The costs of an immediate halt to supply are high, but the benefits of policy action to improve natural gas availability are also great.
(Photo: dpa)
Germany got about half of its natural gas consumption from Russia in 2021. Although this dependency has been significantly reduced in recent months, an abrupt end to Russian gas supplies would continue to hit the economy hard. It is irrelevant for the economic consequences whether such a delivery stop is caused by an embargo by Germany or a decision by Putin.
In recent studies, the Bundesbank, five economic institutes and the author of this column have examined what effects the immediate end of Russian gas supplies could have. The results of these studies paint a worrying picture.
Overall economic production in Germany would collapse in the first twelve months after the delivery stop. Specifically, a decline in economic output comparable to the production losses of the Corona year 2020 or the financial crisis in 2009 would have to be expected.
In the worst case, there could be an economic crisis such as (West) Germany has not experienced since the Second World War. In addition, a recession in the euro area would be unavoidable.
Top jobs of the day
Find the best jobs now and
be notified by email.
But it’s not just the economic consequences that make an immediate end to Russian natural gas supplies so threatening. The social consequences are also worrying. An economic crisis in 2022 and 2023 would cause lasting damage that is more severe than in the previous two crises. There are essentially two reasons for this.
- Firstly, an abrupt natural gas embargo is an energy policy shock therapy that directly affects industry and thus the backbone of the German economy. After two years of the corona crisis and global supply chain problems, this industry has already been weakened, meaning that many well-paid jobs would be lost. Economic policy measures such as short-time work benefits and bridging assistance cannot even come close to compensating for the negative effects.
- Second, a new economic crisis would take place against the background of high inflation rates. A natural gas embargo would be a negative supply shock and could push the already very high rates of price increases even higher – double-digit inflation rates would be possible.
Inflation hits mostly the lower and middle incomes, exacerbating social tensions. In addition, an immediate gas embargo would further narrow the already very narrow scope for monetary policy.
>> Read more: Customs proposes embargo – why the EU should rather make Russian oil more expensive than boycott it
Fiscal policy would also have to act cautiously in order not to fuel inflation further. From an economic policy perspective, negative supply shocks are always a complex challenge for which there is no truly satisfactory solution.
Tom Krebs is Professor of Macroeconomics at the University of Mannheim.
(Photo: Alex Kraus/Kapix)
The costs of an immediate halt to supply are high, but the benefits of policy action to improve natural gas availability are also great. That is why the federal government must consistently continue on its current course and create a replacement for Russian natural gas imports as quickly as possible.
In addition, it should provide additional incentives for private households and companies to save gas. Additional measures are also required to ensure that the necessary expansion of renewable energies can succeed. The fossil fuel crisis is also an opportunity to accelerate the ecological transformation of the economy and society.
More: Corporations and the EU Commission present a declaration of intent on the hydrogen ramp-up.