A wider cut in Russian gas supplies will hit the European economy

Russia’s suspension of natural gas supplies to Poland and Bulgaria will not cause immediate damage to the European economy, but Europe could face a sharp slowdown in growth if the shutdown spreads to other countries or if Europe imposes an embargo on Russian gas, economists say. .

Russia’s war with Ukraine has already swept through Europe, hitting energy prices and hurting producers just as the bloc was recovering from the pandemic-led recession. The International Monetary Fund last week cut its 2022 forecast for euro-using countries to 2.8 percent from an estimate of 3.9 percent in January, with Germany, the largest economy, hit hard.

On Wednesday, the euro fell below $1.06 for the first time in five years due to growing concerns about energy security and a slowdown in Europe. The currency fell nearly 4 percent against the US dollar in April alone.

The actions of the Russian oil monopoly Gazprom, taken this week to shut off gas taps to two countries of the European Union, are unlikely to immediately provoke a new recession in Europe. That’s partly because Europe “still has a lot of diplomatic and fiscal action available” to deal with it, Mark Häfele, chief investment officer at UBS, said in a note to clients.

But the specter of an open energy war, including a potential European embargo on Russian gas and oil, looms at a vulnerable time. European companies are already facing higher energy costs, which are threatening profit margins and reducing consumer purchasing power, analysts say.

The European Union was developing plans to impose an embargo on Russian oil, but did not mention this a few hours after the shutdown of Gazprom. This month, Europe imposed a ban on Russian coal. And while Germany, in particular, has resisted an embargo on Russian oil or gas because of the exorbitant cost to its industry, officials have recently reconsidered.

“This is a thinly veiled threat to Germany — Berlin is now weighing how far it and the EU can go in sanctions on Russian energy exports, and the Russian threats are designed to change its calculations,” said Jonathan Hackenbroich, European Council Research Fellow. on international relations.

However, a complete shutdown of gas for Germany “will have dire consequences for the German economy and Europe,” he added. “Factories would have to cut production or even shut down. Some key industries may be lost forever, and it is really difficult to assess the full range of consequences. But Russia is also heavily dependent on income from energy exports, as they represent its last major source of livelihood,” Mr. Hackenbroich said.

An embargo on Russian energy is likely to trigger a recession in Europe, and high inflation “will become even higher inflation,” said Carsten Brzeski, head of global research at ING Bank.

“All this is clearly negative for the short term,” he said. “But to make matters worse, high energy and commodity prices and the disruption of supply chains will jeopardize Europe’s international competitiveness.”

Germany’s five leading economic think tanks said this month that a full energy embargo, if implemented immediately, would cut annual economic growth in the European Union this year and next by a combined 3 percent, while boosting inflation by about 1 percentage point. in both years.

That’s because natural gas will likely have to be rationed from early next year and parts of European industry “will then have to be turned off for four months so that households can still heat their homes during the cold season,” Holger said. This was stated by the chief economist of Berenberg Bank Schmieding.

He said it was “at least possible” that rationing could start even earlier in the event of an immediate shutdown of gas in Russia.

“In my opinion, the damage to economic growth in Europe will be very serious,” said Mr. Schmieding. “Whether the price is worth paying to limit Russia’s ability to endure a long war is ultimately a political judgment that goes far beyond mere economic calculation.”