The European economy is on the edge and the United States could be useful
Before Russian President Vladimir Putin’s attack on Ukraine, Europe’s recovery from the damage caused by the covid pandemic was solidifying. Industrial production increased in January and retail trade rebounded. Economic sentiment improved in the first half of February, surpassing pre-pandemic levels. But then the war shook consumer confidence by increasing uncertainty and driving up energy and commodity prices. In mid-March, the European Commission’s consumer confidence indicator fell to its lowest level since the start of the pandemic.
Data so far shows only a slight slowdown in demand and limited supply disruptions. They report nothing remotely resembling the collapse in activity that accompanied the pandemic lockdowns of 2020-21. The OECD’s weekly economic activity monitor, which uses machine learning and Google Trends data to infer real-time changes, also signals only a slight slowdown. Box office receipts are stable. Restaurant receipts are stable. Data from the TomTom navigation service does not suggest much of a decline in mobility-related activity.
In response to the war and the energy shock, the European Central Bank rightly lowered its forecast for Eurozone growth in 2022 from 4.3% to somewhere between 2.3% and 3.7%, depending on what happens to oil and gas prices. Nonetheless, even his “harsh scenario” of sustained high energy prices still predicts above-trend growth in 2022.
More expensive energy will undoubtedly dampen growth. But if Russian gas keeps flowing, higher prices won’t cook through a recession. Inevitably, profits will be squeezed by more expensive inputs. Even so, European producers can take steps to save energy and keep the wheels turning.
But using less gas is one thing; not using any is another. In this last scenario, the gasworks will not make any savings; they will close. Over time, US natural gas can be replaced. But Germany has no liquefied natural gas terminals and will need the rest of 2022 to install its first floating LNG terminal – a converted supertanker – even if all goes according to plan. In the meantime, German gas consumption will fall by 30 to 40%. Even assuming that monetary and fiscal authorities react forcefully to prevent second-round business cycle effects, this could lift German growth in 2022 to 1.8%, the latest forecast from the German government’s Council of Economic Advisers, to negative and recessive territory. And here Europe’s lack of control comes into play.
The suspension of gas supplies is entirely up to Putin, who may decide to end shipments in retaliation for Western sanctions. Russia may need revenue, but it wouldn’t be the first time that anger and pride have trumped economic logic.
If the West makes payments not to Gazprombank but to escrow accounts, Putin will lose his last incentive to keep the gas flowing. He knows that these accounts will ultimately be used to finance Ukrainian reconstruction rather than to bail out the coffers of the Russian government.
Above all, if Putin allows his army to continue committing atrocities against Ukrainian civilians, public opinion and policy makers in Western Europe will unite against him.
Given the history of their country, the Germans may not be able to settle comfortably, in houses heated with Russian gas, in the face of this monstrous behavior. If German Chancellor Olaf Scholz does not lead, then other members of his coalition, such as Defense Minister Christine Lambrecht, will almost certainly step in. And at some point it is likely that the German people will drag Scholz with them. Whether that is depends on Putin’s next steps.
It’s easy for an American, hot on natural gas from Texas and the Dakotas, to say that Europe should suffer a recession to turn up the heat on Putin. But if US President Joe Biden’s administration and the US Congress think it’s crucial to step up the pressure on Russia, then they can make it worthwhile for Europe.
Europe will take the lead in Ukraine’s post-war reconstruction. The logistics are simpler. Ukraine is in the neighborhood of Europe, as Ukrainian President Volodymyr Zelensky reminds us. The European Union can deploy its cohesion funds, its trans-European transport and other infrastructure projects, as well as its common energy policy, even without, or preferably before, admitting Ukraine.
But if Europe is the logical party to do the legwork and administer the aid, then America can provide the bulk of the funding, beyond the part funded by Russia’s escrow accounts and other external assets. . It would be an appropriate humanitarian gesture once the war is over.
But a U.S. pledge now to compensate Europe for the steps it needs to take, starting with a ban on Russian oil and gas imports, could also be a way to induce it to help end the crisis quickly. war. ©2022/Syndicate Project
Barry Eichengreen is a professor of economics at the University of California at Berkeley and the most recent author of “In Defense of Public Debt”.