On December 20, 2019 President Trump authorized sanctions against companies and individuals who are participating in building Nord Stream Two, a pipeline under the Baltic Sea that will bring Russian natural gas to Western Europe, principally Germany. The pipeline is more than eighty percent completed. The sanctions were included in the 2020 National Defense Authorization Act, which funds America’s huge military and will be difficult to overturn. Already a pipeline laying company has suspended its operations. Germany, the main beneficiary of this huge project, has denounced the US sanctions. These sanctions are wrong on two fronts and are very likely to backfire against US long term interests.
The Economic Case for Nord Stream Two
The economic case in favor of completing Nord Stream Two is simple. In a free market capitalist society investors decide which projects are likely to return profits, not politicians. The very fact that the pipeline is being built tells us that the investors expect it to be successful in replacing existing, higher priced energy sources and/or providing a solid, lower cost energy source for future economic growth in Germany and Western Europe. In fact, no one has claimed otherwise. The German government has been supportive of the project, because natural gas is a cleaner energy source than coal and is seen, rightly or wrongly, to be safer than nuclear energy. Germany plans to shut down all except eight of its coal-fired plants by 2030 and all of its nuclear power plants by 2022. So, Germany will be left with windmills, solar panels, and little else, which may be fine with its large environmental activist sector but will not provide enough power to support the nation. Natural gas appears to be the answer and Russia has large supplies for sale. Economically, this is the end of the controversy, since capitalists are much better than politicians at foreseeing the economic viability of such a project.
The Geopolitical Case for Nord Stream Two
The publicly stated US case against Nord Stream Two is that it will leave Germany too dependent upon a potentially hostile power to fuel its economy. I say “public stated” because the US wants to sell liquefied natural gas to Germany, but at a cost that is estimated to be double that of pipeline gas from Russia. The US is taking it upon itself to decide what is best economically and geopolitically for the world’s third largest economy. Do our policy makers really have a better understanding of these matters than Germany’s own policy makers? I highly doubt it. Germany may be foolish in shutting down its coal and nuclear energy sources, but in this regard it is hostage more to its own radical environmental lobby than it will ever be hostage to Russia. In fact, one way to look at this issue is that Russia is saving Germany from its own foolishness. I predict that this environmental lobby will never be satisfied and will simply move on to campaigning against another pillar of German industry. Furthermore, Germany has many energy options even if it does shut down its coal and nuclear plants. It can import nuclear power from France and coal-fired power from Poland. Poland is campaigning to stop the new pipeline, too. A skeptical person would wonder whether it does so for geopolitical reasons or because it sees a loss of export revenue and/or a loss of influence over a former enemy. In any event, this is Germany’s decision, not that of the US and especially not that of Poland.
The geopolitical case in favor of Nord Stream Two is as straightforward as the economic one. The German and Russian economies would become interdependent to some extent. If Germany becomes dependent upon Russian natural gas, Russia will likewise become dependent upon export revenue from Germany. This interdependency theory for peace between former enemies was at the foundation of the European Union. Our post World War Two statesmen were wiser than our present bunch. They saw that Germany’s attempt at creating an autarkic state was a key element in its policy to control nature resources from its neighbors via invasion and annexation; such as wheat from Russian and oil from the Balkans. On the Western front, France had plentiful coal supplies and Germany had state-of-the-art steel mills. By agreeing to join the European Coal and Steel Community France and Germany ended their century old and bloody competition to control the resources of the other. Such a simple thing to do and yet how many millions died and were enslaved to pursue the false god of economic autarky? Frederic Bastiat’s purported dictum was never so prescient; i.e., “When goods don’t cross borders, soldiers will.”
The great missed opportunity of our times is that Russia has not been welcomed back into the community of peaceful nations. Where does the blame lie? Some would say that Russia’s annexation of Crimea in 2014 exposed its still expansionist goals. Others would say that expanding NATO to encompass most of the former Warsaw Pact nations is to blame. Economic integration and cooperation may not be a complete panacea for stopping a new Cold War, but the demise of Nord Stream Two almost guarantee that tension will increase. The US should not assume that Germany and the other countries of Western Europe who desire to purchase Russian natural gas will acquiesce in this affront to their sovereignty. If the US persists in enforcing sanctions, one can envision the eventual breakup of NATO itself. You heard it here first.