May 24, 2022

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Europe will experience a severe recession if Russian President Putin turns off the gas taps

Europe will experience a severe recession if Russian President Putin turns off the gas taps

The Nord Stream 2 offshore pipeline, the $11 billion project designed to double the flow of gas between Russia and Germany, is now unused and abandoned. Germany halted certification of the pipeline entirely after Russia formally recognized two pro-Russian regions in eastern Ukraine, setting up a pretext for the invasion that would follow.

Axel Schmidt | Nord Stream 2 | via Reuters

German economists predict a recession in Europe’s largest economy if supplies of Russian gas are halted, and the effects could spread across the continent.

In the semi-annual joint economic outlook, published on Wednesday, Germany’s five largest economic institutions sharply cut GDP forecasts, as the war in Ukraine slowed the recovery from Covid-19.

RWI in Essen, DIW in Berlin, Ifo in Munich, IFW in Kiel and IWH in Halle now expect German GDP to grow by 2.7% in 2022 and 3.1% in 2023, assuming no further growth. economic escalation. Related to the war in Ukraine and the continued flow of gas to Europe from Russia. The institutes previously forecast 4.8% growth in 2022.

Ukrainian President Volodymyr Zelensky and the European Parliament have called on the European Union to impose a blanket ban on Russia’s imports of oil, gas and coal in light of the atrocities committed by Russian forces against civilians in Ukraine.

The The European Union plans to ban imports of Russian coal It is working to impose sanctions on Russian oil as it looks to ostracize the Kremlin from the global economy, while Russian President Vladimir Putin has on numerous occasions threatened to cut off gas supplies to Europe.

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However, such a move is expected to have dire economic consequences for both sides. Germany bought 58.9% of its natural gas from Russia in 2020, according to the European Statistics Agency.

The Nord Stream 2 . pipelineThe $11 billion project designed to double the flow of gas between Russia and Germany is now unused and abandoned. Germany halted certification of the pipeline entirely after Russia formally recognized two pro-Russian regions in eastern Ukraine, setting up a pretext for the invasion that would follow.

In the event of a complete shutdown of Russian energy supplies, German institutes forecast a cumulative loss this year and next at around 220 billion euros ($238 billion), equivalent to more than 6.5% of annual economic output. This will lead to just 1.9% growth this year and a 2.2% contraction in 2023.

inflation headache

“If the gas supply is cut off, the German economy will go through a severe recession. In terms of economic policy, it will be important to support marketable production structures without stopping structural change,” said Stefan Kothes, Vice President and Director of Research. For business and growth courses at the Kiel Institute.

“This change will accelerate for gas-intensive industries even without interruption, as
Reliance on Russian supplies, which were available at reasonable prices until now, will be quickly overcome anyway.”

Kooths advised governments to avoid introducing “poorly targeted transfers” in order to support higher energy prices.

“If these subsidy schemes are spread over a broad front, it will increase inflation and undermine the important signaling effect of higher energy prices. This in turn exacerbates the problems of low-income households and increases overall economic costs,” he said. .

The European Central Bank faces the uniquely conflicting challenge of reining in record high inflation without overcoming already weak economic growth, which is likely to be further affected by supply shocks as the war in Ukraine continues.

Eurozone inflation was 7.5% for March on an annual basis, according to Eurostat, and German institutes forecast a full-year average in 2022 of 6.1%, the highest figure in 40 years.

In the event of a power outage, they expect an increase to a post-war record of 7.3%. Next year’s projected rate of 2.8% will remain well above the average since reunification, and rise to 5% in the event of an energy blockade, the report said.

“The shocks from the war in Ukraine are weighing on economic activity on the supply side and on the demand side,” Kothes said.

“Government stimulus packages during the pandemic have already had an inflationary effect. Increased prices of vital energy commodities in the wake of the Russian invasion are adding upward pressure on prices.”

Geraldine Sundstrom, portfolio manager at PIMCO, told CNBC Friday that the risks of a recession in Europe are much greater than the risks of a recession in the United States at this point.

“The European economy is not in the same strong position as the American economy and a possible industrial recession may be on the doorstep of Europe, depending on the disruption caused by the conflict, which is certainly happening in Asia, and we have seen – especially in the auto sector – a number of factories have been forced to close due to a shortage spare parts and this reintroduced leave for some workers in Germany,” said Sundstrom.

“Europe is also facing a very significant supply shock and an inflationary shock, and if anything, the ECB appears to be more willing to normalize policy despite the fact that the risk of a recession in Europe is much greater than in the United States.”