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

Can Germany afford to cut off the Russian gas supply? The Bundesbank is now positioning itself on this issue for the first time. The result of their calculation is clear.

Factory closures, unemployment, horrible inflation – if Russian gas stopped flowing into 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 are opposed to the gas embargo.

The problem: the Ministry of Economy was unable to present its own calculation, an economic case study for the gas stop scenario, until recently. Instead, as criticized by numerous economists, the federal government seemed to be referring primarily to the prophecies of doom in the industry, which – by nature – is against the end of gas supplies.

This should change now. For the first time on Friday, a semi-governmental body, the Bundesbank, presented a calculation in the event that Germany would refrain from importing all energy from Russia in the short term, namely coal and oil as well as gas. The result in short: the German economy would indeed fall into recession.

In the year of the Crown, the economy dropped even more drastically

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

For comparison: in the year Corona 2020, the German economy contracted more than double, at the end of the year there was less than 4.6%. However, it was also a global pandemic that blocked the entire world economy, not just energy supplies from a single country.

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

Difficult to find replacement gas suppliers

The question of how much an embargo would harm Germany has recently caused a heated discussion among leading German economists. Put simply, the guild split into two factions: those who did not consider the consequences of a gas embargo to the German economy too serious, and in some cases even supported it politically – and those who, like the federal government, it feared dramatic consequences.

The Bundesbank now positions itself in the middle, with a slight leaning towards those experts who warn of more serious effects. Since it would hardly be possible in the short term to fully compensate for supply shortages from Russia by increasing imports from other producing countries, it is likely that there will be bottlenecks especially in gas supplies.

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

A full embargo would result in economic losses of € 165 billion this year. The German economy would also suffer in the following years, write the economists of the Deutsche Bundesbank. Federal bankers estimate the absolute amount for 2023 and 2024 at an additional 115 billion euros in losses per year. No calculations have been made on the effects of a possible energy rationing for these two years.

Broken supply chains make things difficult for companies

In principle, the Bundesbank stressed that the model’s calculations are subject to considerable uncertainty and that future developments can “overestimate and underestimate”. What is certain, however, is that the central bank believes that the economic effects of the war in Ukraine “will considerably weaken the strong recovery actually planned”.

Among other things, disrupted supply chains, drastic increases in energy prices and increased uncertainty have weighed on businesses and individuals. The extent of the economic consequences of the war is still very uncertain and depends on its further progress.

The central bank expects economic output to stagnate roughly in the first quarter of this year. Before the Russian attack on Ukraine began on February 24, supply bottlenecks in the sector would have eased slightly.

In addition, the construction sector benefited from the mild climate, economists justified their assessment. At the end of last year, however, the fourth wave of the crown and the tightening of protective measures against the spread of the pandemic halted the economic recovery. Gross domestic product shrank by 0.3 percent in the fourth quarter from the previous quarter.

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