horror inflation? An energy embargo would really hit Germany that hard

Can Germany afford to stop supplying Russian gas? The Bundesbank is now positioning itself on this issue for the first time. The result of his calculation is clear.

Factory closures, unemployment, appalling inflation: if more Russian gas did not reach Germany, it would have fatal consequences for the economy and consumers. At least that’s what the federal government has been doing for a few weeks. Chancellor Olaf Scholz (SPD) and Economy Minister Robert Habeck, in particular, justify that they are against the gas embargo.

The problem: The Ministry of Economy was unable to present its own calculation, an economic case study for the gas stoppage scenario, until recently. Instead, as many economists have criticized, the federal government seemed to be referring mainly to prophecies of doom in the industry, which, qua natura, is against the end of the gas supply.

That should change now. On Friday, for the first time, a quasi-governmental body, the Bundesbank, presented a calculation in case Germany refrains from importing all of Russia’s energy in the short term, meaning coal and oil, as well as gas. The result in a nutshell: the German economy would enter a recession.

In the Corona year, the economy fell even more sharply

Instead of growth of around 3 percent, the German economy is likely to contract by 2 percent. The monthly report published by the German central bank on Friday says: “In the worsening crisis scenario, real gross domestic product (GDP) in the current year would fall by almost 2 percent compared to 2021.”

For comparison: In the Corona year 2020, the German economy contracted more than twice, at the end of the year there was less than 4.6 percent. However, it was also a global pandemic that paralyzed the entire world economy, and not just the energy supply of a single country.

All this can be understood even better by looking at the recent past. At the end of 2021, before the Russian invasion of Ukraine, the Bundesbank still expected economic output to rise 4.2 percent in 2022.

It is difficult to find substitute suppliers for gas.

The question of how much an embargo would hurt Germany had recently sparked a heated discussion among leading German economists. In general terms, the union was divided into two camps: those who did not consider the consequences of a gas embargo for the German economy too serious and, in some cases, even supported it from a political point of view, and those who, like the federal government, they feared dramatic consequences.

The Bundesbank is now positioned in the middle, with a slight bias towards those experts who warn of more severe effects. Given that it would hardly be possible in the short term to fully offset Russia’s supply shortfall with increased imports from other producing countries, bottlenecks in gas supply in particular are likely.

In its scenario, the Bundesbank therefore assumes that energy use will be rationed. This probably means, among other things, the gas emergency plan, as a result, first industry and finally private households would be deprived of the then scarce gas.

A total embargo would mean economic losses of 165,000 million euros this year. The German economy would also suffer in the years to come, economists at the Deutsche Bundesbank wrote. Federal bankers estimate the absolute amount for 2023 and 2024 at another 115 billion euros in losses per year. No calculations were made on the effects of possible energy rationing for these two years.

Disrupted supply chains make things difficult for businesses

In principle, the Bundesbank noted that the model’s calculations are subject to considerable uncertainties and that future developments may “both overestimate and underestimate.” What is certain, however, is that the economic effects of the Ukraine war will, according to the central bank, “significantly weaken the strong recovery that was actually anticipated”.

Among other things, the disruption of supply chains, the drastic increase in energy prices and the increase in uncertainty weighed on businesses and private households. The extent of the economic consequences of the war is still very uncertain and depends on its progress.

The central bank expects economic output to plateau around the first quarter of this year. Prior to the start of the Russian attack on Ukraine on February 24, industry supply bottlenecks would have eased somewhat.

In addition, the construction industry benefited from the mild weather, the economists justified their assessment. At the end of last year, on the other hand, the fourth wave of corona and the stricter protection measures against the spread of the pandemic brought the economic recovery to a halt. Gross domestic product contracted 0.3 percent in the fourth quarter compared to the previous quarter.


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