, saying we're going to spend another hundred billion euros on defense and and when they were criticized by the opposition

Christian Democrats in in the Bundesta. Christian Lynn was the finance minister and the head of the FDPs. He basically laughed at him and said, this is an investment or freedom. Why are you worrying about the dead levels here? We need this for our security. You know, this is an enormous number. By the way, I mean, I don't you know how it gets spread out over times is a

little ambiguous. But you add that with the fact that Schultz committed to spending at least two percent of GDP on defense, which is Germany's you know, obligation of ther NATO. But you know for many years they've been spending like one percent of GDP on defense. Because again, if you're feeling budget constrained, you're someone like Augle and Merkel, cutting defense budget is a very easy way, relatively speaking, to you know, meet your targets. That would seeming like a problem.

Of course, the problem to you know what the problem is that the Buddhist first like lost so much capability, and you hear all the story and how they couldn't do anything, and like there was some German I think army intelligence guy was stuck in Ukraine. He had to get like a civilian transport out or something. I mean, they didn't really have a lot of capabilities, and now they realized they need to do something dramatic. They didn't have I think, you know, you were mentioning this, they

didn't have any energy import terminals. Europe as a whole does have a lot of energy UH import capacity, Germany

has none. So there they are working on on fixing the stuff, and so I think I think it is encouraging that they realized that, um, you know, the situation that they as they inderstood it, you know, is a lot different than you know, what they've been thinking, that that it needs a response, which incidentally, it is consistent with a history of many other countries where you know, national security risks leads to radical changes in domestic investments.

Now you mentioned that at least the last of the nuclear plants had been scheduled to UM sunset at the end of this year, and maybe that will be pushed off if I'm not mistaken. The Green Party in Germany, like this is like a core thing for them, right like they were they were like a prime mover against

UH nuclear for decades. I understand. Do you think that, like, you know, there's gonna be some I don't know if like you have specific views on sort of like German energy policy down to the mix, but you know, it seems unrealistic that anytime soon you're going to have uh solar and wind really do will the lifting, especially in the lack of like with the lack of like utility

grade battery tech. Do you do you said, to any meaningful change on that front, Well, so, yes, I mean I think one thing that's interesting here is that, first of all, they've said that they think they are going to, you know, not turn them all off at the end of the year, and then that is something that could not have been done without the consent of the Greens. The Greens have been known for being anti nuclear for

very long time. However, they also, and this is actually arguably even more important part of their identity, at least in recent years, have been very hawkish on Russia and very much against fossil fuel dependence. And in practice, what we've seen is that turning off nuclear has not meant that Germany has gotten greener. In fact, their emissions carbon emissions record has been among the worst in any rich country precisely because they turned off the nuclear plants. Is

substitutent with coal. So I think that you know, Greens can read this just as well as anyone else. I think they know this. Again, the Degreenes have been but consistently the most hawkish on Russia, in part because unlike basically every other party, they don't have any kind of weird Russia baggage in terms of you know, ideological lengths or the oil, the gas pipelines, or supporting business interests that you know, selling manufactured goods to Russia. So they

they've always been the most relatively hawkish. And and and you know, talking about a foreign policy of values, and in fact the Foreign Minister is from the Green Party right now, so I mean, there's definitely the flexibility there. So if the choice that they face is turning on nuclear plants versus actively sending money to Russia in the middle of a situation where Russia is violently invading one of its neighbors, I would imagine, you know, they'd be

more flexible on that front. And I think that we're seeing that. I mean, and as also, as you mentioned, like in the in the short term, you know, solar and wind are great, but they're intermittent, and so you need selling that staple, and you know it's either gonna be coal or gas or nuclear, and you know if those three, I mean nuclear is clearly going to be preferable. So I realized we've been very focused on Germany. Here can you talk a little bit about how Russia's energy

links have played into the current situation. And also one of the things that keeps coming up is this idea of um, you know, the rest of the world has imposed these very strict and dramatic sanctions on Russia, but the thing they've left out is energy for obvious reasons.

But now there's a sort of big question mark over whether or not that can a continue given that you see a lot of firms who are voluntarily self sanctioning and just deciding that they don't want to have anything to do with Russian assets, or they're worried about clearing through the system and things like that, so they're just

not dealing in Russian energy at all. And b it's unclear whether or not Russia will able will be able to use the dollars and euros that it actually earns from its energy exports, and so there's a question of, well, why would they continue to do this if they're not going to be able to actually use that money. So how do you see all of that at the moment? Those are all great questions. I mean, it is an interesting question. Why would Russia keep pumping gas if they're

getting money that they can't use. You can understand why they keep doing it if they could use the money. And there's an argument for actually setting up sanctions in a way that they are forced to keep pumping the gas but not really able to do a lot else with it, which arguably is what was set up. But

it does create this tension. So, I mean, one theory I've heard I have no idea this is right, is that the Europeans actually do want Russia to cut off the gas, but they want Russia to be the ones take the blame, which I mean, I have no idea if that's right. I mean, I certainly would be a reasonable way of interpreting, you know, how things are plying out, you know, But then there's a question of how you

deal with that. I mean, as I said, I mean, the good news is that winters basically over, so you don't need it for heat the way you would have before. Um, you could imagine a situation where you're rationing electricity for industrial consumers and then you know, sort of hope that things get resolved one or another before next winter. It is that is definitely a tricky question. I mean, because it's not like you Germany is uniquely depending on Russian gas.

In fact, if anything, many other countries are even more dependent on on gas from Russia, basically all the countries to Germany's east and sort of southeast, because there isn't really a lot of other sources you can get. I mean that you can get gas from from cutter, gas from Norway, um, the North Sea. There's some lergy coming in from the US, although the US is sort of

maxed out and we sell a lot to Asia. Um, you know, you could have rerouting of l G. I mean, there's a world where you know, Australian and American ellengy is rerouted from Asia to Europe. But then you know that creates you know, that creates new problems for other people. So there isn't an immediate obvious substitute, and that does theoretically give the Russians aut levertay is that for all

we know, they've already been cutting off. I just we just don't have the hard data from like the past week we can have, so that's a sort of interesting question there, but it does potentially create I mean, one of the reasons why before any of this happened, why nord Stream to which was the planned pipeline. It's basically finished, but that would have dramatically increased Russia's ability to send

gas directly to Germany under the Baltic Sea. The reason why that was so controversial before all of this it was because it would have meant that Russia could have sent gas to Germany directly and bypass all the countries that are in eastern, Central and Eastern Europe that previously were able to get gas and be confident they could get a supply of gas because it's not as if there are a lot of pipelines that Germany could could

use if they wanted to supply Poland, Czech Republic, Slovakia, Austria, the Baltic States, Hungary, Romania, those all depend on gas coming from Russia and then some of that gets rooted to Germany. But if it all went to Germany directly and those countries would all get hosed. And so that was like the big concern they had before any of this,

so you know, those countries are still doesn't dependent. Um, we're now in a situation where at the moment you're actually having gas being rooted from those countries to Ukraine. A lot of the pipelines run through Ukraine that had been case that the Ukrainian government made a decent amount of earned a this amount of hardcurrent, so basically getting a transit fee from gas sent from Russia through those

pipelines that I'm guessing that's not happening right now. Um, and so you're having gas being sent the other ways that Ukraine can keep the you know, the power on. But yeah, I mean it's a it's a it's the situation with gas and Russian you know, entergy securities is a significant problem for all these all of Europe. Realian's basically have to used to go either as far west as places like France and Spain or north to like Sweden and Norway for it not to be an issue.

And in those countries they have a lot more hydro power and a lot more nuclear and at more solar. But that's you know, where they get lergy from elsewhere. But that's not you know, but that's a lot of Europe is very depending on Russian gas. You know. One of the things that you talked about this a little bit earlier is that you know, with oil, there are multiple prices of oil, but they do tend to cluster.

And so there's Brent oil and there's West Texas oil, and they're usually a few dollars of are but they go in the same direction. The gas market isn't like that at all. I mean, the gas the price of what's a cubic meter? Is that a standard? Yeah? Yeah, billions of cuban mater it's just completely different. All it's just completely different all around the world at any given time. And it's because it's so as you're described there, it's

so infrastructure specific. Yeah, I mean not to like piece or obvious, but one is the liquid and one is the gas. And like liquids, it's pretty easy. You know, you can put them in barrels, you can put them on ships, and like gases, you know, it's much harder to do that. And that's why you know, the invention of liquefaction, which is where you've turned the gas, you cool it and condensed into a liquid and then you

can transport it on ships. Is with such a revolutionary technology because it meant that you could move the gas all over the world. But you know, until that happened, um and even and you know, it's still expensive to do that. Pipelines is the way you did it. I

mean natural gas in the US. Prices of natural gas in the US have been so much lower than in Europe and Asia for a long time because we have a lot of gas in the US and we have pipeline infrastructure can transport it, but it's very difficult to send it over to places that don't you know, have the pipeline. Sending it across an ocean is very expensive. So there is a lot of liquid faction capacity in

the US. There is a tremendous amount of liquid faction capacity that's currently been approved but has not yet been built. If it does, the U S would be able to more than supply Europe and Asia with with with gas uh in theory, but you know, it's it's very expensive to do that. I mean all the transportation causes why

that the differentials are so huge. So even if the U S producers are responding the way you think they would to market signals, for like if the price of gas whatever is I don't like, six times or more whatever in Europe than it is in the US, and they are responding to that. But you know, there's sort of hard physical limits and you can, you know, until the liquid faction capacity builds up a lot, until the import terminals on the other side build up a lot,

you know that price differential is going to exist. And that's why Russian gas always had appeal. Europe has pipelines to gas from North Africa as well, and that's and and from you know, the North Sea and stuff. So they do get other pipeline gas, but a lot of it comes from Russia. And so I mean, it's gonna be more expensive regardless, right, but the energy is always

gonna be expensive than Russian gas. But on the end of Russia is cutting off the gas or if you don't want to be dependent on Russian gas, and that's a price worth paying. I mean, as Linder would say, it's you know, it's an investment freedom and so that's a you know, it's it's worth doing, but it is

going to be more expensive. So actually that leads into something else I wanted to ask, which is naturally this idea of Russia's sort of leaning or looking more towards China because of the various things and pressures that are happening in Europe. So obviously Russia exporting more energy in various forms to China would appear to be an obvious

option for it here. Yeah, no, it would. I mean, but that sort of goes the other way, which is you need to build all the pipelines going the other direction, and so they could do that. They do have one pipeline they called the Power of Siberia and it runs into China, and they do export pipeline gas to China,

but the volumes are pretty small. So again, if you're looking at which I think sort of the most reasonable camp you had, like Russian gas going to EU U and was not, and so China is a pretty small I mean most of China gas. I mean, China actually has a lot of gas domestically, and they get a lot of allergy. So they they've definitely been trying to get more from Russia. But it will take a long

time and put those pipelines together. I mean, basically I don't know the exact timeframe of how long long it takes to build these things, but like I would not be surprised if the time it takes for Russia to build pipelines to China to substitute, you know, to fully divert all the gas from that used to go to Europe, probably would I would not be It's probably comparable time scale like building out the capacity for Europe to get

ellen G from the rest of the world. So I don't know, like it's I mean, it's not going to

be kind of a fast thing. And of course there's the fact that if Russia would be doing this with China, it's at a period where, unlike you know before, Russia is a pariah state, and as you said, they're not having access to all the Western oil and gas services companies that actually know how to do this stuff because all these things were built I mean like north Stream and stuff that was a joint venture with European companies.

That's where a lot of the time, I mean, they have technical know how in Russia, but a lot of it was done with you know, European help. And so I'm sure China has the capacity as well because they have their own domestic as industry and Russia cast industry for a long time. But I mean it's extent that they would want help from anyone, and that Russia has become prie stay that will make it even you know,

comparatively more difficult for them. Well, the the other element and the thing I've been thinking about it this conversation is like, Okay, Germany wants to spend a lot more and build up perhaps build up terminals or other other forms of energy infrastructure and other other infrastructure. It's not

a great time. I mean, it's not a great time to have to build setting aside the war specifically, Uh, it's not a great time to have to build anything physical given the tightness in every commodity markets and thinking about the metal that would have to go into new pipelines, and the steel and the cement and everything else that have to go into a terminal. It sort of speaks to, I guess the tragedy of having been so spend thrift for the last at least the last decade. Yeah thrift. Yeah.

I mean it's funny because the Europeans have this phrase, this is so annoying talk about you if you fix the roof when the sun is shining. And it's a good phrase if you think about it. In the right perspective, but the way they always used it was, oh, you know, your economy is not actively contracting because we're not in the depth of a global financial crisis. You should be

doing budget austerity and paying down your debt. Is how that was interpreted in your That's so that's what fixing the roof in their video, fixing the roof being like lowering your debt GDP ratio. And they talked about this all that you fix the roof in the sun is shining, but so then you have the space to expand your debt to GDP ratio when you know, things go bad.

There's an obvious problem here, which is that you can't fix the roof if you're not spending money like you know, they they literally did was not fix the roof when the sun was shining. And then now that it's raining and they've saved a lot of cash, it's getting wet. I mean, if I don't draw this analogy too much, like I mean, they basically had an opportunity to do all these things when natural resources prices were low, when there was a lot of labor slack, when real interest

rates were negative, and they didn't take it. I mean, real instructs are still negative. But other than that, I mean, they completely missed this opportunity. I mean, I remember I mentioned this in one of my my research notes. It's a really striking that the last time Russia attacked Ukraine in a really big way, it's in early basically eight years ago, and eight years is a long time to make an adjustment, and it just didn't happen at all.

And I remember writing at that time, back when I was at Bloomberg, actually writing writing a piece saying, look like Russia is doing this, but like, long term, they're not in a great strategic position because Europe always just the option to diversify away from Russian gas, then Russia is no leverage. Ironically, they didn't do that. But I mean it's not like no one was talking about this

back then. They just missed their window. And now they're trying to do it, and you know, as you said, now they're doing it like the worst possible time because they're being squeezed and you know it'll get done eventually, but you know, it's it's it's really striking how they sort of missed the you know, the focus on the sort of financial savings and not on the fact that you know, there's some things that are worth doing that

should have been done at some point. You're gonna do it anyway because you need to do it, but you know, if you have a chance of doing it when things

are cheap, that's the best time to do. And they missed that window well before we go and then with Fantastic obviously we've talked a lot about the energy linkage is but just before before we get out, you know, you've also written a little bit about the financial LINKAGEES and the various exposures that Europe and Germany have to Russia, all of which are now almost you know, some of these value of these assets and relationships might in many cases simply go to zero. But how big are we

talking about here? For some of the non energy connections. There's a lot of trade and financial links between Europe and Russia. And I mean it makes sense. Russia is a large country, it's Europe's neighbor. That's sort of you know, what you'd expect to have happened. That is probably a lot that's gonna go to zero. There's going to be an economic kid. I think one thing one of the

reasons I initially had been. I was not sure. I wouldn't say Scott, but I was not sure that that Europe would be willing to kind of put in place the kind of sanctions that we've ended up seeing is because there is a carler here, which is that there's gonna be a real hit to European businesses, both businesses that export to Russia and two banks that have relations with Russian businesses, and so um, we're talking in like the hundreds of billions of dollars in terms of potential

losses here. I mean, that's definitely manageable for an economy that's the size of Europe. And you know, again to use Learner's phrase, it's it's it's an investment in freedom, so it's it's worth it's a worthwhile to bear that cost.

But that is it is significant. I mean you have something like in total global banks, which is global banks in this in practice basically means US, UK, EU, Japan, something like a hundred fifty billion dollars or exposure to Russian you know, borrowers that's probably gonna mostly go to zero. I mean, the good news for them is that a lot of that exposure is through local subsidiaries and so

and practice. What that means is that it's Russian depositors and Russian you know, bank bond holders and other Russian banks that are going to take a lot of that hit, although not all, but a bunch of it. You know, the exporters are gonna get hit pretty soon. I mean, your Russia imported about three seventy billion dollars worth of goods and services from the rest of the world. In the majority that is from countries and that are sanctioning Russia.

So that's going to be a hit. Again, We're talking about a very large economies, so you know, in the agate, it's not gonna be huge. It it's gonna feel, gonna be notable, and of course it's going to have multiplier effects as those businesses, customers, you know, react to the Lass sales. So there's a hit to be taken. I mean, I think Russia was counting on this, these kinds of relationships,

preventing any kind of saying in the past. I mean, that's what happened, right like they did something that everyone said was illegal and horrible and then nothing really had I mean, things happened, but it wasn't significant the way like we're seeing now, I think, quite frankly, if it hadn't been for the fact that the Ukrainians fought back and are still fighting back, I think there's a decent chance that you're probably would have rolled over because you know,

what was what would have been the point right from

their perspective. The fact that it's now actually is still a live question, I think is a lot of what's motivating this and people's willingness to you know, bear that economic pain because it is real, and I think obviously if you're looking at the rest of the world globally, not to you know, point figures in any countries, but you can imagine other countries that might be thinking potentially about invading some of their neighbors at some point in

the future and wondering about, you know, how those economic links is whether protect them or not from you know, Western responses. But I mean, you know, seeing this is is I think I think Putin was not crazy for thinking that this would not have happened because of those links. But at the same time, I think, like it's it is, you know, once you do something like what he did and you see the response, I think that that it's not surprising that there's been this sort of very strong

pushback and willingness to take these kind of losses. Well, Matt, Matt Klein, thank you so much for coming on odd lots. I learned a ton from that, very very useful conversation. Yeah, that was great, Thanks so much. You know, I always learn a lot talking to Matt and following him on

Twitter and reading his newsletter. One thing that just really strikes me as has such a good command of like the data, so a lot of you know, it's in addition to just sort of like the theoretical big ideas, like he really knows the numbers behind all of it, which is one reason it's great to talk to him. Yeah. Also, I didn't realize he had such historical knowledge of oil and gas pipeline, so that's all it's fun fun to discover. Yeah, But I mean, I guess I'm trying to think, like

what the big takeaway here is. I mean, I guess, like, I guess, it does seem like even before the recent crisis, Germany had changed some of its attitude towards fiscal spending, um, you know, similar to other governments. In the wake of the pandemic, there seems to be a greater acceptance of spending on on social systems and infrastructure and things like that, and this would seem to be something that's going to

to ramp that up. But at the same time, I guess the offset of all of this is we're sort of talking about building up supply chain independence, energy security independence. It does feel like we're sort of this is so this is such a cliche, but it does feel like

we are moving away from that interconnected globalized world previously. Right, You're right, it is a cliche and people talk about it a lot, but here you do have this like very sharp break and it's you know, it's very hard, and you know, we talked about this in our sanctions episode, where even if the formal sanctions lift, it's very hard to imagine so many of these other ancillary actions, particularly the corporate announcements reversing is very hard to see, you know,

Germany reversing on its plans to invest in domestic energy or increase its military. So there are a lot of actions that have been taken that, um, you know, we are going to be pushing ourselves into a new direction that even two or three weeks ago didn't seem didn't seem very likely. Yeah. And then the other thing I'm thinking about just in terms of things that didn't seem very likely two or three weeks ago and maybe now are is, of course restarting the nuclear plants in Germany,

because it does go ahead. I was just gonna say, you know, the sort of bigger picture. The big picture thing to me was that phrase, as Matt put it, fix the roof on the sunshine. It's very interesting. It's like, well, yeah, but then the question is what is your definition of fixing the roof. So if your definition of fixing the roof is just getting your debt to GDP ratio back below some number, then it's like, okay, great, your economy is booming. Uh, cut spending and then the numbers there.

But you would hope or you would think that maybe fixing the roof could mean something like, well, having a more sustainable energy mix, having a more sustainable domestic infrastructure, and so forth. And it really is costly, and maybe that's something that we have to talk about more in the context even of US infrastructure spending, which is going to go up a lot. It's like we're doing all this at a time when commodity prices are booming. Every single day I look up at the terminal and commodity

prices are so ring. This is going to be much costlier from a real perspective, more difficult, more time consuming because we're now in the ear of tight commodities. Would have been much easier in a period when so many

of these commodity markets were structurally loser. Well totally, but it also feels like, I mean, the message, certainly from the Biden administration has been the solution for high prices is investment, and so you know, if you want to get away from that, you're going to have to invest in. The timing is terrible, and yeah, maybe we should have done it earlier, but you kind of have to do it now otherwise it's just going to get worse. But it does feel like there are no easy solutions. Again

another cliche. I'm all about cliches today Apparently, Yeah, that's okay, but now I know, I thought that was great, and just the whole world I think, you know, we want to do more. There's so much to do. I think on energy specifically this year, like all the different questions

about ellen G infrastructure alone is so fascinating. We need to find someone who can really get into like, you know, the business of Okay, energy prices might be six times in Europe what they are here, but you don't have the infrastructure to move it because of liquid faction capacity,

because of terminal capacity. Huge opportunities for someone, and it's just a question of like who and what is the time for Also, pipeline historians get in touch, because I'm very curious about, you know, the decisions that go into building these things and how long it takes to reverse or alter course. And I think that's gonna be a pretty important thing going forward. Totally. All right, shall we leave it there? Let's leave it there. Okay. This has

been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't It All? You can follow me on Twitter at the Stalwart. Follow our guest Matthew Klein. He is the founder and editor of The Overshoot. He is at m Underscore see Underscore Klin. Follow our producer Laura Carlson. She's at Laura M. Carlson And very sad news we have to report this is Laura's last episode as our producer. She's returning to history, her her true

love of history. So very said, Laura, are you there? I am, I'm here. Can you can you say a few? We're gonna miss you so much. We're gonna We're gonna it's it's on the this is devastate. We're gonna miss you. You've been an amazing producer the last I think, how long has it been three years? You've been the outliveed producer. Yeah, well you know in COVID time, it's actually been about two decades, so yeah, just about three years. That's exactly right.

What are you gonna be doing next? Um, I'm as you said, I'm going back to my my my roots in history. I'm I'm writing a book. I'm gonna be doing some teaching and lecturing. Um unfortunately on on nothing related to markets or or anything like that. It's all culinary history, so so good food food history, UM, stories of restaurants, those kinds of things. So so yeah, you've definitely got to be a guest one day. I would

love that. I I am there that anytime you want me to talk food history on odd lots, I'm did be the best combination of my various world So I'm up for it. Great. We we will definitely make it happen. Thank you, Thank you so much, Laura. Just it's been a it's been a real pleasure work with it. Thank you both. This has been this has been great and a wild ride. Yeah. Well, we're definitely, uh gonna continue to follow your work everyone, even after this episode, you

won't be our producer anymore. Follow Laura Carlson at Laura and Carlson follow all her work. Thank you so much, Laura. Be sure to follow the head of podcast at Bloomberg Francisco Levi at Francisco Today, and check out all of our podcasts here at Bloomberg under the handle at podcast. Thanks for listening year to