No, France and Germany Haven’t Fallen Out

(Bloomberg Opinion) -- France and Germany’s recent cooperation agreement – in which the two nations promised to form join positions on all important European matters – appears to have withstood a difficult early test. The two powers have forged a compromise over the contentious issue of the Nord Stream 2 gas pipeline from Russia.

The connection, which will run from Ust-Luga in Russia to Greifswald in Germany, has many enemies: Among them are Ukraine, whose pipelines will be bypassed, and Poland and other Eastern European countries opposed to the increased leverage over the region Russia will gain from the project. The U.S., too, is wary of Europe’s dependence on Russian supplies; it would rather the bloc relied on U.S. liquefied natural gas instead. 

In 2017, the European Commission tried to respond to those concerns by proposing an amendment to its gas market directive, expanding it to cover pipelines coming into the EU from outside. Operators would be required to give equal access to gas suppliers and be banned from simultaneously owning the infrastructure and the gas it carries. 

Gazprom, the state-controlled company that owns Nord Stream 2, enjoys a monopoly on export pipelines. Russian laws would need to be changed to conform with those of Europe, and Gazprom would have to give up ownership of the pipeline, something that would undermine the economics of the $11 billion project.

The U.S. has enthusiastically embraced the Commission’s proposals because of the trouble they would cause Russia. So have the eastern Europeans.

Germany, for its part, hasn’t followed. Chancellor Angela Merkel is adamant the country wants the project. The extra 55 billion cubic meters of gas a year the pipeline will carry would help the country, which consumes about 90 billion cubic meters of gas a year, to transition away from coal by 2038.

Not even repeated threats of U.S. sanctions against the German companies taking part in the project, Uniper SE and Wintershall AG, have undermined Merkel’s resolve; given her unconcealed discomfort with the Trump administration, they may only have strengthened it.

French President Emmanuel Macron has disagreed loudly with Donald Trump on many issues – but he has also tried to stay on the U.S. leader’s right side and establish a good personal relationship. He doesn’t need a quarrel with the U.S. about a pipeline that won’t benefit France as much as it will Germany.

When the France’s foreign ministry said on Thursday that it would back the EU’s proposed amendments, it looked like a major rift had developed with Germany. The version submitted for consideration to EU member states’ permanent representatives in Brussels would have created a major headache for Gazprom and Germany.

Without France’s support, Germany only has the Netherlands, Belgium, Austria, Bulgaria and Hungary (all potential beneficiaries of Russian pipeline projects) on its side; in total, these countries command only 27 percent of the EU’s population, short of the 35 percent needed to block the new rules.

On Friday, however, it transpired that Germany and France had hammered out an elegant compromise. The EU country a pipeline enters will have the power to decide whether to apply the amended rules. With Germany thus empowered, Nord Stream 2 will almost certainly get an exemption. There would have been strong legal grounds for one, anyway. Management consulting firm Arthur D. Little wrote in a September analysis of the proposed rules that the EU would struggle to deny the project an exception because “the investment began before the amendment was even being discussed.” It’s conceivable that the project will be almost completed by the time the new legislation takes effect.

Even so, I’m in favor of making Nord Stream 2 fully comply with the EU’s gas market rules. They are fundamentally fair; Gazprom’s export monopoly is obsolete and inefficient. Competition is good for consumers, who in Germany pay the average EU rate for gas, but could do better. 

By allowing Gazprom to preserve the status quo, France and Germany have missed an opportunity to bring about some positive change in Russia. There, export liberalization is being discussed in the highest echelons of government, pushed by the powerful state-controlled oil and gas producer Rosneft and the large private player, Novatek, which has been forced to focus (successfully) on liquefied gas exports because of Gazprom’s pipeline monopoly.

East Europeans and Ukrainians won’t be happy with the outcome. The U.S. may, however, find it harder to continue threatening Germany, at least until it actually exempts Nord Stream 2, since the amended regulations comply, technically, with the U.S.’s demand for the EU to apply its own internal rules to external pipelines.

With the link likely to be completed, the important lesson from this controversy is that, despite their diverging national interests, France and Germany under Macron and Merkel are indeed bent on hammering out common positions. Driving a wedge between them won’t be easy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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