Economic development: 200 billion euros in damage – energy embargo would drive Germany into recession
Berlin It is an illustrious group that met on Tuesday evening in the NATO conference room of the Federal Chancellery. The CEOs of the largest companies were there, whether Airbus, Allianz, BASF, Bosch, Siemens or Mercedes, reports corporate circles. You had a lot to discuss at the face-to-face event with Chancellor Olaf Scholz (SPD) and Economics Minister Robert Habeck (Greens).
What is the situation in Ukraine and Russia, what about the sanctions that have been passed, how are talks going with the allies? Scholz then thanked the German economy for their support. Probably the most sensitive topic of conversation, however, came up when it came to the question of whether Germany and the EU should impose a complete energy embargo on Russia. “The companies described existing challenges in view of high energy prices, especially for energy-intensive industry,” said a statement from the federal government.
Germany is under enormous domestic and international pressure on this point. Several European countries and a broad coalition of scientists and celebrities are calling for an embargo in response to Russian President Vladimir Putin’s war of aggression and to cut off the money supply. However, the federal government is vehemently opposed to this step.
>> Also read here: EU argues about oil embargo – these countries are blocking it
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Although Berlin is supporting the import ban on Russian coal that has already been decided, it is not entirely opposed to an oil embargo. But the heavy reliance on Russian gas keeps the government fighting a full embargo. More than half of the natural gas in Germany comes from Russia. According to Scholz and his cabinet, a cessation would lead to enormous macroeconomic damage. Vice Chancellor Habeck even sees social peace as endangered.
But calculations by the five leading German economic institutes are now putting the federal government in even more trouble. In their current joint economic forecast, the economists have determined the consequences of a complete embargo. The result: a delivery stop would cause the German economy to shrink. “In this case, the German economy is likely to fall into a sharp recession next year,” says the joint economic forecast for the Federal Ministry of Economics, excerpts of which are available to the Handelsblatt.
Gross domestic product would fall by 2.2 percent
In the scenario of an immediate embargo, gross domestic product (GDP) falls by 2.2 percent in 2023 – a loss of 200 billion euros compared to the scenario without an embargo. The economic slump would be strongest in the second quarter of 2023 with a minus of five percent. The number of unemployed would increase by 418,000 compared to the previous year. According to the forecast, the unemployment rate has long since reached the 6 percent mark again.
The joint diagnosis is to be officially presented on Wednesday. The report was developed under the leadership of the RWI in Essen, the DIW in Berlin, the Ifo Institute in Munich, the IfW in Kiel and the IWH in Halle.
The researchers are forecasting a recession due to an embargo. At around two percent, however, it is significantly lower than some have previously assumed. In addition, according to the joint forecast, the economy would still grow in 2022 despite the embargo, the forecast for GDP for the current year is plus 1.9 percent. At 7.3 percent, the inflation rate would be high. According to the estimate, it would drop to five percent in 2023.
>> Also read here: Fight inflation and risk recession? The Fed is in a dilemma
In addition, inflation would ensure that the debt ratio – the ratio of government debt to economic power – falls to 63.3 percent in 2023, according to government circles.
It is true that economists these days repeatedly emphasize the limited significance of their calculations for an embargo, because there are hardly any comparable values for such a situation. The authors of the joint diagnosis also make it clear that their figures are not a recommendation for politicians to take action. But the dire warnings from Scholz, Habeck and the other members of the government were more likely to assume a GDP minus of five percent or even more.
In the Ministry of Economic Affairs, reference is made above all to the analysis of the trade union-related Institute for Macroeconomics and Business Cycle Research (IMK). That had calculated: If no more gas came from Russia and at least half of the resulting gap could be closed by alternative suppliers, the GDP in the current year would be six percent lower – a loss of 230 billion euros. If less than half of the supply gap is closed, the damage is so great that it can no longer be calculated.
No end to the discussion about the numbers in sight
In the meantime, however, the forecasts are increasing, which, like the joint forecast, are on a smaller scale. The beginning of March was marked by the widely acclaimed “Bachmann study”. It is named after Rüdiger Bachmann, a German economist who teaches at the US Catholic University of Notre Dame. Scientists such as Ifo researcher Karen Pittel and Benjamin Moll from the London School of Economics were also involved.
A stop in the supply of Russian gas would therefore dampen German economic output by 0.5 to three percent – a “manageable” slump, as some of the study’s authors immediately announced and since then, based on their study, have had no doubt that the federal government must try to get Putin involved to stop an energy boycott.
On the same day of all things, the National Academy of Sciences, the Leopoldina, published an investigation into a delivery stop. Their result was also: Germany can afford the embargo. Critics accuse the authors of the study of being unrealistic because numerous effects would be missing, above all collapsing supply chains as a result of the lack of energy from Russia.
However, extended calculations by the German Institute for Economic Research (DIW) and the Bonn economist Christian Bayer based on the Bachmann study also come out with a minus of three percent for economic output. And at the end of its calculation, which was published last week, the Advisory Council of Economic Experts had a minus of two percent in the report.
In the joint diagnosis, the five institutes calculated possible gas bottlenecks for industry using their own model. “On the demand side, the analysis takes into account possible savings potential and on the supply side additional delivery quantities,” it says.
However, the resulting economic forecast is not the end of the discussion. As with all economic calculations, the significance of the figures mentioned is limited. There has never been a crisis like the one we are experiencing today, and given the mixed outcomes, there must be models that are wrong. In addition, not only the consequences for Germany are decisive, but also to what extent an embargo puts Putin in trouble. This is also controversial among economists.
More: Bundesbank expects noticeable strain on the economy