Barclays: The cost of the Russian energy embargo – moderate to deep recession in the eurozone

Her Eleftherias Kourtali

An embargo on Russian energy products that would push prices higher would trigger a mild recession, according to Barclays. However, restrictions on gas consumption (bulletin) would lead to a much deeper contraction, which would require strong political support to limit long-term economic damage, such as that applied to the pandemic by the EU and the ECB.

According to the British bank, due to the great dependence of EU countries on Russian oil and gas products, any restrictions on flows would put further pressure on energy prices and could even lead to the implementation of an energy card.

Barclays believes that The gas cut-off could affect the development of the euro area in at least three ways. First, Given that much of the energy is imported, rising gas prices would be a shock to the trade balance. Secondly, natural shortages could limit inputs on the output side. Thirdlythe interruption of the gas flow would increase the uncertainty.

In this context, Barclays examines the magnitude of the impact on GDP based on three scenarios, compared to its current forecast for growth in the euro area of ​​2.4% this year and 2.1% in 2023. The bank’s energy analysts estimate that if the flow of the Russian pipeline is cut off, the EU will have significant shortages of gas supplies in the summer (about 11 billion cubic meters per month). This will increase TTF prices by an average of € 300 / MWh. Oil prices could reach $ 150 / barrel.

Scenario 1: Oil and gas flows from Russia are being curtailed, leading to sharply higher wholesale prices but without a ticket. Thus, futures contracts in the Netherlands will increase by 200% and oil prices by about 40%. A year later, in the euro area, the trade shock (-4%) would reduce real GDP by 1.3% and inflation would be 1.4% higher.

Scenario 2: The eurozone is reducing gas consumption by an amount equivalent to the final gas consumption covered by Russian imports. The Barclays model predicts a 4% drop in the region’s real GDP, with a deeper recession in Germany and Italy than in France or Spain. In both cases, a broader blow to global confidence is expected, cutting 0.3-0.5 percentage points of euro area growth.

Scenario 3 (perhaps the most realistic): The aforementioned higher oil and gas prices and the bulletin “happen” at the same time. These effects, coupled with rising global uncertainty, could potentially reduce euro area GDP by more than 5%.

“In such a scenario, we would expect more expansionary fiscal measures, not only from national governments but also possibly at European level.“Governments are likely to step up their use of labor market support programs to curb rising and long-term unemployment and subsidize businesses to prevent bankruptcies and minimize long-term economic impact.” A new mechanism. such as the SURE program implemented during the COVID-19 pandemic to lend money to governments to finance these expenditures could be agreed at the EU summit on 30-31 May, if the ban on Russian energy products becomes a reality.

However, compared to COVID-19, inflation above the target limits the ECB response. This, together with a weaker fiscal position, would limit the fiscal space of governments.

So in the face of a deep recession and worrying market reactions, the ECB could launch a new QE program (or more likely use a new tool, possibly something between APP, PEPP and OMT, perhaps an OMT , but with less stringent conditions) to ensure the smooth functioning of the market and to prevent the fiscal crisis in countries with high debt. Another possibility would be a wider type of fiscal response mechanism than SURE at European level.

In any case, Barclays concludes, although the re-election of President Macron indicates progress towards more fiscal integration, any European fiscal response will take time to materialize.