Good morning, everyone. Peter Zeihan here coming to you from Colorado. It is July 11 and today may very well may be the beginning of the end of the German system. Today the gas flowing through a pipeline called Nord Stream shut down. Now that’s a subsea pipeline that goes directly from Russia to Germany. It’s one of the few pieces of infrastructure that is not an immediate danger from the Ukraine war. All these pipes that cross Ukraine and Belarus from Russia to the European system at some point over the course of this next year, probably within the next few months, they’re all going to be shut down because of war damage. Whether that is because the Ukrainians shut them down themselves or because of the Russians accidentally hitting their own infrastructure is kind of irrelevant at that this point. It’s kind of baked in as a hundred percent chance, really. There’s no way that it’s gonna last.

That leaves things like Nord Stream as the only remaining links. And the Germans worked with the Russians over the last 20 years to build the Nord Stream system, to give them some insulation from things like what’s going on in Ukraine now. And it has not worked. 

It has simply made the Germans horrendously dependent. Now there are four things that the Germans rely upon to be the economic powerhouse that they are. The first are those natural gas flows. With the shutdown of Nord Stream, which is ostensively for maintenance is what the, the Russians are saying…in theory, they’ll be back online on the 21st, but the Germans are being blackmailed by the Russians to back out of the coalition that is supporting Ukraine. Nord Stream is the most effective tool that the Russians have to do this. 

The quid pro quo is pretty straightforward. You stop providing logistical and political and military support for the Ukrainians, or we turn off the gas and never turn it back on. That would generate industrywide shortages and shortages in heating systems. And there is absolutely no way that the Germans would be able to maintain their economic model. It is based on access to large volumes of cheap Russian energy, both in terms of for electricity and as an industrial inputs to power the entire German manufacturing model.

So that all by itself could kill the German system almost overnight. Well, not overnight, but within a year. But all of the other things that allow the Germans to be successful are in danger, too. The Germans rely on a large, robust, highly skilled workforce, but Germany has one of the fastest aging societies in the world. Until now that’s worked for them because if you have a lot of people in their late forties to early sixties, you know, decades of experience, and none of ’em have kids, well they can spend either all their time working and the state can spend all of their efforts on educating them to make them the most highly value added workers in the world. 

But it’s a bit of a starvation diet because eventually people who are in their forties to sixties become in their sixties to seventies. And that’s where Germany almost is now.

Germany will hit mass retirement this decade. And so the model was always in danger on demographic grounds. The third thing that allows the Germans to be who they are, is access to central European labor all the way from Poland, Romania and even further east. Whenever you’re doing manufacturing, not all of the jobs are high skilled. Some are mid skilled, some are low skilled. The person who’s bending the metal for fenders is probably not the person who’s doing the spark plugs or the transmissions, and to have a successful manufacturing system in a globalized world, you need a differentiated workforce. Different skill sets, different price points. And in central Europe, the Germans have all that. They’ve had all that since the 1990s, but that’s going away too, because just as the Germans are rapidly aging, the central Europeans are aging even more rapidly. They’re still on average a few years younger. They won’t hit that mass retirement until the latter half of this decade or the first half of the 2030s. 

But the replacement population, the birth rate in all of these countries is actually lower than it is in Germany. So it’s every bit as terminal. And then fourth, you need access to the global system, especially when you have an age demography without a lot of 20 and 30 somethings. The way you make it work is you sell products abroad. But the Americans have lost interest in that. The Americans created globalization as a bribe to fight the Cold War. We will enable everyone to trade with anyone and sell into any market if you side with us on security policies. But the U.S. has been backing away from that for some time. And even in this reinvigoration of the Western Alliance and NATO and the Western relations in general that the Russian attack on Ukraine has caused, the Biden Administration has not even floated the idea of a broad scale regeneration of the old Cold War structures of trading economic access for security agreements. 

There’s just a security deal in place here, which means that when the Ukraine war ends as all wars eventually do, we go back to where we were, where the Americans basically go their own way. I’d love for it to turn out a different way, but I don’t see it. Anyhow, all of us put together suggests that the manufacturing model that has sustained Germany that has provided the tax base that has provided economic growth that has made the population relatively happy with their situation…it’s gone. And it’s going to vanish within the next year and a Europe that does not have a German motor at its heart is a Europe that all of a sudden needs to find a very, very different way to function. Now that can take us down any number of rabbit holes, but we’re gonna have to hold off on that for another day. Okay. That’s it for me until next time.