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 disruption spreads to other countries – or if Europe imposes an embargo on Russian gas. economists say.
Russia’s war against Ukraine is already raging in Europe, hitting energy prices and damaging producers just as the bloc is recovering from a recession caused by a pandemic. Last week, the International Monetary Fund lowered its 2022 forecast for countries using the euro to 2.8% from a 3.9% estimate in January, with Germany, the world’s largest economy, suffering a major blow.
The euro fell below $ 1.06 on Wednesday for the first time in five years amid growing concerns about energy security and a slowdown in growth in Europe. The currency fell nearly 4 percent against the US dollar in April alone.
This week’s action by Gazprom, Russia’s oil monopoly, to shut off gas taps in two European Union countries is unlikely to lead Europe to a new recession immediately. This is partly due to the fact that Europe “still has a lot of diplomatic and fiscal policies” to combat, said Mark Hefele, UBS’s chief investment officer, in a note to clients.
But the specter of an outright energy war – including a potential European embargo on Russian gas and oil – is emerging at a vulnerable time. European companies are already facing higher energy costs, which threaten profit margins and shrink consumer purchasing power, analysts say.
The European Union is drawing up plans for an embargo on Russian oil, but did not mention it in the hours following Gazprom’s shutdown. Europe banned Russian coal this month. And while Germany is particularly opposed to the embargo on Russian oil or gas because of the huge costs to its industry, officials have recently reconsidered it.
“This is a subtle threat to Germany – Berlin is currently assessing how far it and the EU can go in sanctioning Russian energy exports, and Russian threats are aimed at changing its calculation,” said Jonathan Hackenbroich, a political associate at the European Council on Foreign Relations. relationships.
Still, a complete gas cut for Germany “would have dire consequences for the German and European economies,” he added. “Factories will have to limit production or even close. Some key industries may be lost forever, and it is actually difficult to assess the full range of consequences. But Russia is also heavily dependent on energy export earnings, as they are its last major lifeline.
The embargo on Russian energy is likely to trigger a European recession, and high inflation “will get even higher,” said Carsten Brzeski, global head of research at ING Bank.
“All of this is obviously negative for the short term,” he said. “But to make matters worse, high energy and raw material prices and disrupted supply chains will jeopardize Europe’s international competitiveness.
The Russia-Ukraine war and the global economy
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Lack of base metals. The price of palladium, used in car exhaust systems and mobile phones, is rising amid fears that Russia, the world’s largest metal exporter, could be cut off from global markets. The price of nickel, another key Russian export, is also rising.
Financial turmoil. Global banks are preparing for the effects of sanctions designed to limit Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies that are crucial to trade. Banks are also on the lookout for retaliatory cyber attacks from Russia.
Germany’s top five economic research institutes said this month that a full energy embargo, if introduced immediately, would cut annual economic growth in the European Union this year and next by a cumulative 3 per cent, while raising inflation by around 1 per cent. point in both years.
This is because natural gas will probably have to be normalized from the beginning of next year and parts of European industry “will then have to be shut down for four months so that households can heat their homes during the cold season”, Holger. said Schmiding, chief economist at Berenberg Bank.
He said it was “at least possible” that rationing would begin even earlier in the event of an immediate shutdown of Russian gas.
“My best guess is that the damage to European growth will be quite serious,” Mr Schmiding said. “Whether it would be worth the price to limit Russia’s ability to endure a long war is ultimately a political judgment that goes far beyond ordinary economic calculations.
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