Olaf Scholz Gets a Tough Lesson in What It Means to Run Germany
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(Bloomberg) -- Olaf Scholz ascended the podium of Germany’s parliament for a routine speech on federal spending, but then the normally deadpan chancellor let loose.
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His right hand balled tightly, Scholz unleashed an angry attack on critics of his energy policy, pumping his fist up and down before pointing a finger at the conservative opposition and blaming Angela Merkel’s bloc for Germany’s predicament.
“That was you” who failed to diversify Germany’s energy sector, Scholz said, focusing his anger on the Christian Democrats -- the current leader in voter polls.
The unusual outburst is a sign of the strain the 64-year-old Social Democrat is under as he enters a defining phase of his still-young tenure. If Scholz struggles to guide Europe’s largest economy through the coming months, his power could be broken well before the next scheduled election in 2025.
The roots of Scholz’s emotional flare-up can be traced to the early days of his chancellorship. Shortly after taking charge, he was briefed that intelligence reports suggested a Russian invasion of Ukraine was possible and warned that President Vladimir Putin could then seek to weaponize energy.
What’s Plan B?, Scholz asked his aides in the chancellery. Only to be told there wasn’t any, according to a person familiar with the discussions.
It was a bitter revelation that Germany was in big trouble, and Scholz could take the blame for it, even if the country’s reliance on Russian energy was decades in the making. That frustration bubbled to the surface in his attack in parliament last month.
The issues are starting to come to a head as winter approaches and the risks of blackouts and rationing become more tangible. The hallmark of Scholz’s efforts to stabilize Germany is a debt-financed €200 billion ($196 billion) initiative to rein in energy costs through next winter.
Equivalent to more than 5% of gross domestic product, the money is meant to send a signal to the Kremlin that Germany won’t cave. But even before details are set, the spending plan has riled European Union partners and threatens to reopen rifts in the bloc.
Scholz defended the move, arguing it reflects Germany’s exposure and is inline with steps taken by other countries.
“We will manage to offer a good, comprehensive relief for many citizens and many companies to secure jobs,” Scholz said after arriving for an EU summit in Prague this week. “We know that many others are doing something similar now and in the years to come.”
A rogue, inward-looking Germany would be bad for the EU, which is in need of leadership after Italy veered to the far right and France’s Emmanuel Macron lost control of parliament.
In addition to strains with Brussels, tensions are building domestically. The CDU-led conservatives have opened up a 10-point lead over Scholz’s SPD in some national polls, and the far-right Alternative for Germany is gaining strength, exploiting fears of voters worried over the fallout of sanctions against Russia.
Scholz might get a brief respite on Sunday, when the state of Lower Saxony votes. Polls show the Social Democrats set hold on to power in the home of Volkswagen AG, thanks to a popular incumbent.
But broader concerns are spilling over into the mainstream. An alliance of social organizations, trade unions and environmental groups are preparing rallies on Oct. 22 to protest against what they call the government’s “inadequate response” to the energy crisis.
“The German economy is threatened with a free fall, and not all companies will survive the impact,” Sarna Roeser, head of an industry group representing young business owners, wrote in a column for the RND media group. “The federal government is even worsening the economic crisis.”
Scholz and his center-left Social Democrats rose to power after squeaking out a narrow election victory a little over a year ago, succeeding Merkel with the weakest backing for a German chancellor since World War II.
Forced into an awkward three-way alliance, internal divisions have crystallized around Finance Minister Christian Lindner, the head of the pro-market Free Democrats, and Economy Minister Robert Habeck from the Greens.
The simmering rivalry erupted into the open in late September over a controversial plan to help prop up embattled energy companies by imposing a levy on gas consumers, with Lindner and Habeck feuding publicly over the plan to raise €34 billion.
The dispute was set aside by abandoning the levy and establishing the massive energy fund. Scholz presented the plan while still in isolation for Covid-19, making the announcement with less than 48 hours before the levy was due to take effect on Oct. 1.
The money is being placed in an off-balance sheet entity to keep from breaching debt limits -- a move that would have been a blow to Lindner’s badly slumping FDP. An initial recommendation on policy details is expected on Monday.
The briefing in the early days of his tenure helped Scholz and his team move quickly to refill depleted gas reserves and kick start the construction of terminals to import liquefied natural gas.
He also reacted decisively to secure Germany’s energy sector, seizing control of the local units of Russia’s Gazprom PJSC and Rosneft PJSC and moving to nationalize Uniper SE, Germany’s biggest buyer of Russian gas.
“Germany is in a better position than many had expected,” said Ulrike Malmendier, an adviser to the government and a professor of economics at the University of California in Berkeley. “It has unfortunately been a bumpy ride.”
The country remains in a difficult spot. LNG supplies are tight, and producers such as Qatar are demanding long-term contracts that would lock Germany into high prices for years, undermining plans to shift away from fossil fuels.
Efforts to ramp up renewable power are struggling, and some approval processes can still take as long as 15 years, according to Simon Mueller, a director at energy think tank Agora Energiewende.
There’s also a risk of focusing too much on the coming months rather than a long, hard transition. Behind closed doors, people close to the chancellor acknowledge the real challenge will be next winter without Russian gas flowing to refill reserves.
“I have the fear they believe they’ll get through the winter and then everything will be fine,” said Malmendier. “Unfortunately, this is not the case.”
If Scholz struggles in the coming months, he may have little political capital left, and Germany would end up weakened.
“Our prosperity could be shaken, our economic structure hit so that in the end our social cohesion erodes,” he said in justifying the energy shield. “With this, Germany is showing its full economic might in an energy war.”
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