WEBVTT - Matt Klein on How Germany Wound up So Dependent on Russian Gas 0:00:10.720 --> 0:00:14.960 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:15.080 --> 0:00:20.040 I'm Joe Wisn't Thal and I'm Tracy Alloway. Tracy Um. 0:00:20.079 --> 0:00:23.200 You know, of course, on our last episode we talked 0:00:23.200 --> 0:00:27.080 about the sanctions that are being imposed against Russia, and 0:00:27.080 --> 0:00:32.120 they're really extraordinarily dramatic. Obviously, we've seen the Russian financial 0:00:32.159 --> 0:00:38.080 sector get pounded, all kinds of disruptions, Russian equities listed abroad, 0:00:38.479 --> 0:00:41.520 their value in many cases going to zero, numerous companies 0:00:41.760 --> 0:00:45.040 often just voluntarily sort of washing their hands at the 0:00:45.120 --> 0:00:49.640 Russia business. But of course, as everyone understands, the one 0:00:50.159 --> 0:00:52.360 huge I guess it's the elephants in the room. One 0:00:52.400 --> 0:00:56.720 area that has not been directly targeted is is energy, right, 0:00:57.000 --> 0:00:58.800 and this is really I don't want to say the 0:00:58.800 --> 0:01:01.400 crux of the whole issue, but certainly this is something 0:01:01.440 --> 0:01:04.600 that has played into the fact that Putin invaded Ukraine 0:01:04.720 --> 0:01:09.920 in the first place. There's a huge reliance on Russian 0:01:10.000 --> 0:01:12.640 natural gas in Europe and I think this is well 0:01:12.720 --> 0:01:16.000 understood and well established now. And even before the recent actions, 0:01:16.480 --> 0:01:19.440 prices had been going up, people were talking about inflation 0:01:19.760 --> 0:01:22.800 and energy crisis, and then this all made it worse. 0:01:23.319 --> 0:01:26.400 But on the one hand, all of this plays into 0:01:26.600 --> 0:01:29.720 the geopolitical situations. So there's an argument to be made 0:01:29.760 --> 0:01:34.520 that Putin feels more empowered in invading Ukraine because he 0:01:34.600 --> 0:01:39.200 knows that Europe relies on his country for its gas needs. 0:01:39.720 --> 0:01:41.720 And of course, sorry, I don't know where I'm going 0:01:41.760 --> 0:01:45.280 with this. There's a lot to say there. There is 0:01:45.319 --> 0:01:48.240 an extraordinary meant to say. I guess one of the 0:01:48.360 --> 0:01:53.960 questions is why wasn't Europe more prepared or why wasn't 0:01:54.280 --> 0:01:59.000 Why hadn't Europe already taken steps to perhaps wean itself 0:01:59.120 --> 0:02:04.120 off Russian natural gas and oil and coal, And of 0:02:04.200 --> 0:02:08.760 course there was the annexation of Crimea, So it's not 0:02:08.880 --> 0:02:13.320 like these geopolitical concerns suddenly just came out of nowhere. No, 0:02:13.520 --> 0:02:15.280 this is where I was going with it. Actually was 0:02:15.320 --> 0:02:18.760 that Putin has a really good grasp of the energy situation. 0:02:18.840 --> 0:02:23.280 It seemed to understand that Europe needs Russian gas. But 0:02:23.360 --> 0:02:26.760 at the same time, it doesn't feel like Europe necessarily 0:02:26.840 --> 0:02:29.240 understood that, or if they understood it, it it doesn't seem 0:02:29.280 --> 0:02:31.640 like they did anything about it. Everything just sort of 0:02:31.680 --> 0:02:34.680 went on as it did before and even even after 0:02:35.000 --> 0:02:38.320 the first invasion of Ukraine and you know the situation 0:02:38.320 --> 0:02:42.200 in Crimea. In Even after that, you didn't really see 0:02:42.200 --> 0:02:46.160 Europe back away from Russia in any meaningful way, even though, 0:02:46.200 --> 0:02:49.880 as we discussed with Sultan Posar recently, you did see 0:02:49.960 --> 0:02:54.680 Russia takes steps to sort of insulate itself from the West. 0:02:55.520 --> 0:03:00.239 And of course we're talking about Europe broadly, but there's 0:03:00.280 --> 0:03:03.000 obviously sort of a specific you know, the the key 0:03:03.080 --> 0:03:07.480 country in Europe from the sort of Russian gas reliance 0:03:07.760 --> 0:03:10.240 that a lot of this revolves around is Germany. Because 0:03:10.280 --> 0:03:14.720 it is an extremely rich and successful country, it also 0:03:14.880 --> 0:03:18.799 is extremely reliant on natural gas. And you know, it's 0:03:18.840 --> 0:03:22.760 sort of taken some odd energy choices because this is 0:03:22.800 --> 0:03:26.120 a country whose leadership has talked a lot about going 0:03:26.200 --> 0:03:30.480 green and sustainability and all that, and yet it's actually 0:03:30.520 --> 0:03:33.840 really not done well on hitting some of its emissions goals. 0:03:34.200 --> 0:03:37.280 It's phased out nuclear, but it also that means it's 0:03:37.320 --> 0:03:41.120 more reliant on cold, more reliant on gas, and maybe 0:03:41.120 --> 0:03:44.840 in the long term one day beyond wind power and 0:03:44.880 --> 0:03:47.400 solar power and be all renewables, but that seems very 0:03:47.480 --> 0:03:50.920 long term right here. And now its emissions are going 0:03:51.040 --> 0:03:55.360 up and it's dependence on Russia is acute. Yeah, and 0:03:55.400 --> 0:03:58.840 I think that's become very very apparent in the way, well, 0:03:59.120 --> 0:04:02.000 just the way the whole crisis has unfolded. I will say, 0:04:02.080 --> 0:04:06.760 we're recording this on March second, and I'm looking at 0:04:07.000 --> 0:04:10.440 that gas the spot price on the Bloomberg terminal. Now 0:04:11.000 --> 0:04:15.880 it jumps sixty earlier today, and of course it's another 0:04:15.960 --> 0:04:19.480 fresh record, but it's been at fresh records for multiple 0:04:19.560 --> 0:04:23.520 times in recent days and indeed in recent weeks. So 0:04:23.640 --> 0:04:26.240 you can feel all of these tensions and all of 0:04:26.279 --> 0:04:30.839 this pressure, all of these potentially um bad policy choices 0:04:31.279 --> 0:04:36.160 UH manifesting themselves in these record energy prices exactly right. 0:04:36.200 --> 0:04:38.880 So we want to like push the conversation forward and 0:04:38.960 --> 0:04:43.479 get more insight into this crisis, this war, and the 0:04:43.600 --> 0:04:48.080 German situation specifically. I'm very excited for this conversation. We've 0:04:48.120 --> 0:04:50.160 had our guest on one time before we're going to 0:04:50.240 --> 0:04:53.560 be speaking with Matt Klein is the founder and publisher 0:04:53.839 --> 0:04:58.680 of The Overshoot, which is a phenomenal newsletter on economics 0:04:58.720 --> 0:05:00.680 and the economy, and of course he is the co 0:05:00.800 --> 0:05:04.920 author of the book Trade Wars Are Class Wars. Matt Klein, 0:05:05.000 --> 0:05:07.640 thank you so much for coming on coming back. Thank 0:05:07.640 --> 0:05:10.960 you very much for having me. So, you know we 0:05:11.000 --> 0:05:13.080 talked the last time we talked to you, I think 0:05:13.400 --> 0:05:17.400 maybe it was maybe it was, and you had published 0:05:17.400 --> 0:05:20.520 this book trade wars are class wars, and of course, 0:05:20.880 --> 0:05:25.440 you know, going back to nineteen around that time, when 0:05:25.480 --> 0:05:29.240 you think trade wars, obviously you think US China attention 0:05:29.320 --> 0:05:32.160 because of course there were the various uh Trump tariffs 0:05:32.200 --> 0:05:35.080 and so forth. But a big part of your book 0:05:35.200 --> 0:05:37.680 was not just about US China, of course, but also 0:05:37.800 --> 0:05:41.280 this third actor Germany specifically, what do you like talk 0:05:41.360 --> 0:05:44.400 about to us about like what was their role in 0:05:44.560 --> 0:05:47.640 the story before we even get to the current crisis. 0:05:47.960 --> 0:05:50.120 Why were they like sort of like a key player 0:05:50.400 --> 0:05:54.240 or actor to be understood in the sort of global context. 0:05:54.760 --> 0:05:58.000 The basic argument of the book is that for a 0:05:58.120 --> 0:06:01.760 very long time and maybe years or so, that the 0:06:01.760 --> 0:06:04.960 world economy as a whole has been suffering from the 0:06:05.040 --> 0:06:09.760 systematic shortage of consumer demand, and that's ended up creating 0:06:09.800 --> 0:06:12.480 a lot of tensions as businesses are trying to capture 0:06:12.520 --> 0:06:16.760 this finite demand and as consumers over you know, in 0:06:16.760 --> 0:06:18.520 different parts of the world trying to compensate for the 0:06:18.600 --> 0:06:21.000 lack of income. That is a result of this, and 0:06:21.080 --> 0:06:24.040 so one of the major drivers of the shortfall of 0:06:24.080 --> 0:06:27.479 consumer demand was Germany and then later Germany, uh you know, 0:06:27.520 --> 0:06:29.719 extended to the rest of Europe as a whole macro 0:06:29.800 --> 0:06:32.800 policy in terms of both business investment being weak in 0:06:32.880 --> 0:06:37.880 terms of government policy essentially over taxing, underspending, and squeezing 0:06:38.040 --> 0:06:40.080 demand for goods and services, and then that ended up 0:06:40.080 --> 0:06:41.960 redounding in all sorts of different ways in terms of 0:06:42.000 --> 0:06:44.719 higher debt levels and financial crises and stuff. And the 0:06:44.800 --> 0:06:47.760 argument of the book being that policies in Germany, not 0:06:47.839 --> 0:06:50.440 just government policies, but really the policies of business leaders 0:06:50.480 --> 0:06:53.640 and other elite actors in society ended up leading to 0:06:53.720 --> 0:06:57.200 systematic problems for the world as whole, and that ended 0:06:57.240 --> 0:06:59.680 up leading problems for people in Europe and people outside 0:06:59.680 --> 0:07:01.640 of Europe. And even if that wasn't something we think 0:07:01.640 --> 0:07:03.599 of in the trade war context, as you were saying, 0:07:03.640 --> 0:07:05.800 like the Trump and China stuff, was very you know 0:07:05.839 --> 0:07:07.640 obvious what this was, and it was nevertheless leading to 0:07:07.680 --> 0:07:09.840 tremendous amounts of tension within Europe. And you can see 0:07:09.840 --> 0:07:12.160 that throughout the eurok crisis in terms of the conflicts, 0:07:12.160 --> 0:07:14.000 and you know, you have people like the Dutch finance 0:07:14.040 --> 0:07:17.200 minister blaming lazy Southern Europeans for things, and then you 0:07:17.240 --> 0:07:20.480 have Southern Europeans talking about fascists in the north. And 0:07:20.480 --> 0:07:23.160 then that was all really, I think a reflection of 0:07:23.200 --> 0:07:26.360 the fact that you had really bad economic outcomes driven 0:07:26.400 --> 0:07:31.560 by bad econnotic policy. So you mentioned, um like a 0:07:31.600 --> 0:07:35.920 bad situation caused by policy decisions. Could you maybe just 0:07:35.960 --> 0:07:38.440 elaborate on that a little bit more as it relates 0:07:38.560 --> 0:07:42.840 to the current Russia situation and the energy landscape that 0:07:42.880 --> 0:07:45.040 we were talking about a little bit in the intro. 0:07:45.520 --> 0:07:49.560 How much does a country like Germany actually depend on 0:07:49.640 --> 0:07:52.960 Russia for its energy needs. Germany is quite dependent on Russia. 0:07:53.000 --> 0:07:55.520 So for the European Union as a whole, if we 0:07:55.560 --> 0:07:58.600 look at basically the period right before the pandemics, the 0:07:58.600 --> 0:08:01.000 pandemic kind of distorts things a little bit. It about 0:08:01.680 --> 0:08:05.320 of all energy came from Russian imports, So that's a 0:08:05.360 --> 0:08:07.880 lot of that includes natural gas, that includes coal, that 0:08:07.960 --> 0:08:11.400 includes oil. Natural gas is the most significant one for 0:08:11.480 --> 0:08:13.840 these purposes because it's not easy to substitute it. You know, 0:08:13.880 --> 0:08:16.320 if Russia doesn't sell oil to Europe, someone else is 0:08:16.360 --> 0:08:18.360 going to buy that oil. Europe can therefore buy oil 0:08:18.400 --> 0:08:21.080 from whoever you know previously was not buying Russian oil, 0:08:21.160 --> 0:08:23.280 so it's it's more fungible. Gas, on the other hand, 0:08:23.320 --> 0:08:27.160 is mostly transported by fixed pipelines, and so therefore you really, 0:08:27.480 --> 0:08:29.200 you know, you can substitute to a degree, but it's 0:08:29.240 --> 0:08:32.080 much more challenging to do that. Germany sort of compounded 0:08:32.080 --> 0:08:33.840 this problem in a couple of ways, some of which 0:08:34.120 --> 0:08:38.000 one is that they made the decision after the Fukushima 0:08:38.080 --> 0:08:41.360 nuclear disaster in Japan to start decommissioning all of their 0:08:41.360 --> 0:08:45.280 own nuclear power plants, and so a is quite substantial 0:08:45.320 --> 0:08:50.560 source of clean and uh you know, reliable, local, locally 0:08:50.600 --> 0:08:53.680 sourced energy shut off, and I think they basically they're 0:08:53.679 --> 0:08:56.319 either about to. I think that they had been currently 0:08:56.320 --> 0:08:59.199 scheduled had been scheduled to turn off the last of 0:08:59.240 --> 0:09:01.120 the nuclear plants, I think at the end of this year. 0:09:01.360 --> 0:09:03.000 I think now that's starting to change, but that was 0:09:03.000 --> 0:09:05.000 basically something that had been going on over the past 0:09:05.040 --> 0:09:08.280 ten years, turning off nuclear power. Another thing that they've done, 0:09:08.640 --> 0:09:09.920 which I think we can relate sort of more to 0:09:09.960 --> 0:09:13.520 their macropolicy mix, is that they didn't invest enough in 0:09:13.640 --> 0:09:16.880 coming up with replacements. So while there has been a 0:09:16.960 --> 0:09:20.720 real commitment since I think about towards greening the energy 0:09:20.760 --> 0:09:23.120 makes they called the energy transition. They have invested a 0:09:23.160 --> 0:09:26.840 lot in wind and solar power. Particularly wind power hasn't 0:09:26.840 --> 0:09:29.000 been enough to offset the loss of nuclear and so 0:09:29.040 --> 0:09:30.800 one of the things that actually have been you know, 0:09:31.080 --> 0:09:33.360 bridging the difference was that they increased their coal consumption 0:09:33.440 --> 0:09:36.280 quite a bit, which is ironic given their desire to 0:09:36.320 --> 0:09:38.720 be more environmentally friendly. The other thing they did, of course, 0:09:38.800 --> 0:09:41.960 that they imported even more Russian gas. So the story 0:09:42.080 --> 0:09:45.480 the connection between Russia and Germany on gas is, you know, 0:09:45.840 --> 0:09:48.240 it goes back quite a long time. Basically, you can 0:09:48.240 --> 0:09:50.080 really sort of argue that it goes back to the 0:09:50.120 --> 0:09:52.640 nine sixties before Eve Russia had gas, when the German 0:09:52.679 --> 0:09:55.800 government under Willie Brandt decided that they wanted to call 0:09:55.880 --> 0:09:58.760 ast politic and the idea that the Germany would sort 0:09:58.760 --> 0:10:02.560 of be a bridge between the rest of the West 0:10:02.800 --> 0:10:06.000 and the Eastern Bloc and have sort of friendly relations 0:10:06.040 --> 0:10:08.240 and you know, just their own sort of distinct history 0:10:08.240 --> 0:10:11.240 and culture, and they would be trying to be more 0:10:11.280 --> 0:10:13.360 friendly to the USSR and the rest of the Warsaw 0:10:13.400 --> 0:10:15.360 Pact countries. And so one of the ways that that 0:10:15.440 --> 0:10:19.000 manifest is once Russia started developing gas fields and wanted 0:10:19.040 --> 0:10:21.880 to export it that Germany was pretty eager and building pipelines, 0:10:22.120 --> 0:10:24.680 and this goes back to the early nineteen eighties, they 0:10:24.679 --> 0:10:26.840 start building the pipelines. In fact, this is something that 0:10:26.880 --> 0:10:29.960 the Raning administration criticized the German government for at the time, 0:10:30.040 --> 0:10:34.120 because they thought it would be increasing Europe's dependence on 0:10:34.320 --> 0:10:37.160 the Soviets and potentially become a security risk. The German 0:10:37.280 --> 0:10:39.959 argument was engagement is going to be better. We want 0:10:39.960 --> 0:10:43.160 to integrate Russia into you know, the Western economy. That's 0:10:43.160 --> 0:10:45.360 going to moderate their behavior. And if you look just 0:10:45.400 --> 0:10:47.240 at the nineteen eighties, maybe that was a good argument 0:10:47.240 --> 0:10:49.480 because Russian in fact, did you know, the Soviet Union 0:10:49.559 --> 0:10:51.800 rather did in fact become you know, more moderate over 0:10:51.840 --> 0:10:53.440 the course in nineteen eighties, and that did become a 0:10:53.679 --> 0:10:57.920 constructive relationship. Nevertheless, though as time progressed that, you know, 0:10:57.960 --> 0:10:59.720 the question is why do they keep sticking with this? 0:10:59.800 --> 0:11:04.880 You you mentioned that the first Russian invasion of Ukraine, 0:11:04.960 --> 0:11:07.679 the annexation of Crimea, might have led to a shift 0:11:07.679 --> 0:11:11.600 in behavior. It did not. The project that Russia and 0:11:11.720 --> 0:11:14.199 German businesses had been working on for quite some time 0:11:14.240 --> 0:11:17.520 called nord Stream to another pipeline basically to increase the 0:11:17.600 --> 0:11:20.520 Russian gastles or Germany had been in progress before that, 0:11:20.600 --> 0:11:24.559 and continue to accelerate after this. Total German imports through 0:11:24.640 --> 0:11:27.360 the first North Stream pipeline, which goes under the Baltic 0:11:27.440 --> 0:11:31.800 Sea went up, and so actually overall energy imports of 0:11:31.840 --> 0:11:35.800 gas were significantly higher by the time you get than 0:11:35.840 --> 0:11:39.000 you were even, which is the exact opposite of what 0:11:39.040 --> 0:11:41.760 you'd think would have happened if if you know, European 0:11:41.760 --> 0:11:45.360 policymakers were concerned about reliance on Russia, and it now 0:11:45.400 --> 0:11:47.160 puts them in a situation where it's kind of challenging, 0:11:47.160 --> 0:11:50.840 which is, you could theoretically cut your gas consumption by 0:11:51.040 --> 0:11:55.000 you know, a significant amount or whatever. But is that 0:11:55.120 --> 0:11:58.520 actually something you can do on a dime? Maybe? Um? 0:11:58.520 --> 0:12:00.360 I mean, I guess the good news that winter mostly 0:12:00.400 --> 0:12:02.760 over so they don't need it for heat, But you know, 0:12:02.840 --> 0:12:04.800 that does create a lot of leavorage. I mean, as 0:12:05.000 --> 0:12:08.040 you mentioned, Tracy, the pricing of natural gas is so 0:12:08.120 --> 0:12:10.600 high because the supply was already being constrained. I mean, 0:12:10.640 --> 0:12:12.280 I think one thing that hasn't been appreciated enough. I 0:12:12.320 --> 0:12:14.400 was surprised to see it myself. Is that, you know, 0:12:14.520 --> 0:12:18.040 until they stopped making their website publicly accessible, gas Prom, 0:12:18.160 --> 0:12:22.120 which is the Russian company that produces and transports the gas, 0:12:22.320 --> 0:12:25.800 they published daily data on how much gas they shipped 0:12:25.800 --> 0:12:29.440 to European Union customers and which route, and the last 0:12:29.520 --> 0:12:32.480 data we have this is the weekend before they invaded Ukraine. 0:12:32.760 --> 0:12:34.640 But you know, what you can see is that in 0:12:35.840 --> 0:12:40.320 basically starting around sort of the end of August, the 0:12:40.360 --> 0:12:45.240 gas flows start falling dramatically. And basically, if you look 0:12:45.280 --> 0:12:47.520 at the beginning of two so you've been going down 0:12:47.559 --> 0:12:48.800 kind of steadily, and if by the time you get 0:12:48.840 --> 0:12:51.319 to the beginning of so like from January one to 0:12:51.480 --> 0:12:54.160 February was bright before the invasion, we're talking about thirty 0:12:54.240 --> 0:12:58.760 six percent lower deliveries to EU customers compared to the 0:12:58.840 --> 0:13:02.880 January through August one average, So it's a really dramatic drop. 0:13:02.920 --> 0:13:05.120 And basically they're there are a whole bunch of different pipelines. 0:13:05.559 --> 0:13:08.480 A bunch go through Ukraine. There's one that goes directly 0:13:08.480 --> 0:13:10.760 to Germany, and then there's one that goes through Belarus 0:13:10.800 --> 0:13:14.440 and Poland to Germany. And with the exception, the only 0:13:14.440 --> 0:13:16.480 one that really had maintained its flow was the one 0:13:16.480 --> 0:13:18.160 that goes straight to Germany. The other ones we're getting 0:13:18.280 --> 0:13:20.720 really squeezed. I don't know what has been happening in 0:13:20.720 --> 0:13:22.480 the past year week and a half that those data 0:13:22.480 --> 0:13:24.240 are no longer available, but I mean the price signals 0:13:24.240 --> 0:13:27.319 suggested maybe they've squeezed it even further. You know, that's 0:13:27.360 --> 0:13:29.600 Tracy saying like that that I think that it was 0:13:29.679 --> 0:13:32.920 reasonable for Putin to conclude that this did give them, 0:13:33.000 --> 0:13:35.079 the Russians, of fair amount of leverage and that they 0:13:35.080 --> 0:13:54.080 were in fact trying to use that. So it's interesting 0:13:54.120 --> 0:13:59.800 you mentioned that the German Russia figurative and literal pipeline 0:14:00.040 --> 0:14:03.120 has gone back several decades. I learned on our last 0:14:03.240 --> 0:14:06.760 episode that we did actually that our current Secretary of State, 0:14:06.800 --> 0:14:09.280 Anthony B. Lincoln, several years ago even wrote a book 0:14:09.840 --> 0:14:13.160 on called Ali Versus l I America, Europe and the 0:14:13.200 --> 0:14:18.880 Siberian Pipeline Crisis about this dispute in on this exact thing. 0:14:18.920 --> 0:14:20.720 So I kind of want to read that book because 0:14:20.720 --> 0:14:24.480 now it's come up in two separate podcasts, and so 0:14:24.560 --> 0:14:28.440 it seems highly relevant. Something I'm you know, something I'm 0:14:28.440 --> 0:14:30.800 curious you know, to sort of like bridge this and 0:14:30.840 --> 0:14:33.200 I guess this is really the key question is so 0:14:33.240 --> 0:14:35.600 we talked at the beginning about this sort of and 0:14:35.680 --> 0:14:37.160 this is what your book is about, this sort of 0:14:37.480 --> 0:14:43.800 demand constraining policy, macro policy from Germany. You know, in theory, 0:14:43.880 --> 0:14:47.280 you could run balanced budgets and do better on nuclear 0:14:47.640 --> 0:14:50.720 or sorry, do better on energy investments. And theoretically they 0:14:50.720 --> 0:14:54.640 could have invested more in renewables or domestic sources of 0:14:54.720 --> 0:14:58.440 energy or energy terminals that would have allowed them to 0:14:58.480 --> 0:15:01.560 become less reliant on Russia, still maintaining a balanced budget, 0:15:02.120 --> 0:15:04.120 whether that's wise or not. But can you talk a 0:15:04.160 --> 0:15:07.400 little bit more about the sort of like macro stance 0:15:07.640 --> 0:15:10.880 that the German state has had for the last five 0:15:11.000 --> 0:15:14.480 years and the sort of sclerotic under investment that they've 0:15:14.480 --> 0:15:18.280 seen in the energy sector. The context here is is 0:15:18.400 --> 0:15:23.200 that when the Berlin Wall fell in nineteen nine and 0:15:23.480 --> 0:15:26.640 West Germany prepared the Federal Republic of Germany, West Germany 0:15:26.640 --> 0:15:29.520 prepared to absorb the states of East Germany into a 0:15:29.560 --> 0:15:32.480 new and large federal republic. There was a surge of 0:15:32.720 --> 0:15:35.160 spending both by the government and my businesses to make 0:15:35.200 --> 0:15:38.600 that transition happen. And you basically have the last like 0:15:38.800 --> 0:15:42.280 great boom in the German economy. For I guess there's 0:15:42.280 --> 0:15:45.440 point over thirty years. The Buddhist Bank, which is Germany 0:15:45.520 --> 0:15:48.400 Central Bank at the time, responds by really aggressively raising 0:15:48.440 --> 0:15:51.480 interest rates because they're worried about inflation. Then you have 0:15:52.000 --> 0:15:55.120 you know, pretty dramatic reversal by the federal government in 0:15:55.160 --> 0:15:57.080 terms of spending cuts after a couple of years later, 0:15:57.480 --> 0:15:59.760 compounded by the fact that it turns out that you know, 0:15:59.800 --> 0:16:02.280 a lot of the optimism that people had about the 0:16:02.320 --> 0:16:05.240 ability to transform East Germany into a part of Germany 0:16:05.240 --> 0:16:07.600 that be is productive as West Germany, that optimism was 0:16:07.640 --> 0:16:10.520 not validated for well ever enough a very long time. 0:16:10.520 --> 0:16:12.440 They there was a hope that a lot of East 0:16:12.440 --> 0:16:15.480 German businesses could be transformed. Um, you get this huge 0:16:15.520 --> 0:16:19.080 boom from privatization and better management. That didn't happen. You 0:16:19.120 --> 0:16:22.080 just had the government instead ended up taking a huge loss. 0:16:22.120 --> 0:16:25.600 They finally wrote it down in and then they basically 0:16:25.600 --> 0:16:27.880 spend a long period of time afterwards, there's a really 0:16:27.960 --> 0:16:30.880 nasty recession, all these people East Germany losing their jobs. 0:16:31.120 --> 0:16:33.080 You have the high interest rates in the early nineties. 0:16:33.400 --> 0:16:36.480 Even then you have essentially the budget you know, restraint 0:16:36.520 --> 0:16:38.920 cutback because the German government felt they just spent too much, 0:16:38.960 --> 0:16:41.520 and they just signed a treaty UM with their European 0:16:41.560 --> 0:16:43.880 neighbors that they that they themselves have pushed for UM 0:16:43.920 --> 0:16:46.360 for balanced budgets as part of preparation for the creation 0:16:46.400 --> 0:16:49.440 of the common currency. All that led to a huge 0:16:49.480 --> 0:16:51.440 squeeze and you can look at things like you know, 0:16:51.480 --> 0:16:54.120 construction activity, other measures of business investment. You have this 0:16:54.320 --> 0:16:56.920 massive decline in the nineteen nineties and a very long 0:16:56.960 --> 0:17:00.640 period stagnation. It was really painful and in fact was 0:17:00.640 --> 0:17:04.320 was the reason why the German left had its best 0:17:04.359 --> 0:17:08.159 elections ever in after years of you know, despite the 0:17:08.359 --> 0:17:11.560 four of reunification that was done under the German Conservative 0:17:11.560 --> 0:17:14.560 Party the Christian Democrats, you know, in the beginning of 0:17:14.560 --> 0:17:16.840 the nineteen nineties and the late nineteen eighties that the 0:17:17.280 --> 0:17:19.280 Social Democrats and the Green's come into power for the 0:17:19.320 --> 0:17:24.400 first time as a coalition in and incidentally, the person 0:17:24.480 --> 0:17:27.360 who led that coalition, Gerhard Schroeder, then later went on 0:17:27.440 --> 0:17:30.280 to become a very prominent person in gas, prominent leading 0:17:30.320 --> 0:17:33.080 the North Stream to project. I think he might still 0:17:33.160 --> 0:17:35.439 be on it, Yeah, I think he's technically as of 0:17:35.520 --> 0:17:38.920 right now, I think he's still which is kind of remarkable. Yeah, 0:17:39.040 --> 0:17:43.560 so they so that was the context there. So Schroeder 0:17:43.600 --> 0:17:45.959 comes into into power with this coalition government, and one 0:17:45.960 --> 0:17:47.919 of the things they want to do is you know, 0:17:48.080 --> 0:17:50.880 increased spending. They want to have lower interest rates, and 0:17:51.320 --> 0:17:53.720 especially after the downturn of the early two thousands, which 0:17:53.760 --> 0:17:56.080 is Germany pretty hard. It's a global downturn. The tech 0:17:56.160 --> 0:17:58.520 bus that it was not in unique United States, and 0:17:58.600 --> 0:18:01.240 they can't. Ironically, you know, we thinking now to Germans 0:18:01.280 --> 0:18:03.959 being you know, the major blocks on you know, looser 0:18:03.960 --> 0:18:06.560 monetary policy and the e c B, the Germans being 0:18:06.560 --> 0:18:09.080 the major constraint on ability for governments to borrow and 0:18:09.119 --> 0:18:12.080 spend in responsive downturns because we have a run you know, 0:18:12.119 --> 0:18:14.280 the recollection of how things were and say two thousand ten, 0:18:14.280 --> 0:18:17.560 two thousand, eleven, twelve, but if you go to like 0:18:17.640 --> 0:18:20.680 two thousand, two thousand one or even that was it 0:18:20.760 --> 0:18:23.760 was the opposite. Actually, the Germans were pressuring the e 0:18:23.880 --> 0:18:27.560 CP for looser policy because relative to their domestic needs, 0:18:27.600 --> 0:18:30.560 ECB was way too tight, and the BCP just this 0:18:30.800 --> 0:18:32.840 to no, like, you know, I there's a there's a 0:18:32.880 --> 0:18:34.800 press conference you can find. I don't remember exactly what 0:18:34.800 --> 0:18:37.200 the day was. It's in the book where some journalists 0:18:37.200 --> 0:18:39.800 asked the ECB about the request they've been getting from 0:18:40.080 --> 0:18:42.800 from Schroeder and from his finance minister Oscar La Fontaine 0:18:42.880 --> 0:18:45.160 and the head of the c B as well. I hear, 0:18:45.320 --> 0:18:49.199 but I do not listen. And you know, okay, so 0:18:49.359 --> 0:18:52.000 you know that they have another like severe downturn, and 0:18:52.080 --> 0:18:54.520 you know, they they sort of push for some modest 0:18:54.560 --> 0:18:57.240 exemptions to the budget caps. So that basically the the 0:18:57.280 --> 0:18:59.840 EU treaty that they signed um in Masstrich in the 0:19:00.000 --> 0:19:02.919 other ones back was that you can't have a budget 0:19:02.920 --> 0:19:06.640 deficit more than three percent of GDP. That number, as 0:19:06.640 --> 0:19:08.119 it happens if you go back in the history, it 0:19:08.160 --> 0:19:11.760 was basically selling that some French, relatively young French bureaucrat 0:19:11.840 --> 0:19:14.040 made up in the eighties and thought it was you know, 0:19:14.440 --> 0:19:16.080 you know, three was a nice round number. That they 0:19:16.280 --> 0:19:18.679 reminded him of the Trinity or something. But there's no 0:19:18.760 --> 0:19:21.879 economic significance to this, but it was a constraint. And 0:19:21.920 --> 0:19:24.919 so Germany and France which are both having a rough period, 0:19:25.119 --> 0:19:27.800 uh you know, downturns in early two slow recoveries pushed 0:19:28.040 --> 0:19:29.840 to get the limit of that, but it wasn't really 0:19:29.840 --> 0:19:32.760 they didn't really exceeded very much, and it didn't really 0:19:32.760 --> 0:19:35.080 help that much. They were still relative constraint in their budgets. 0:19:35.119 --> 0:19:37.840 And and the way these things generally work is that 0:19:37.880 --> 0:19:39.439 if you have a limit on how much you can 0:19:39.480 --> 0:19:41.680 spend on your budget, it's easier to cut the investment 0:19:41.720 --> 0:19:45.280 side than anything else, because what the alternative is, you're 0:19:45.320 --> 0:19:46.919 not you're gonna lay off a lot of you know, 0:19:47.000 --> 0:19:49.680 school teachers and and cut you know, unemployment benefits a 0:19:49.720 --> 0:19:53.080 lot of people like That's that compared to, well, we're 0:19:53.080 --> 0:19:55.840 gonna delay you know, fixing this road or building that 0:19:55.880 --> 0:19:58.359 bridge or whatever. It's much easier to cut the investment spending. 0:19:58.640 --> 0:20:00.640 And this is particularly true in a it's like Germany, 0:20:00.640 --> 0:20:02.639 where you know, in some ways, like the United States, 0:20:02.680 --> 0:20:05.399 is is very much of a federal system and a 0:20:05.440 --> 0:20:08.280 lot of the spending is done by the German states 0:20:08.400 --> 0:20:11.600 or by local even you know, sublocal you know, substate 0:20:11.640 --> 0:20:14.360 of local governments, and those were also subject to sort 0:20:14.359 --> 0:20:17.720 of a national constraint, and so they really are being 0:20:17.760 --> 0:20:19.720 pressured because they can't, you know, their ability to borrow 0:20:19.840 --> 0:20:22.240 is very limited so they're going to cut investment spending 0:20:22.280 --> 0:20:25.359 much harder. That sort of the setup going in really 0:20:25.400 --> 0:20:28.159 for you know, the past twenty years, and you know 0:20:28.200 --> 0:20:31.280 that the German governments certainly did also cut you know, 0:20:31.440 --> 0:20:33.399 welfare spending over this period as well, they're trying to 0:20:33.440 --> 0:20:35.960 meet its budget commitments. They later than you know, became 0:20:36.000 --> 0:20:37.600 convinced that this was such a good idea that they 0:20:37.640 --> 0:20:40.399 actually put in what's called the debt break or the 0:20:40.480 --> 0:20:45.240 schulten Brems that that was you know, very extreme, basically 0:20:45.280 --> 0:20:48.840 saying that you can't have a a cyclically adjusted budget 0:20:48.840 --> 0:20:51.720 death sit for the government as a whole of more 0:20:51.760 --> 0:20:55.080 than like half percent of GDP. And the problem of 0:20:55.119 --> 0:20:57.639 course with this, among other things, is that you know, 0:20:57.680 --> 0:20:59.399 it's very sensitive to how you define what the cycle 0:20:59.520 --> 0:21:01.879 is and and you know, if if you set it up, 0:21:02.000 --> 0:21:04.000 especially when they did after a very long period of 0:21:04.000 --> 0:21:07.399 growth being very very slow um and arguably you know, 0:21:07.480 --> 0:21:10.880 significantly below where Germany should have been, then you sort 0:21:10.920 --> 0:21:13.760 of locked yourself in permanent stagnation and that really limits 0:21:13.760 --> 0:21:16.439 your options. So even though the government did try to 0:21:16.560 --> 0:21:18.760 invest more, it didn't really get anywhere. I mean, one 0:21:18.800 --> 0:21:21.040