Europe can withstand a winter recession
Vladimir Putin must think that the leaders of Europe were born yesterday. The Russian president has made it perfectly clear that he will use severe gas supply restrictions as an economic weapon next winter, but the European politicians and central bankers still speak of a Russian embargo as a mere possibility.
There is virtually no way out of a European recession, but it doesn’t have to be deep or prolonged. It is also the last economic map of Russia. As long as Europe makes sure its economies survive the cold season, Russia’s blackmail will have failed. It will not claim victory in Kiev over the backs of shivering households in Vienna, Prague and Berlin.
Certainly, the European economy is vulnerable. With the Nord Stream 1 pipeline operating at 20 percent capacity and other pipelines to Eastern Europe under threat, some countries will face physical gas shortages this winter. Even if European gas storage is higher than last year, according to the IMF, a full Russian gas embargo would leave Germany, Italy and Austria 15 percent of the desired level of consumption. The Czech Republic, Slovakia and Hungary would face shortages of up to 40 percent of normal consumption. All European countries would have to deal with rising prices. European wholesale gas prices are already close to €200 per megawatt-hour, compared to pre-crisis prices of about €25, eight times lower.
When the prices of an imported necessity rise, real incomes and households’ ability to spend money on non-essentials inevitably fall. Recessions are almost unavoidable. That was the conclusion of last week’s gloomy but realistic forecast from the Bank of England. It will soon be repeated by official forecasters in the eurozone. Even France, with its extensive use of nuclear energy, will find no escape route, as its energy sector has its own reliability issues and is deeply integrated into the wider European economy.
The nightmare Europe must avoid is energy nationalism when Putin turns the screw. If cross-border trade is curtailed and industry does not get lifelines, Putin will pit the unemployed in one country against the freeze in others. This would bolster its self-image as the continent’s power broker, capable of increasing or decreasing pressure on Europe and Ukraine by pushing a few buttons in gas pipeline pumping stations. But such a dismal outcome is not inevitable. The main defense is substitution.
Germany has already replaced much of its gas imported from Russia with stockpiles of liquefied natural gas, delivered on ships to the Netherlands or Great Britain and pumped to German storage facilities. By December, it will operate the first of four floating LNG storage and regasification units leased by the government.
Despite protests otherwise, European industry is rapidly changing production processes to replace gas with electricity and other fuels where possible, or importing semi-finished products from outside the EU where access to gas is plentiful. For example, gas-guzzling ammonia for the fertilizer industry does not have to be produced in Europe. Real world evidence The number of industries committed to reducing consumption is growing across the continent.
In power production, despite the environmental impact, coal is sensibly postponed temporarily, and Germany is finally considering delaying the premature shutdown of the nuclear industry. Renewable electricity production capacity in Europe is expected to increase by 15 percent this year, further reducing dependence on Russian gas.
After replacement comes solidarity within Europe. IMF modeling showed that more cross-border sharing of gas could significantly reduce losses in the hardest-hit countries, nearing hits for the economies of Central and Eastern Europe at a low cost to those who keep gas flowing. halved. As cross-border infrastructure improves, the ability to pump gas from Western Europe to the east, which has much better access to LNG, will virtually negate the economic effects of a gas embargo in the future.
Finally, households must play their part. Conservation this winter will be everything. Publicity campaigns have worked in Japan and Alaska to curb energy consumption in the face of shortages. This would be aided by sharp increases in energy costs to provide a significant price signal, offset by lump sum payments for poorer families. Industry alone should not bear the brunt of Putin’s energy warfare.
Such policies could reduce the worst effects of a GDP loss of about 6 percent in Central Europe to a third this winter, with the EU economy taking a hit of just 1.8 percent, far less than that of the financial sector. crisis, according to the modeling of the IMF.
Most importantly, any decline in economic output would be temporary. Once passed, it would not last. Each winter, the replacement will improve significantly. Advanced Western economies will once again show their resilience and flexibility – this time in the face of a deliberate attempt to create chaos.
On the other hand, the Russian economy would be hit again. Already significantly undermined by sanctions and unable to import goods needed for production, it will soon lose its main export sector, fossil fuels, to Europe. As Europe recovers from this winter’s recession, it would leave the Russian economy high and dry – lifted by its own petard.