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 80 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 world that is free, or mostly free, market participants — and not politicians — decide which projects are likely to return profits. 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, as safer than nuclear energy. The move also has political support because many ordinary Germans are interested avoiding increases to their cost of living by securing access to affordable energy sources. Limits on these sources will increase the cost of living and decrease real wages.
Economically, this is the end of the controversy, since market participants are much better than politicians at foreseeing the economic viability of such a project. But although environmental regulations are harming average Germans, the US government is now trying to make things even more difficult for ordinary Europeans by attempting to control the flow of energy resources in Europe.
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 “publicly 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 policymakers 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 fears 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 key to the foundation of the European Union.
Our post–World War II statesmen were wiser than our present bunch. They saw that Germany’s attempt at creating an autarkic state was linked to its aim t control the natural resources of its neighbors (such as wheat from Russian and oil from the Balkans) via invasion and annexation. 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 each other’s resources. 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:
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 the 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 panacea for stopping a new Cold War, but the demise of Nord Stream Two almost guarantees that geopolitical tension will increase.
The US should not assume that Germany and the other countries of western Europe that 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.
Patrick Barron is a private consultant to the banking industry. He has taught an introductory course in Austrian economics for several years at the University of Iowa. He has also taught at the Graduate School of Banking at the University of Wisconsin for over twenty-five years, and has delivered many presentations at the European Parliament.