“Europe will be forged in crisis and will be the sum of the solutions adopted for those crises.” These words, from the memoirs of Jean Monnet, one of the architects of European integration, echo today, as Russia closes its main gas pipeline. This is certainly a crisis. Whether Monnet’s optimistic outlook will prevail, we don’t know. But Vladimir Putin attacked the principles on which post-war Europe was built. He simply has to be stopped.
Energy is a vital front in your war. It will be expensive to win this battle. However, Europe can and must free itself from Russia’s stranglehold. This does not mean to underestimate the challenge. Capital Economics says that, at today’s prices, the worsening terms of trade would amount to 5.3% of Italy’s Gross Domestic Product over a year and 3.3% of Germany’s. These losses are greater than either of the two oil shocks of the 1970s. Furthermore, they ignore the disruption of industrial activity and the impact of rising energy prices on the poorest households.
It is also inevitable that the sharp rise in energy prices will lead to high inflation. The experience of the 1970s indicates that the best response is to keep inflation firmly under control, as the Bundesbank did then, rather than allowing desperate attempts to prevent the inevitable reductions in real income from turning into a continuing wage-price spiral. . However, this combination of large losses in real income with less than fully accommodative monetary policy means that a recession is inevitable.
As difficult as the future may seem, there is also hope. As Chris Giles wrote, “There’s virtually no escaping a Europe-wide recession, but it doesn’t have to be deep or prolonged.” The likelihood of a recession has likely increased even further since then. But the work of IMF staff shows that a substantial adjustment is feasible, even in the short term. In the long run, Europe can dispense with Russian gas. Putin will lose if Europe can hold out.
A recent IMF document points out the potential role of the global LNG (liquefied natural gas) market to cushion the shock in Europe. European integration into global LNG markets is imperfect but substantial.
The paper concludes that a Russian shutdown would lead to a decline in EU gross national expenditure of only around 0.4% per year after the shock, if we take the global LNG market into account. Without the latter, the drop would be between 1.4% and 2.5%. But the former, while much better for Europe, would also mean higher prices elsewhere, especially in Asia. The estimated drop of 0.4% also ignores demand-side effects and assumes full integration of global markets. For these and other reasons, the real impact will certainly be much greater.
Another IMF document suggests that, with the addition of uncertainties, Germany’s GDP could be 1.5% below the baseline in 2022, 2.7% in 2023 and 0.4% in 2024. The IMF’s work in individual EU countries also concludes that Germany would not be the hardest-hit member state. Italy is even more vulnerable. But the hardest hit will be Hungary, the Slovak Republic and the Czech Republic.
The big lesson from the oil shocks of the 1970s was that by the mid-1980s there was a global surplus. Market forces will certainly provide the same result in time. The short-term impact will also be manageable. Actions needed are to cushion the shock on the vulnerable and encourage necessary adjustments, which could include the emergency reopening of gas fields.
Ursula von der Leyen, President of the European Commission, said the policy objective should now be to reduce peak electricity demand, limit the price of pipeline gas, help vulnerable consumers and businesses with windfall revenues from the energy sector and help electricity producers facing liquidity challenges caused by market volatility. All of this is sensible, so far.
A crucial aspect of this crisis is that, like the Covid, but unlike the financial crisis, almost all European countries are negatively affected, with Norway being the big exception. In this case, above all, Germany is among the most vulnerable. This means that the shock, as well as the response, is common: it is a shared situation. But it is also true that individual members not only face challenges that differ in severity, they also have substantially different fiscal capacity. For the eurozone to successfully meet this challenge, the issue of sharing fiscal resources will come up again. Ultimately, it will be unsustainable to expect the European Central Bank to be the main fiscal backbone in such a crisis. However, if the weaker countries were abandoned, the political consequences would be dire.
At least two more big questions arise. The narrowest is the UK’s role under its new prime minister, Liz Truss. She has an immediate choice: mend the country’s fences with her European allies in response to Putin’s shared threat, or break the treaty her predecessor made to “complete Brexit.” Europeans, rightly, will neither forget nor forgive if she chooses the latter in this hour of need.
The second, much bigger issue is climate change. As Fatih Birol of the International Energy Agency writes, this is not a “clean energy crisis” but the opposite. We need much more clean energy, both because of climate risks and to reduce dependence on unreliable suppliers of fossil fuels. We learned that lesson in the 1970s. We are learning it again. The case for an energy revolution has become stronger, not weaker.
How Europe responds to this crisis will shape its immediate and long-term future. She must resist Putin’s blackmail. It must adjust, cooperate and resist. This is the crux of the matter.
Translated by Luiz Roberto M. Gonçalves
Chad-98Weaver, a distinguished author at NewsBulletin247, excels in the craft of article writing. With a keen eye for detail and a penchant for storytelling, Chad delivers informative and engaging content that resonates with readers across various subjects. His contributions are a testament to his dedication and expertise in the field of journalism.
