Germany’s policy of “Wandel durch Handel” (“Change through Trade”), aimed at deepening economic ties with Russia in order to prevent war, finally collapsed in 2022, when Moscow launched a full-scale war in Ukraine. This war became the largest hot conflict in Europe in the past 50 years and led to tectonic changes in the economy of the entire continent. They especially affected Germany, which for many years built its industrial power on large purchases of cheap Russian gas and found itself cut off from this resource, refusing to support the aggressor.

Now the question arose for the EU’s largest economy to restructure established international ties and forge new partnerships that would help restore its former prosperity and strengthen security.

"Ukrainian Energy" has figured out what Chancellor Friedrich Merz's new strategy is, what role the United Kingdom plays in its implementation, and what plan his government seeks to implement for the economic revival of Germany.

British accent

A turning point took place yesterday, July 17, in London. On this day, Germany and the United Kingdom signed a treaty of friendship and strategic partnership - 80 years after the end of World War II. Politico called this agreement the first and most ambitious agreement between the two countries since 1945.

The agreements were concluded following negotiations between Federal Chancellor of Germany Friedrich Merz and Prime Minister of the United Kingdom Keir Starmer. "We have never had anything like this. The United Kingdom was a member of the European Union, and we thought that was enough. But, as we now understand, it is not enough. Therefore, we need to continue working in this direction. And indeed, this is a historic event. The United Kingdom and Germany were able to conclude such an agreement, which covers extremely important aspects of our future policy,” Merz noted.

A senior German official told Bloomberg that the strategic agreement between the two countries is “a response to Russia’s increasingly aggressive policy” and an attempt to balance Washington’s influence in NATO. The agreement, in particular, provides for a commitment to mutual military assistance in the event of an armed attack, as well as the joint development of a long-range missile system over the next ten years.

London and Berlin also agreed on plans to strengthen the energy partnership in the context of security, which is becoming a key element of European security and one of the levers of strategic pressure on Russia. This direction combines pragmatism, technology and geopolitics with a focus on accelerating the reduction in fossil fuel consumption, curbing possible Russian expansion in the energy sector and building a sustainable energy future for Europe.

Following Russia’s full-scale invasion of Ukraine, both countries are seeking to diversify their energy sources and break the model of “energy blackmail” that underpins Russia’s policy.

They also see strategic value in building new, reliable cross-border infrastructure. Such cooperation would involve joint investment in offshore wind and grids connecting Germany and the UK across the North Sea. This would reduce the need for natural gas to balance the systems and promote the integration of energy markets, with a focus on renewables, energy storage batteries and digital technologies to make the market more flexible and to increase the resilience of the EU and NATO.

Gas alternative

The agreements between Germany and the UK, concluded at the highest political level, confirmed Berlin’s intention to change the country’s strategic development priorities, which until 2022 were based on economic cooperation with Russia and pipeline imports of its relatively cheap natural gas. However, this did not protect the European continent from the spread of Russian aggression.

Friedrich Merz, elected Chancellor of Germany in May of this year, unlike his predecessor Olaf Scholz, immediately managed to implement a more belligerent policy aimed at limiting Moscow and preventing its re-expansion into Europe. This brought the positions of Berlin and London closer together, while at the same time hitting Russian interests.

Thus, it was Friedrich Merz's government that announced in June the preparation of an amendment to the Foreign Trade Act, which would give it the right to veto any initiatives to resume Russian gas supplies via the Nord Stream 2 pipeline. Legal innovations will also make it impossible to make agreements with the project operator - the NordStream2 AG company - to transfer the transit of Russian gas to foreign investors.

Previously, numerous Western media sources reported on a possible deal between NordStream2 AG and American businessman Steven Lynch in the interests of Russia's Gazprom. Commenting on such rumors, Friedrich Merz repeatedly emphasized that in order to preserve Europe's energy security and maintain anti-Russian sanctions, it is important to prevent the launch or transfer of Nord Stream 2 to another control. The legislative changes proposed by his team, which the German parliament is going to support by the end of this year, will help to avoid such risks.

But Berlin's "anti-Moscow offensive" did not end there. On July 2, Germany gave the green light to the development of an offshore field near the island of Borkum in the North Sea, capable of providing up to 16% of its domestic gas demand and avoiding renewed dependence on Russian energy sources. This became possible thanks to the adoption of a bilateral agreement between Germany and the Netherlands.

According to German Minister of Economics and Energy Katharina Reiche, the country will be able to receive about 13 billion cubic meters of gas from this field every year. The intergovernmental agreement was a necessary condition for the start of its development, since the Dutch company One-Dyas is to conduct horizontal drilling on German territory. “One-Dyas received permission from the authorities of the state of Lower Saxony a year ago, but the then Minister of Economics Robert Gabeke from the Green Party postponed the final decision for environmental reasons,” - Reuters reports.

The head of the Ministry of Economics also harshly criticized the calls of some German politicians and businessmen to resume the operation of the Nord Stream 2 gas pipeline connecting Russia and Germany. “Return to Russian gas? To the regime that bombs Kyiv every day? This is absolutely unthinkable for me,” the official said. According to her, Germany, which was Gazprom's largest customer in Europe a few years ago, must now, on the contrary, step up efforts to diversify energy supplies for the sake of security and restoring stability. "Germany was deceived into believing that Russian gas supplies would be reliable under any circumstances. We paid a bitter price for this naive position," she admitted.

Energy restructuring

After the May rotation of the German government, its priorities became clear. Katharina Reiche, who headed the economic and energy sector, has focused on strengthening infrastructure and energy security and a moderate "climate transformation" that should not weaken the country's competitiveness.

Before her government position, she was a top manager at energy giant E.ON - she headed its subsidiary Westenergie AG. In her first speech in her new role, she stressed the need to “take more risks and accelerate infrastructure investments” to strengthen the country’s economy.

Among the key priorities, Katharina Reiche also named lowering energy prices and ensuring a stable energy supply. She believes it is necessary to quickly hold a tender for the construction of new gas-fired power plants with a total capacity of at least 20 GW. “However, the issue of financing these projects remains open, especially against the background of the minister’s plans to reduce the electricity tax and the gas storage fee,” the Financial Times reports.

Reiche also called for a rethinking of the approach to the development of renewable energy sources, emphasizing the need to take into account systemic risks and costs when expanding them. As a first step in her new position, she introduced careful monitoring of risks and an assessment of the current state of Germany’s energy sector.

Regarding the possibility of Germany returning to the development of nuclear energy, the minister was quite clear. She said that to revive the nuclear power plant projects, the country needs not only significant financial injections, but also to restore the trust of energy companies that was lost during the energy crisis. “We will now have to live with this situation,” concluded Katharina Reiche.

She warned that the survival of the country’s heavy industry was vital for Europe’s sovereignty, and called on Brussels to approve a government support plan for German energy-intensive companies that are still suffering from high gas and electricity prices. The plan involves providing electricity subsidies for sectors such as the chemical industry and steel production to help overcome Germany’s longest post-war period of stagnation.

At the same time, Berlin is determined to “do its homework” by implementing structural reforms and launching a €1 trillion investment plan in infrastructure and the defense industry to correct past mistakes that led to the country’s overdependence on Russia and China.

“The absence of steel production in Germany and the abandonment of basic chemical production, which requires significant amounts of natural gas, will mean entering into new dependencies,” Katharina Reiche told the Financial Times. She added: “Growth in Germany is essential to ensure growth in Europe again. The European Commission has been forced to lower its growth forecasts for this year… We must therefore do everything possible to strengthen Germany as an attractive business destination again.”

Price constraints

The eurozone’s largest economy, Germany, is heavily dependent on the productivity of its heavy industry, which has been hit by high energy costs – the consequences of an accelerated phase-out of nuclear power and Russia’s full-scale invasion of Ukraine in 2022, which has caused significant volatility in markets. This has put additional pressure on export-oriented companies, which are also suffering from competition from China and domestic labor shortages. Now, Donald Trump’s threat to impose a 50% tariff on EU imports could send Germany’s economy into recession this year after three years of stagnation.

Chancellor Friedrich Merz’s government has pledged to cut electricity prices by at least 5 eurocents per kilowatt-hour through tax and grid tariff cuts as part of a stimulus package to boost growth and support industrialists. His parliamentary coalition has also promised to introduce a special reduced electricity tariff for energy-intensive industries such as steel, glass, cement and chemicals.

The plan risks breaching EU state aid rules, which are designed to prevent countries in the bloc from giving unfair advantages to their national economies. But those rules were relaxed after Russia’s full-scale invasion of Ukraine in 2022 to allow countries to support businesses hit by record gas prices.

“To preserve energy-intensive industries, and not only them, in Germany, we need permission for state aid,” said Katharina Reiche, indicating that the current system of price compensation linked to indirect carbon costs should also be “continued.” “Economic growth is vital for the health of democracy on the continent and the ability to defend our values,” she noted.

Risks and expectations

One of the manifestations of the “bitter price” for naivety in relations with Russia, which Katharina Reiche mentioned in the context of past gas dependence, is that the German economy is not getting out of the “roller coaster” mode.

According to the results of the second quarter of this year, Bundesbank analysts predict that the country’s GDP growth will be quite limited or even absent altogether. This means that the German economy continues to operate in a “start-stop” mode: quarters of growth and contraction have alternated since 2022, when Russia launched a large-scale war in Ukraine. But this time the “roller coaster” turned out to be truly “American”, they are associated with expectations of American tariffs, which US President Donald Trump wants to introduce from August 1. If at the beginning of the year the main EU economy grew by 0.4%, now the real threat of 30% tariffs has come to the fore, and the Bundesbank warns of a “significant downside risk”. At the same time, according to S&P Global Market Intelligence, business in the country is showing the greatest optimism in the last two years. However, this is due to expectations of fiscal stimulus, which is being talked about in the government of Friedrich Merz, and investments in defense and infrastructure. “This economic stimulus will have a delayed effect. In the short term, export-oriented sectors of the German economy will face the consequences of the US tariff policy,” the Bundesbank notes.

As for electricity prices in Germany, according to analyst Tobias Federico from the Montel agency, they must be reduced to the level of the US and China in order for the country’s industry to become competitive again. Among the government measures aimed at achieving such an ambitious goal are the establishment of price caps, tax cuts and transmission tariffs.

The loss of Germany’s energy-intensive sector, which still cannot fully recover from the “cheap Russian gas” trap, risks hitting the economy with losses of more than 90 billion euros.

Svitlana Dolinchuk, specially for “Ukrainian Energy”

Tags:Germany