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Achtung: Genius at Work!

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
August 21st, 2014

The genius on this occasion is provided by none other than Chancellor Angela Merkel of Germany and her foot soldiers, while the work being referred to is the slow-motion ruining of the German economy, which if it continues could result in a severe weakening of several other economies, and not just those in Europe. To use some terminology that may still be in vogue at the U.S. Military Academy at West Point, the travesty now being orchestrated in Germany will almost certainly be found ( found wanting and dumped) before the end of the present decade, although considering the damage being done, that may turn out to be half a decade too late.

SOME BACKGROUND

The story behind the proposed abandoning of nuclear in Germany - the energiewende (= energy transition) - begins with the tsunami that took place in the vicinity of Fukushima (Japan). Without that tsunami - thousands of miles from Berlin - Frau Merkel might be in or on her way to an exciting and well-paid position at the European Union (EU) headquarters in Brussels, or perhaps she would be judged a possible replacement in Hollywood for the two exotic German language actors Marlene Dietrich and Romy Schneider, who were such a sensation in the middle years of the 20^th century.

But unfortunately there was a powerful tsunami, the Fukushima reactors were in the wrong place, and as I repeatedly discovered in lectures I delivered, and conversations afterward, it was a complete waste of time to insist that in a decade or two, reactors at Fukushima, or for that matter next to the 'Spree' (River) in Berlin, could be 'tsunami proof'. The decision makers in many countries were 'spooked', and generally uninterested in claims by myself and others that 'The March of Technology' will work in favor of nuclear to a greater extent than any other source of energy.

My next course in energy economics might commence in a month or two, and if so there is one item that must be perfectly understood by every student: although it may sound ridiculous, without the tsunami IN JAPAN, there would be no locks on reactors IN GERMANY, and without those locks it might be possible that the European macro-economy would almost be functioning normally. Moreover, at a conference in Stockholm last week, Stanley Fisher of the (U.S.) Federal Reserve (= Central Bank) might not have felt compelled to say that with a normal functioning of the European economy, the U.S. economy would be in better shape.

I do not know who attended that conference, but even so I have reason to believe that most of Mr Fisher's audience did not have the slightest idea of what he was talking about. The economic expertise in Sweden may or may not realized that Germany accounts for a large slice of the Eurozone economy, and when the senseless order went out in that country for an immediate closure of eight of Germany's nuclear installations, and a phasing out of the rest by 2022, the more perceptive members of that audience comprehended that Europe's macroeconomic - and financial market - future would not improve, and would likely get worse. Moreover, I suspect that the reason why that conference was not discussed at great length in my morning newspaper was to avoid contributing to the bizarre lie that a nuclear retreat, accompanied by a heavy investment in wind and solar, is capable of maintaining Germany's industrial health.

ERSATZ GENIUS

The (London) Economist was not a popular publication in my classroom during the five years that I taught international finance. It was not popular because I repeatedly called it "a compendium of London wine-bar gossip", and made it clear that items from that publication were never to be mentioned when serious work was taking place by me or students at or just in front of the black or whiteboards, nor would I appreciate encountering the twisted wisdom of The Economist on written examinations.

But where energy economics is concerned, I feel it necessary to be somewhat more liberal. In the near future my energy economics students will receive a long article from that publication called 'HOW TO LOSE HALF A TRILLION EUROS' (October, 2013), which is a welter of easily exposed lies and misunderstandings (= Ersatz Genius), as compared to the real deal being practiced by Merkel & Co, and which involves convincing the voters that economic nonsense is in their interest. Those young ladies and gentlemen will then have the pleasure of demonstrating that they understand as much about the foolishness presented on the last two pages of that article, as I understand and will explain to them about similar absurdities served up on the first.

Behind a barrage of lies about future intentions, the German government has recently revised its clean-energy law so that 'green' subsidies can be reduced, but at the same time the price of electricity to German households is supposed to be kept from increasing. The question is, how can this be done while a nuclear retreat is taking place? The answer is that the cost of abandoning nuclear will not be paid for by an increased investment in solar and wind power, as frequently claimed, because Chancellor Merkel knows almost as well as I do that solar and wind cannot replace nuclear in Germany, or for that matter in any industrial country. Instead there will be increased imports of electric power from countries where electricity is less expensive than in Germany (which is true in every country in Northern Europe except Denmark), an increased use of coal, and a marginal reduction in the real incomes of certain categories German employees.

As for the industrial sector, intensive lobbying has made it possible to weaken the EU carbon dioxide restrictions, (which, ceteris paribus, is equivalent to a reduction in the cost of suppressing pollution). As is clear though, this is inadequate, and so you can expect an increased movement of German manufacturing facilities to nearby countries.

Readers of the Economist article are told in the second paragraph that energy from solar and wind power is "free". Once we understand what the expression capacity factor means, we realize that that statement is nonsense. The capacity factor of a power source is the ratio of its actual output over a period of time to its potential output over that period if it were possible for it to operate at full nameplate capacity. Jeffrey Michel is an MIT graduate active in Germany, and he places the (average) capacity factor of wind at under 30%. The situation is much the same for solar, and so with wind and solar a backup power source could be necessary over a large fraction of a day or week.

Perhaps the best fast-start backup is hydro, although everything considered, equipment that burns natural gas is almost as good. But according to the Economist article "gas plants (in Europe) are being shouldered aside by renewable energy sources". That statement is not wrong, nor is it nonsense - it is wacko, off-the-wall, irresponsible.

The German government has announced that it wants renewables to supply 35% of that country's electricity by 2035 and 80% by mid-century. Hearing that forces me to repeat a prediction from my new textbooks (1914,1915). By mid-century Germany and Japan will probably be the most nuclear intensive countries in the world, Even with the theoretical and applied evidence in front of them, many other countries may continue to entertain fantasies about the most useful sources of electricity, but in the long run those two countries will not play the fool.

CONCLUSION

On the third page of the article being discussed, you can read that "European countries are slowly piecing together a system in which there will be more low-carbon and intermittent energy sources, more energy suppliers, more modern power stations replacing coal and nuclear and…" And I think that that is enough of the silliness in a half-baked Economist presentation, although the following observation might be useful. About 1939 another high and mighty German pseudo-scholar, Josef Goebbels, stated that "the bigger the lie, the bigger the effort to believe it." The Cold War and the War in Korea gave me the opportunity to see a few of the results of believing in lies, and I suggest that you and my students should find another form of entertainment.

REFERENCES

Banks, Ferdinand E. (2015). Energy Economics: A Modern First Course. (in process).

______, Energy and Economic Theory. (2014). Singapore, London and New York: World Scientific.

Michel, Jeffrey H. (2014). Lignite Power Provides Bargain-Priced Pollution. (Jeffrey.Michel@gmx.net)

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
August 21st, 2014