Energy crisis may trigger European recession, unrest

European recession
The Russia-Ukraine war may lead to a European recession that threatens to destroy Europe’s industrial prowess and high living standards.

The Russia-Ukraine conflict that came amid the disruption caused by the Covid-19 pandemic has crippled economies around the world, but the biggest calamity of the war is Europe. The continent is ravaged by high energy prices and high inflation that pose the risk of a European recession. The real incomes and living standards are falling, pushing many nations to the brink of civil unrest. The war threatens to destroy Europe’s industrial might and living standards, making policymakers scurrying for cover.

While joining the aggressive sanctions against Russia, the continent may have underestimated the power of their eastern neighbour to throttle their energy supplies. When Europe tried to cut off Moscow’s cash flow, Russia retaliated by choking Europe’s gas supplies, pushing inflation to record highs. The monetary tightening that followed has disrupted Europe’s economic activity that was struggling to recover from the pandemic crisis.

Europe’s industrial economies including Germany are deeply dependent on Russian energy, a close link that developed over years. The prices of natural gas have risen eight-fold since February. Power blackouts, factory closings, and rationing is the new normal, pushing Europe to its biggest crisis since the end of World War II.

Last week, the European Central Bank raised policy rates by 75 basis points in an attempt to curb inflationary pressures in the economy. It warned of a “really dark downside scenario” triggered by the energy crisis.

Now, a European recession during winter months looks almost certain. Some commentators believe that the recession has already set in for many EU member countries. The energy shortage will weigh heavily on Europe’s GDP. An uneven recovery from the coronavirus pandemic and a drought across the continent are casting uncertainty about Europe’s economic future. European nations and policymakers are in panic mode and pushing for a diplomatic solution to the Russia-Ukraine war.

European crisis and India

The broader effect on a European recession may leave India better off. A glimmer of hope comes from the fact that a recession in Europe will drive down crude oil prices. This is good news for the country which is one of the biggest crude oil importers. Since India is dependent on imports to meet 80% of its energy needs, it is very sensitive to the happenings across the globe.

Further, companies which deal in renewable energy are hoping to make hay as soaring energy prices may incentivise people to switch to green energy. The manufacturers of equipment for the renewable energy sector have witnessed a boom, leading to heavy investment flows and a long order pipeline.

The Indian currency has been on a free fall, taking cue from the global market. This has led to a surge in inflation and the import bill has shot through the roof. In total, Europe’s pain can be India’s gain. Meanwhile, Russia is vying with other large oil producers to woo India with deep discounts.  Russia is keen on weaning away the world’s third largest oil importing nation from the Western influence as the G7 nations looking to impose more sanctions on Russia to choke fund flows into the Russia-Ukraine war.

READ | Russian crude oil: Will India defy the West to grab Putin’s sweetened offer

US may benefit from European recession

India may not be the only gainer from Europe’s misfortunes — the US would benefit most from a debilitating European recession, experts say. While the probability of a recession is around 60% for Europe, it was just 30% for the US, according to Goldman Sachs. How will Europe’s crisis benefit the US? Europe’s hardship will affect demand in Europe which, in turn, will help the United States to curb inflation at home. Many economists believe that a recession in Europe may help the world’s largest economy avert one at home.

The US dollar remained unaffected through the ongoing crisis. This means Europeans will have to shell out more to pay for American goods. Moreover, the US is poised to weather the storm in Europe as it is the largest producer of oil and natural gas. The US has witnessed one of the strongest recoveries, says Federal Reserve economist Claudia Sahm. But Europe can expect a cold winter with its energy spendings sucking out 11.7% of the EU’s GDP.

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Anil Nair is Founder and Editor, Policy Circle.