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Speaker 1: From the opinion pages of the Wall Street Journal. This is Potomac Watch.

Kyle Peterson: The United Kingdom has a new prime minister, as Russia shuts down a natural gas pipeline to Germany. Welcome, I’m Kyle Peterson with the Wall Street Journal. We’re joined today by my colleagues, columnists Joe Sternberg in London and editorial board member Mene Ukueberuwa. Welcome to you both. Liz Truss was the foreign secretary in Boris Johnson’s government most recently, but she has now won the conservative party vote to succeed him as prime minister. Recall that Johnson announced in July he would resign, triggering this leadership change mid-election. There are originally several nominees, which conservative members of parliaments whittled down, and then the final two went to party members for a vote, and Truss won with about 57% of that. About 81,000 votes in all from the conservative party members. Here’s a clip of the new prime minister Liz Truss explaining the challenges ahead.

Liz Truss: We now face severe global headwinds caused by Russia’s appalling war in Ukraine, and the aftermath of COVID. Now is the time to tackle the issues that are holding Britain back. We need to build roads, homes, and broadband faster. We need more investment and great jobs in every town and city across our country. We need to reduce the burden on families and help people get on in life. I know that we have what it takes to tackle those challenges. Of course it won’t be easy, but we can do it.

Kyle Peterson: Joe, can you give us a better sense from your perch in London of who is Liz Truss? How did she win this leadership race and are the analysts right to be hearing some echoes perhaps of Margaret Thatcher here?

Joseph C. Sternberg: Yeah, well I think actually your last two questions are related to each other, because she did win the race among conservative party members by channeling big elements of Thatcherism. Now, the immediate parallel that people are always drawing here is with tax policy, because I think that one of Liz Truss’s signature policy ideas in recent months has been this notion of using tax cuts as a way to alleviate the inflation or cost of living crisis over here, and to try to unstick the economy. So people are seeing in her proposal to reduce corporate tax rates, or to dial back a planned increase in the payroll tax, are seeing echoes of that 1980s Thatcherite supply side-ism.
But I think there’s also deeper parallel there, which is Truss Haws about a real sense of optimism about Britain’s private sector as opposed to the government, and emphasizes a lot the need for private entrepreneurship, risk taking, investment to really drive the British economy and society along. And along with that, I think, comes this real sense that economic growth is the solution to a lot of the problems that the country has, and not just redistribution. And so I think that it was that kind of message, which is fundamentally a very optimistic message, explains what has propelled her into that top job this time.

Kyle Peterson: And to my mind, this kind of optimistic agenda was the best case for Brexit to begin with. The advantages of being in a trading block like the European union are you have harmonized regulations, so it’s easy to trade across borders. And if you’re losing that advantage, the corresponding advantage you can get by leaving is to do a deregulatory and trade agenda, a competition agenda, and to say that we’re losing that ease of trade, but we’re going to be more competitive outside without the EU putting all these regulations on the economy. And so to my mind, this is kind of makes sense, Mene. And particularly if you look at something like this planned increase in the corporate tax rate in the UK to 26% from 19%, if you’re trying to compete with the people across the English channel, it seems like that would be the exact wrong way to go.

Mene Ukueberuwa: Yeah, I think you nailed it on what British people thought the promise of Brexit would be. And I think there’s a pretty widespread sense, especially among members of the conservative party, that their leaders had failed to deliver on that promise.
So I kind of want to back up to 2016, around the period that the Brexit referendum was passed. I didn’t have a front row seat to it in the way that Joe did, but of course followed it. And what I remember is that there were a couple of reasons why the British population decided to vote in favor of it. One was maybe some skepticism toward immigration, cultural change. You saw this in a lot of the lower income, northern territories of the country, where the economy has declined somewhat. And so that was part of the coalition, and I think that’s what a lot of American audiences focused on, but just as important, and probably even more important from the perspective of the conservative party members who really backed it, was the idea of this kind of economic liberation moment for the UK economy, because they felt that they had been overburdened by the European union’s trade restrictions, and by their regulatory policies on how businesses could operate, and the idea was that Britain freeing itself from the EU would then allow them to strike up more bilateral trade deals with other countries, and really supercharge the economy.
And so it really seemed like the Boris Johnson administration was expected to kind of synthesize both of these sides of Brexit. On the one hand, he did promise some economic support for the downtrodden parts of the British economy outside of the city of London, but then there was also this expectation that there would be a lot of trade deal making, and that really didn’t materialize. He seemed to lean much more into the green subsidies and things like that, than he did on the free market economic policy front. And so part of Liz Truss’s mandate is to really deliver on the more optimistic side of free market oriented deal making.
I think she has some bonafides there. As first trade secretary and then as a foreign secretary, she did push through these trade deals with Australia and Japan. So far there hasn’t been one with the United States, but I think people are really watching and seeing whether the promise that she’s made to recharge the UK economy can be delivered through this more free market approach.

Kyle Peterson: Well, let’s listen for a moment to a man we’ve mentioned a couple times, Boris Johnson, the outgoing prime minister throwing his support behind Liz Truss

Boris Johnson: This is a tough time for the economy. This is a tough time for families up and down the country. We can and we will get through it, and we will come out stronger the other side. But I say to my fellow conservatives, it’s time for politics to be over, folks. It’s time for us all to get behind Liz Truss and her team and her program, and deliver for the people of this country, because that is what the people of this country want, that’s what they need, and that’s what they deserve.

Kyle Peterson: Joe, how would you size up Boris Johnson’s legacy as prime minister? He entered office an extremely popular figure, and I agree with Mene. I at least expected him to push towards the kind of competitive Brexit that we’ve been talking about. But is it true now that maybe under Liz Truss, we are going to get the turn for the conservative party away from a redistribution agenda that might make sense?

Joseph C. Sternberg: Yeah, I think that Pius Johnson’s legacy is going to be very complicated, I think both politically and policy wise. One thing you need to say at the outset, and this is a big part of the complexity there is that your view of him, even within the Conservative Party, depends an awful lot on where you were sitting. And so you hit this dynamic where he was always much more popular with the party’s grassroots out in the countryside than he was with his own members of parliament here in London. Even those members of parliament who owed their seats to the historic electoral mandate that he won in the December 2019 election. And so there’s already speculation about whether he might try to stage some kind of comeback at some point. And a lot of that is built around this popularity that he may enjoy at the grassroots level.
But against that, you have just the economic disaster that is unfolding around the country right now. It’s expected to be the slowest growing major economy in the world next year, energy prices are skyrocketing, this is causing enormous pain for both households and businesses, especially small businesses. Consumer and business confidence are all plunging, there is a growing sense of malaise here, and he seemed completely unequal to tackling that.
So I think that this is an opportunity for Truss to come in with this much more optimistic message, but also a message that is very different from what people have heard either from orris Johnson or his two Conservative predecessors as prime minister, going back to 2010, Theresa May or David Cameron. This is a major break for the Conservative Party, about 12 years into their current period governing the country. And it probably comes not a moment too soon for them.

Kyle Peterson: One last thought on this. Mene, I would pick up on the point that you made about the fact that we still don’t have a US/UK free trade deal post-Brexit. And it seems to me that there’s one party to blame, and that’s the Biden administration in Washington has still accepted this turn away from trade that we’ve seen in recent years and recent decades. And I think it’s a mistake. If we want to help the British conservatives pursue this post Brexit success that we’re talking about, a free trade deal would be a good way to do it. And by the way, it would be good for consumers in the United States to get things that they’re buying from British products without the extra tax added onto them. And in absence of any real push in Washington for this, there’s an interesting May story. This is from Reuters.
It says, “Britain will sign its first state level trade agreement with the US corn belt state of Indiana on Friday, with more to come as London eyes ways to expand a commercial trade despite Washington’s decision to halt trade talks on a national level free trade deal.” And the story goes on to say that Britain is talking to about 20 states looking for these state level trade deals, but I don’t know why this shouldn’t be on President Biden’s agenda, particularly as we’re talking about inflation, rolling back some of the President Trump’s tariffs has been floated as a way to take a one time bite out of in India’s inflation figures we’ve been seeing, and I think doing a trade deal with Britain would be in a similar spirit.

Mene Ukueberuwa: That sounds right to me. I think it should reflect as an embarrassment on the Biden administration that you have UK diplomats forced to talk to governors and state houses about striking these trade deals, American consumers thankfully aren’t struggling quite as much as the British counterparts, but definitely are looking for economic relief, are looking to their leaders to find ways to keep our economy going strong, and the fact that the Biden administration has completely slow footed its approach to international trade so much should definitely be counted against it.
It’s interesting, again, to go back a couple of years, President Trump was very enthusiastic about the possibility of a bilateral trade deal. Maybe he could have worked faster to lay the groundwork for striking that with the UK, but it definitely fit into his philosophy of, “We want to do more bilateral deals,” as opposed to multinational deals like the transpacific partnership, which he scuttled. He wanted to do one-on-one deals specifically with American allies, and the UK seemed to want exactly that as well. But just, I think a combination of the messiness of the Brexit process on their end, and the change to the Biden administration on our end has made that almost impossible. And it isn’t just Britain in the case of Biden, as I was implying. His trade representative and his administration in general has been very skeptical of trade liberalization, and seems to have completely cast its lot with protecting American industries and unions, to the point that they’re leaving a lot of positive trade steps completely on the table.

Kyle Peterson: Hang tight. We’ll be right back. You’re listening to Potomac Watch from the Wall Street Journal.

Speaker 1: From the opinion pages of the Wall Street Journal, this is Potomac Watch.

Kyle Peterson: Welcome back. On Friday, Gazprom, the Russian energy giant said that it would keep the Nord Stream One pipeline shut. And now we have some more news here in recent days about what exactly is going on here, but it’s sort of a confused situation. So there’s one story today that quotes a Russian official saying that there’s some equipment that needs to be repaired before the pipeline can turn on, and you could go ask Siemens Energy to figure out when the pipeline will be able to reopen. Then there are quotes from representatives of Siemens saying that there’s no technical reason for stopping the operation.
And so Joe, what is going on here? Is this just the latest in Vladimir Putin’s energy politics, as he attempts to use the leverage that he has over the EU?

Joseph C. Sternberg: Yeah. So remember, Nord Stream one is the main conduit for Russian natural gas into Western Europe. It flows direct from Russia, under the Baltic Sea, to Germany. And it has been a major supply point for Germany for several years now. And so the shutdown is a very big deal, and this is part of a longer term pattern that’s been going on really since the Russian invasion of Ukraine started back in February, where Gazprom, who’s the ultimate owner of the pipeline has been steadily reducing the amount of gas that was flowing through it. And along the way, we’ve had a series of these shutdowns that were ostensibly for maintenance, although as is so often the case in these situations, there was a certain amount of ambiguity about how much of that maintenance was really necessary.
So back in July there was a 10 day maintenance shutdown, and then there was a lot of concern about whether the Russians were going to reopen the pipeline on schedule. It turns out that they did, but then they reduced the capacity from pushing through about 40% of the capacity down to 20. And now, so what’s new is after a three day really unplanned maintenance shut down, last week they announced they’re just going to keep it shut down indefinitely.
And the Siemens angle is really interesting here, because Russia all along has been claiming that this was maintenance related. Back in July with that 10 day shutdown, there was a big blather about a turbine that supposedly had been undergoing maintenance in Canada, and had gotten caught by Canada’s sanctions against Russia, and so the Germans needed to somehow get the turbine back, and it became this big shaggy dog story about what was going on here. But everyone has long since figured out that this is a political move by the Kremlin to demonstrate that they do have the power and the willingness to shut down the pipeline. And I think that that is the thing to keep your eyes on, even as they continue all of this toing and frowing throwing about the maintenance situation.

Kyle Peterson: But if the intent is to break European will, European opposition to the invasion of Ukraine, the question to me is whether it seems like that’s going to work. And for one thing, as long as the threat is hanging over Europe that this would happen, you could understand how that would create disunity within these European allies. But now that Vladimir Putin has pulled the trigger on the threat, it seems to me, Mene, that that would only unite Europe in opposition to this. And by the way, while making sure that none of those European allies ever trust Vladimir Putin and Russia, again, as a source of energy.
And I was struck by a line in the Journal’s editorial on this subject. It says, “Europe is paying for its energy dependence on Russia. Mr. Putin may pay later for exploiting it.”

Mene Ukueberuwa: Right. I think the rhetoric and the plan out of the European capitals in the wake of Putin’s decision to cease Nord Stream One is definitely going to be along the lines that you just mentioned. If we haven’t already, we’re definitely going to see leaders coming out and saying, “This show’s just how vindictive Russia has become. They are trying to bring us to our knees as winter approaches, but we’re not going to tolerate that. And we have X, Y, and Z plans already in place to make sure that we’re able to bear the increased cost of energy, and keep consumers and businesses chugging along despite the challenge.” So that’s the outlook, and I think that’s the right outlook.
There are a variety of adaptations that these countries can make in order to weather that storm we’ve already seen them trying to stockpile energy resources, bringing online more capacity in other fuel sources like reviving coal and things like that. Hopefully starting to open up more ports so that they can import more natural gas and not depend on the gas shipped from Russia over the continent. But I also think it’s going to be a huge challenge. I think you can just look back to February and March of this year and recall that it wasn’t immediate, even after Russia invaded Ukraine, that these countries lined up and said, “We’re going to start weaning ourselves off Russian gas,” and it’s because they’re heavily dependent on it, and their economies are already struggling quite a bit, and they know that it’s going to be a major blow to be able to go without Russian imports.
And so even if they come out on day one and say, “We’re totally committed to weathering this storm without Russian supply,” there’s going to be a lot of pressure on them. And as time drags on, you might see their coalition start to break down a little bit and you very might well see some people talk about concessions that they might be able to quietly make to restore some of that supply. So I hope that that doesn’t happen. It’s not my expectation, but my point is merely that it’s not going to be easy for them to just decide to adapt.

Kyle Peterson: Joe, what’s your analysis of this question of whether this leverage will work to break European unity on the Ukraine question? And then also, what do you see ahead for Europe this winter, as we’re now weeks away from the coming of cold weather. Are there stockpiles of gas that Europe has that can last them a while? Is there potentially rationing ahead, or what should people be prepared for?

Joseph C. Sternberg: Well, it’s going to be a pretty miserable winter over here. And I think that the best that people can hope for is that it’s a mild winter, which will ease some of the pressure on gas consumption, especially for heating. Because remember, many European households rely on natural gas from the local gas grid for heating. So that is a very important consideration that will be on people’s minds.
I think that they’ve done what they could over the summer. I think in Germany, in particular, you saw this great push to stockpile energy, so that their gas storage facilities are filled to a much higher level today than they were on this day last year. But the problem is that storage was never intended to satisfy all of the country’s energy demand over the course of the winter. So they are going to have to prepare for some kind of shortfall. And that’s really where the political element is going to come in here, and also what I think is so interesting and troubling about the Kremlins move to shut off the gas supply at this particular point.
I don’t think that there is any chance that we’re going to go back to the position that we were in before the Ukraine war started, where Europe, and Germany in particular, are blithely dependent on Russian energy. I think that that ship has sailed. There is now a great push to build physical infrastructure like liquified natural gas terminals that will allow them to import more gas from elsewhere and diversify their supply permanently. So that is happening, whether the Kremlin wants it to or not. And even after the Ukraine war is over, those terminals and that other infrastructure will be there.
So I think that what’s happening is there’s kind of this narrow window now for Putin to try to create political mischief, and that’s probably one of the goals here. Maybe he doesn’t even think at this point that he can change Europe’s determination on Ukraine, or on diversifying energy away from Russia, but he can make it very painful for them. And so I think that a lot of this energy blackmail now might just be oriented toward mischief making. It’s a kind of this attitude of, “Well, let’s turn off the spigot for a week or two and see what happens.” And sure enough, you had protests in the eastern German city of Leipzig on Monday about inflation and higher energy prices. So Putin wins from his ability to place that kind of pressure on Western European governments.

Kyle Peterson: Thank you, Joe and Mene. Thank you all for listening. You can email us at [email protected] If you like the show, please hit that subscribe button and we’ll be back tomorrow with another edition of Potomac Watch.

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